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Panera Slumps as Pricey Bread Shop’s Pace Disappoints

The Exchange

The burdens on the fast-casual restaurants are many: Serve up better-than-average-tasting food, convince diners your fare is healthier than most chains, perhaps be socially conscious, keep customers paying premium amounts and maintain torrid growth to please Wall Street.

Panera Bread store

Panera Bread (PNRA) has come up short on the last one, sending shares of the St. Louis-based sandwich and pastry shop sharply lower Wednesday. In recent trading, the stock was down 8.5% at $166.59, its worst single day in two years. At midsession, volume was already five times the level of an ordinary day. Coming into trading, the stock, for years a high-flier, was up 14.5% from where it ended 2012, and that's now been knocked down to 4.9%.

The sell-off came a day after Panera said same-store sales in the second quarter were weaker than expected and that its full-year earnings would fail to meet its target. While sizable post-earnings moves aren't unusual for Panera -- going back 20 quarters its average pullback is 5.7% and its average gain is 6.9% -- the numbers contained enough troubling signs, including another decline in transactions, to send traders fleeing to a greater extent than normal.

Comparable sales at all of Panera's stores rose 3.7% in the second quarter, but analysts were expecting a 4.4% increase, according to FactSet. Company-owned stores had a same-store sales increase of 3.8%. The other big disappointment surrounded the outlook. Panera is now projecting a profit of $6.75 to $6.85 for the year, or up in the neighborhood of at most 16%, whereas it had been calling for 17% to 19% growth. That translates to roughly $6.89 to $7.

Panera Bread, 10-year chart

Additionally, Panera again lowered its prediction for full-year same-store sales growth at corporate-owned units. After initially targeting a 4.5% to 5.5% increase, the company earlier this year dropped that to 4% to 5%. Its new expectation is that the range could be worse on the low end, ultimately being between 3% and 5%. The current view is going to hit earnings, Panera said.

Problems for patrons?

Panera's second-quarter profit of $1.74 a share was 4 cents below the consensus expectation. It also slightly missed in the first quarter. Revenue of $589 million fell about $5 million short of analysts' general view. The average check size rose again, up 4.3% vs. a year earlier, from a combination of price increases and more expensive purchases. That made up for the 0.5% decrease in transactions.

Panera operates in what's known as the fast-casual group, with names like Chipotle (CMG) and Einstein Noah (BAGL), and its patrons aren't unaccustomed to paying a premium to what they would at McDonald's (MCD) or Burger King (BKW) when they check out. However, a troubling trend may be emerging with transaction counts, which have fallen for three straight quarters. If that doesn't reverse, still higher menu prices and/or trading up to costlier options is going to become even more critical to Panera's sales.

Panera, though, is banking on demand to be there. It has a total of 1,708 restaurants in its system, of which 835 are owned by the company. For this year, it has been planning on opening 115 to 125 more stores, and it said this week that it likely will be "at or above" the top end of that range.

Ron Shaich, chairman and co-CEO, said in a press release that Panera "must improve our peak hour throughput. While results in the next few quarters may be choppy as we invest in both sales-building initiatives and operational capabilities, we believe that our efforts will ultimately enable us to deliver an enhanced customer experience, grow sales and expand earnings."

The question is going to be whether those customers continue to show up in large numbers, and if the transactions aren't increasing, whether those who do come will be willing to pay ever more. For investors in a stock that's quadrupled in the past five years, it's not an academic exercise.