Despite soft third quarter results posted on Oct 22, 2013 and a lowered outlook for the year, we reaffirmed our Neutral recommendation on Panera Bread Company (PNRA) encouraged by the company’s initiatives to boost sales.
Why the Reiteration?
Panera’s top line missed the Zacks Consensus Estimate in the third quarter of 2013 while its bottom line matched the same. For full year 2013, the company expects comps to increase in the range of 2% to 2.75%, down from the previously guided range of 3% to 5% as comps growth fell short of the guided range of 2%–4% during the quarter. The company also narrowed its 2013 earnings guidance to a range of $6.77–$6.83 from $6.75–$6.85.
Following the dismal results, estimates for the year largely moved downwards over the past 60 days. The Zacks Consensus Estimate over the past 60 days has declined 1.9% to $6.68.
Back to back declines in earnings and comps guidance due to soft comps and continuous decline in transactions in the last three quarters are concerns.
However, the company has strong long-term fundamentals. Panera is one of the few casual dining chains, which have been expanding steadily in an anemic economy. The company is investing heavily in several initiatives to improve operational efficiency, customer service and core enterprise systems. The company’s salad and sandwich offerings are gaining traction. During the quarter, Panera added new offerings such as salad, pasta, and egg soufflé. In fiscal 2014, the company plans to come up with freshly baked Panera flatbreads and artisan flatbreads. This solid menu pipeline and aggressive advertising spending would help the company to improve its top line.
Meanwhile, the company is also working on improving entrée growth. Entrée growth reflects better demand for cafes. Entrees have increased steadily since 2011. Despite a 1.0% decline in transactions, entrée was up approximately 1.0%. This demonstrates a problem in meeting demand. Therefore, in order to keep a balance between transaction and entrée growth, the company is focusing on product, environment, service and people. It plans to add approximately 35 additional hours per week at cafes. By Feb 2014, the company intends to acquire additional production equipment to handle incremental demand. Going forward, these initiatives are expected to drive both entrée and transaction growth.
Though these initiatives sound encouraging, the benefits of these will not be realized before late-2014/2015. On the contrary, increased investments for these initiatives will put pressure on margins in the near term.
Other Stocks to Consider
Panera Bread presently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the industry include Buffalo Wild Wings Inc. (BWLD), Burger King Worldwide, Inc. (BKW) and Cracker Barrel Old Country Store, Inc. (CBRL). All these hold a Zacks Rank #2 (Buy).