Will Panera Bread Earnings Justify the Stock's Big Rise?

Image source: Panera Bread.

Investors in the fast-casual restaurant space have gotten used to rapid change and potentially disruptive conditions. Panera Bread (PNRA +0.00%) has been one of the giants of the fast-casual space, using its emphasis on healthy ingredients and tasty yet speedy menu offerings to build up a solid following among customers. Yet as investors in Mexican-food specialist Chipotle Mexican Grill (CMG +1.44%) can appreciate, customer loyalty is something that you have to earn every day, and so it's important to keep executing well. Coming into Panera's first-quarter financial report on Tuesday, investors are optimistic that Panera can avoid the downturn that Chipotle has suffered lately, but it's unclear whether Panera's growth will be fast enough to explain the big boost in its share price. Let's take an early look at Panera and what's been happening with the company recently.

Stats on Panera Bread

Data source: Yahoo! Finance.

How much yeast will Panera earnings have?
In recent months, investors have had mixed views on Panera earnings. They've boosted their first-quarter estimates by a nickel per share, but they've made corresponding downgrades of more than $0.20 per share to their full-year projections for 2017. Even so, the stock has performed very well, climbing 14% since mid-January.

A good deal of the enthusiasm surrounding the fast-casual chain came from Panera's fourth-quarter earnings report. Revenue gains were modest at less than 3%, with total comparable-store sales rising 2.3% on a 3.6% gain in comps at company-owned locations. Adjusted earnings just barely managed to rise on a per-share basis, but that defied earlier pessimistic calls among investors and ended up beating the consensus forecast by a dime per share. The chain kept battling weaker operating margins stemming from structural wage increases and start-up costs, but a combination of expansion efforts and initiatives to improve productivity led to solid guidance from Panera, and investors took the news well.

Yet recent positive views from analysts following the stock have also heightened interest in Panera. Earlier this month, analyst firm Jefferies took a look at Panera, and it boosted its target price on the shares to $245 per share, up $50 from its previous guidance. Bullish investors point to the Panera 2.0 platform to allow customer ordering via touch-screen tablets at restaurant locations or through their own smartphones or other mobile devices as a potential game-changer, and despite the upfront cost that has held back Panera's earnings growth, CEO Ron Shaich has repeatedly expressed confidence in the initiative's potential to boost business and customer loyalty.

Delivery is also a growth area that Panera is increasingly looking at developing. The company said that it hopes to offer delivery service at about a tenth of its restaurants this year, which would amount to begin 200 to 300 locations. Already, testing in two markets with about a total of 25 restaurants has gone well, and if the larger tryout goes well, then a full-blown rollout to cover a much wider swath of Panera's territory could come in the future.

Still, Panera will have to keep working hard to stay ahead of the curve. Chipotle Mexican Grill has been playing a lot of defense lately, trying to recover from the recent incidents of foodborne illness that have hurt its reputation and eaten into sales. As Chipotle goes back on the offensive, Panera will have to be ready, and continuing to focus on marketing and efficiency gains will help give Panera the ammunition it needs to stand up to Chipotle.

In the Panera earnings report, investors should take a close look at the strategy that the company is following and see if the numbers support the thinking behind the move. Panera's shares are heading in the right direction, but the restaurant chain's fundamentals will also need to strengthen in order to justify the advance in the stock in the long run.