Here's the good news at Panera Bread
The latest earnings report from Panera Bread (PNRA) didn't impress investors at all. Understandably so.
Compared with Wall Street's estimates, the numbers certainly weren't favorable. Various costs are problematic, and for the third consecutive quarter, the St. Louis-based bakery operator lowered its full-year outlook. Shares dropped 5.6% in response to $165.42. A day later, on Thursday, the stock was down another 1.8% to $162.43.
Yet there's good news here, a reason, if it holds, to consider that Panera may be at the beginning of an important reversal. And it's this: For the second quarter in a row, same-store transactions have been positive at company-owned restaurants, which make up almost half of the 1,845-store system. This time, they were up 1.4% and, with a 0.7% increase in the average check, led to a 2.1% climb in company-owned comparable sales.
As the chart below shows, the number of guest transactions had half a dozen declines before the second quarter of 2014. Each passing result was more and more troubling, especially after the fourth quarter of 2013 and the first quarter of 2014 were down, even though they were being compared with previous negative years (note that in both the 2013 and 2014 first quarters, Panera blamed winter weather for lowering its overall same-store sales). Optimism does need to be tempered, because it's easier to be on the plus side a year after a negative number. But it's a start.
Clearly, the key will be to keep it going quarter after quarter. It wouldn't qualify as a "trend" today necessarily, though the series of drops had to be halted, and it has been.
But not surprisingly, that wasn't where traders and investors were focused. That's because Panera again reduced its outlook, now saying it probably will earn $6.60 to $6.70 a share this year. When it initially provided a forecast, the guidance was $6.80 to $7.05, but it's kept decreasing.
That's not all. For the fourth quarter, earnings will be $1.77 to $1.87 a share, down from what had been the company's earlier estimate of $1.89 to $1.98. Driving the reduction are rising ingredient costs and the funding needed for its technological upgrades, such as new ordering kiosks, and its re-planning of store designs meant to improve ordering. All these "enhancements will have an adverse impact on our 2015 results," the company says. Not overly compelling for would-be buyers.
And don't forget the fact that Panera is in a competitive arena, with its sandwiches, soups and breads going up against a variety of other shops. Or that it's already a high-cost meal, and that, as the chart makes clear, year-over-year increases in the average amount paid at the register each quarter sometimes have been substantial. However, the rate of the climb appears to be mitigating, which could serve as another boost for traffic. (It’s important to note that the check combines two components -- menu increases and diners opting to buy pricier items, so the change in average check isn’t only a matter of restaurant-level inflation.)
Also, even with a stock that's now down 7.9% year to date, it's not gotten convincingly cheap. The last-12-months price-to-earnings ratio is below its average level, but the forward multiple isn't. Price-to-sales is under the normal reading, while price/earnings-to-growth isn't.
That's plenty to worry about. So with Panera, it's reasonable to be skeptical. But there is a sign that makes brighter prospects not entirely unreasonable either, and that's traffic to its stores. If the last two quarters are the start of a true turn, a lot of other problems go away. The "if" is what matters.
