The Exchange

Panera Bread needs a traffic turnaround

The Exchange

If Panera Bread (PNRA) succeeds in beating Wall Street's fourth-quarter sales expectations, it will do so with the strongest quarter-over-quarter growth it's seen in at least five years.

The last few months haven't always been kind to the St. Louis-based sandwich and pastry seller, which has previously lowered its financial targets, and yet, analysts are still looking for a 15.3% climb in the top line, vs. the third quarter, when Panera reports its numbers after the close Tuesday. According to FactSet, the company is set to earn $1.94 a share on revenue of $660.3 million.

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Should it beat projections on sales, it would bring to an end four consecutive shortfalls and also mark a 15.5% improvement from the fourth quarter of 2012. Same-store sales, however, are predicted to be up 1.2%, the slowest year-over-year climb since the second quarter of 2009, FactSet data show, and down from the 1.7% pace of the third quarter.

Whether it meets, exceeds or misses the forecasts, it's important to note Panera makes money and it brings in revenue. What's happened of late, though, is the number of transactions has been retreating, a serious concern it has to get rectified. This fact has been attributed in large measure to the inability of stores to get diners in and out quickly, cutting into sales as some customers walk away or simply look for alternatives.

Being a public company, Panera can't afford for that to go on. It's a member of the fast-casual set, like Chipotle (CMG), that's coveted by analysts, investors and a segment of the eating-out public. But it's ultimately a soup and sandwich shop, one that's expanded sharply in recent years with its pronouncements of better-for-you food such as artisan rolls and chicken that's not treated with antibiotics. And it's done so thanks to visitors who have proven willing to pay the high price for a Panera lunch, allowing it to increase its locations (roughly half of which are franchised) and keep its cost structure in fine shape at the same time.

That said, the downturn in traffic is a clear trouble sign, because ever-pricier items alone can't be a sound forever strategy to prop up sales. As the chart below shows, Panera has maintained its ability to raise check levels year over year, via a combination of higher prices and consumers opting for more-expensive fare when they're in the store. The rate of transaction growth, meanwhile, has been slowing, and through the first nine months of 2013, was negative. In other words, fewer checkout instances are being recorded this year than last.

In its defense, Panera is far from the only restaurant fighting to maintain customer growth, as this is an industry-wide worry.

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This year, shares of Panera are up 1.1%. In the period of 2008-2012, stockholders had grown accustomed to annual increases of 35.4%. That dropped off to 11.2% in 2013, making it a relative laggard in a tremendous year for the restaurants, with the group surging nearly 55%. Since reaching an all-time high of $194.77 last May, shares have shed 8.8%.

So the problem Panera has to solve, and says it's focusing on, is getting customers to drop in at lunchtime and fly through the line, while still paying a greater premium for its goods. If guest checkouts keep decreasing, as they have done each of the first three quarters year over year it will have to rely on still further price hikes, further trading up on the menu, or both, to offset the drop. That is, if it wants to keep investors happy.

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