Panera Bread Company (PNRA, Financial) operates through three broad segments -- Bakery-Cafe Operations, Franchise Operations, and Fresh Dough and Other Product Operations in the U.S. The company posted its first-quarter fiscal 2015 results this month and the shares are trading near the 52-week high levels. Is this company a long-term buy, or should the investors stay away for the time being? Let’s recap the quarter and look at growth drivers.
Recap of numbers
During the reported quarter, the comps grew 1.5% year-over-year and transaction growth of 0.1% year-over-year. Also, Panera opened new company-owned café’s during the reported quarter. System-wide net bakery-café sales inched up a meager 0.7% year-over-year versus 3% growth in the previous quarter. However, the comps at franchise operated outlets registered a 0.1% decline versus 2.7% comps growth in the previous quarter.
All in all, comps growth was soft. As a result, the company posted revenues of $648.5 million, registering a year-over-year growth of 7.1% due to higher bakery-café sales, fresh dough and other product sales to franchisees and the increase in franchise royalties and fees. However, this growth wasn’t sufficient to trump consensus estimates of $658 million.
Operating margin registered a contraction of 180 basis points, or bps, as a result of structural wage increases and costs related to its strategic initiatives. As a result of sluggish comps growth and higher expenses, earnings per share came in at $1.41, registering a year-over-year decline of 9%. Analysts were expecting earnings per share of $1.44.
Growth initiatives
Panera probably has the largest market share in the country in large order catering market space. However, it is still a very tiny slice of the overall market potential. The company opened seven new delivery hubs, bringing the total to 28 and the company now has 183 company-owned cafe hubs that garner 20% of sales.
The company believes that catering service can prove to be a long-term growth driver. As a result, Panera plans to expand this to other markets in 2015 and then have a broader rollout in fiscal 2016.
Another growth driver that Panera is focusing on is improving guest experience through Panera 2.0 platform, stressing on operational integrity that includes digital access, improved operational capabilities, and innovation in food, marketing and store design. The option of digital or phone ordering with a full customizable menu will also be the need for expanding the catering business meaningfully. Mike Bufano, Chief Financial Officer said during the earnings call:
Digital access creates a significantly better to go an eating experience and it is the foundation for catering and delivery. It also maturely impacts labor favorability over the long-term as there is no labor needed to input orders with digital. Furthermore, as digital utilization goes up and surely it will labor goes down. Indeed with high performance digital access in play. Panera has far greater potential to both rose sales and to reduce labor from many years to come.
However, this initiative will require capital and hence will weigh in heavily on profits in the near term. It’s not surprising that the company is expected muted profits in fiscal 2015 as a result of these initiatives and roll out of Panera 2.0.
That said, the company is investor friendly. The Board of Directors approved an increased share repurchase authorization to $750 million and Panera plans to repurchase shares worth $500 million during the course of next 12 months through a combination of cash on hand, cash from operations and up to $500 million in new debt.
Now, I am not a big advocate of pleasing investors by taking loans. However, Panera has low long term debt of only $100 million versus free cash flows of $111 million generated in the past 12 months. This means that Panera should have no difficulty in paying interest on the debt. $500 million is around 10% of market cap. This means that this will drive earnings per share growth over the next 12 months.
Final words
For the next five years, analysts have pegged growth at a CAGR of 15.74% versus 15.01% for the past five years. For the current fiscal, EPS estimates have seen 9 upward and 1 downward revisions during the past 30 days. Also, a forward P/E of 26.79 is relatively cheaper than its rival Starbucks (SBUX, Financial) which is trading at a forward P/E of over 31.
The company is making all the right moves to sustain the growth momentum over long run. Hence, I would not hesitate to recommend a buy for long-term gains, despite the fact that shares are trading near its 52-week highs.
