Panera Bread Co. (PNRA, Financial) is currently the largest player in the fast-casual restaurant industry, with more than 1,780 bakery-cafes as of December 2013. Owning and franchising bakery-cafes under three brands — Panera Bread, Saint Louis Bread Co. and Paradise Bakery & Café —Â the company specializes in baked goods, sandwiches, soups, salads and custom-roasted coffees. Panera Bread operates through three business segments: company bakery-cafe operations, franchise operations and fresh dough and other product operations.
Results posted for fourth quarter 2013 were mixed, with revenues up 15.6% year over year, but still missing estimations, and earnings were $1.83 per share, below estimated figures as well. Analysts’ evaluations reflect higher expenses and sluggish comps growth, which resulted on slightly disappointing results. Nevertheless, Panera Bread remains in a strong position among the competitive market, with pricing power, customer loyalty and trendy restaurants, while it keeps innovating and introducing new menu items, and increasing media exposure. During 2013, the firm represented 13% of the $34 billion domestic fast-casual industry with systemwide sales of $4.3 billion.
The company’s business model is steady, and has proven to remain less perturbed by macroeconomic pressure than other companies. During 2013, it opened 133 new stores, and for 2014 has targeted to further open 115 to 125. Seeking to increase its sales, the company focuses on menu innovation and operational efficiency. The new squash soup and the ABF turkey chili soup have gained popularity, and the company is planning to develop new freshly baked Panera flatbreads and artisan flatbreads. The solid menu and intensive marketing campaigns are expected to improve the top line during 2014. Meanwhile, Panera Bread is also improving its operational excellence with its training and bonus programs. These initiatives along with the loyalty program My Panera, which initiated in November 2010, already has over 16 million members, are expected to lift growth.
Panera 2.0
The company has been recently developing some interesting improvements such as mobile technology, seeking to enhance customer experience, with mobile ordering and payment capabilities across its systems. Moreover, Panera’s loyalty program which accounts for 50% of transactions will also benefit from the increased usage of technology, reinforcing as well the company’s brand intangible asset. Panera 2.0 aims to reduce wait times and speed up service, increasing sales and providing a better guest experience. Moreover, Panera 2.0 allows customized menus and MyPanera loyalty program.
Through the Rapid Pick-up system, an improved way of ordering, customers will be able to order up to five days in advance and pick up at a pre-determined time without waiting in line. Customers can also place online/mobile orders from the restaurant and have orders delivered to the table.
However, Panera 2.0 right now it only exists in two markets and 14 restaurants, although it expects to have it installed in all of its restaurants by year-end. Starbucks Corp. (SBUX, Financial)’s mobile payments currently account for 14% of all U.S. in-store transactions; Panera will have to speed up its rollout if it expects to catch up to Starbucks.
Risks and Competition
The company faces increased competition, both from quick-service restaurant chains, which are upgrading their menus and decor, and casual dining firms which have been focusing on enhancing their value proposition. Peers such as Chipotle Mexican Grill Inc. (CMG, Financial) and Starbucks Corp. have been posing a strong threat to the company, with higher same-store sales during 2013 —Â up 5.6% —Â than Panera with just 2.3%. Starbucks, which recently acquired bakery chain La Boulange, competes for Panera’s customers.
Furthermore, several companies have been affected by the Affordable Care Act, having now to compulsory provide coverage for workers. Panera Bread would incur $15 million as additional annual labor expenses, pressurizing margins. In addition, the investments the company has been doing in its operational capabilities and technological innovations have led to higher general expenses. Indeed there is no doubt these investments will increase transaction growth over the long-term, but nevertheless are likely to have a negative impact on margins in the near term.
Final Thoughts
Panera Bread's fourth quarter 2013 earnings of $1.96 per share increased 12.0% year over year, driven by an increase in revenues during the same period of 16.0%, to $662.0 million. Still, both earnings and revenues missed analysts’ estimations. System-wide comparable net bakery-cafe sales in the quarter increased only 1.1%, lower than 4.9% in the year-ago quarter and 1.3% in the third quarter. The company s operating margin declined 170 basis points (bps) to 12.9% due to an increase in total expenses and general and administrative expenses. Nevertheless, Panera Bread managed to grow 1.6%, surpassing the industry's average performance.
Moreover, Panera Bread efforts to return wealth to its shareholders via share buybacks. The company has recently bought back $332.0 million of shares in 2013 and has approximately $248 million available for further repurchases.
The fact that the company is determined to improve both the top line and bottom line through menu innovations, enhanced customer experience, new Panera 2.0 with Rapid Pick-up ordering system and aggressive advertising campaigns have led analysts to think this company is well positioned to continue increasing sales and with a promising growth perspective. Moreover, within the market, despite being highly competitive, customers have developed strong loyalty towards Panera Bread, positioning in a solid position with strong brand recognition. Analysts still feel bullish about Panera Bread, and state it has still plenty of room to grow.
Disclosure: Damian Illia holds no position in any of the stocks mentioned.
