Panera Bread (NASDAQ:PNRA) has been a successful fast-casual company that seems poised for big things in 2016 and beyond. Here are three questions I would like to ask its longtime CEO, Ron Shaich.
Company owned or franchised?
Panera has an almost even blend of company-owned and franchise-operated locations. In 2015, 112 new locations were opened, with 55 of them being franchised. Of 1,972 total locations, 1,071 are franchised. Some companies choose to franchise nearly exclusively, while others keep all of their locations corporately owned. Panera's choice to do both adds another layer of complexity to Shaich's job but might be a powerful tool.
Franchised locations are cheaper to open, allow for faster growth, and provide revenue stream from royalties, fees, and product sales. These two sources accounted for about 12% of the company's total revenue in 2015. The downsides are having less control over day-to-day operations and not being able to retain the earnings from the franchised locations.
Company-owned locations allow the business to retain all of the store-level earnings and have more direct control over the operation of the business. In Panera's case, the average weekly sales for both types of locations have been similar for the past few years, with company-owned stores delivering $49,090 in 2015 versus $47,680 for franchised locations. Comparable sales year over year were 3% and 1.9%, respectively.
The CEO, as capital allocator, must decide how funds can best be deployed to maximize total shareholder return. In the right hands, this power can lead to outstanding performance. Similarly, Shaich must decide what the growth footprint of Panera should look like over the next five, 10, and 20 years. In 2014, 43% of new locations were franchised, and that number jumped to 49% the following year. In the Q4 conference call, he said that 2016 openings will skew toward company-owned. I would like more information about the broad strategy regarding new openings and where he sees the blend in 10 to 20 years.
"Panera at Home" or delivery?
In the Q4 conference call (transcript by Seeking Alpha), the CEO mentioned two initiatives that intrigued me as a shareholder.
Panera at Home intends to sell Panera-branded products through other retailers. The company claims that it's a $150 million business, with a 50% compounded annual growth rate over the last three years, and with sales growth of more than 20% in the past year alone. Shaich hopes for this to eventually become a business with $1.3 billion in total revenue. Considering that the whole company had revenues of $2.66 billion in 2015, the potential impact on the business is obvious.
Delivery is currently in 25 cafes generates sales of $5,000 a week against a $3,000 breakeven point, says Shaich. One can expect the breakeven point to become lower as scale increases and inefficiencies are worked out, and for the AWS to increase as awareness of delivery increases. Even $2,000 a week in profit spread over 2,000 stores would mean an additional $208 million in profit. This could prove to be either a conservative or lofty set of expectations, but the delivery opportunity remains a significant one.
My concern is that the company may be spreading itself too thin. Between reconfiguring its stores for Panera 2.0, expanding its loyalty program, and opening 90 to 100 new locations in 2016, I wonder if it has the resources to successfully capitalize on all of these opportunities. They're all compelling in their own right, but I worry that the company may be too small to be focusing on so many new initiatives. Starbucks has a line of branded goods and is experimenting with delivery, but its market capitalization is 16 times larger than Panera's. I hope management can pull all of this off, but I would like some reassurance from the team.
Tatte Bakery & Cafe: Boulange or Locale?
Panera acquired a 50.01% stake in Tatte Bakery & Cafe, which "is a five-store urban craft bakery cafe concept ... offering breakfast and lunch." The company has options to acquire more of the brand in the future, and management views it as a "wonderful brand with significant growth potential in residential urban and upscale suburban markets." This seems like a low-risk move that the company can benefit from in a few different ways. It was only briefly mentioned on the conference call, and I would like some more color, not for Tatte specifically, but for how Panera views small acquisitions as fitting into its future.
Starbucks acquired bakery chain Boulange in 2012 and began incorporating its food into Starbucks locations as a way to improve the (previously lackluster) offerings. Chipotle Mexican Grill made a similar investment in a small Pizza chain called Pizzeria Locale. The company continues to operate independently and is slowly expanding, and most people probably aren't even aware of the connection with the burrito purveyor.
This seems to be the type of arrangement Panera has with Tatte. For a small investment, it retains the option of deploying this more up-market alternative around the country as it sees fit. Chipotle may never see meaningful returns from Locale, or it may become a meaningful contributor with thousands of stores throughout the world. I like that Panera is making small bets like this to diversify its future offerings, and it shows me that management is thinking about the very long term. The CFO, Michael Bufano, mentioned the investment on the earnings call. I'd like to hear from Shaich about what role he sees for Tatte, and other investments like it, in Panera's future.