The fast food restaurant industry is anticipated to generate total revenue of $240 billion in 2014, with a 19% growth in the next 5 years. The business is anticipated to achieve a volume of about 249 billion transactions in 2014.
Despite the economic recession, the U.S. remained one of the world's prevailing countries in the worldwide quick service restaurant market. The U.S. fast food industry is anticipated to grow by 4% through 2014. The business sector is governed by increasing youthful populace and growing working class with higher expenditure capacity. Restaurants are now focusing on various changes to stay ahead of their competitors. The most common changes that we notice is menu, online ordering systems, and healthy food options. Panera Bread (PNRA, Financial) is one such restaurant which is focusing on attracting more health-conscious customers by knocking off various artificial additives from the menu.
Quarter Overview
The company recently reported its second quarter results and was quite good in terms of revenue growth. Consolidated revenue was up 7.1% year over year, to record $631.1 million as compared to $589 million for the same quarter last year. The net income was down by 4% year over year, to record $49.2 million as compared to $51 million in the same quarter last year. The net income was down despite the rise in the revenue, mainly due to decline in the operating margin. The company witnessed a decline in operating margin by 250 basis points year over year.
Operating margin was high as the company underwent various expenditures in infrastructure enhancement, technology, sales and marketing expenses. These expenses will leverage growth in the future and influence the bottom line. Despite the decline in the operating margin, diluted EPS recorded growth by 5% year over year, to $1.82 as compared to $1.74 in same quarter last year.
In the quarter, the company opened 10 new company-owned outlets and 9 new franchise outlets. The total count for Panera locations is 1,818 bakery cafes.
Menu for health conscious customers
The bulk of the footsteps in restaurant are now leaning toward healthy recipes in restaurants. Natural nourishment, refreshments and food with low trans fats are progressively discovering their spot on restaurant menus.
Panera Bread is focusing on providing a healthy diet for health conscious customers. Panera has already eliminated high fructose corn syrup from various product categories such as dressings and sauces. The modified menu looks quite appealing and healthier for calorie conscious customers. The menu is free from artificial trans fat with calories are posted on menu boards. Panera is also the first restaurant chain to invest in animal proteins raised without antibiotics on a large scale.
Furthermore, Panera has taken up a bold step to eliminate all artificial ingredients and preservatives from its food and bakery items. The new menu is expected to be implemented in all its outlets by end of 2016.
Following are the course of action for the healthy food menu.
- All bakery items will be free from high fructose corn syrup.
- All artificial colors used in bakery icings to be replaced with natural alternatives and also provide better taste and exotic colors for presentation.
- All artificial preservatives will be removed from dressings, sauces, beverages syrups and deli meats. It plans to use traditional meat like artisan smoked ham. The natural meat option is being currently tried as a pilot run project at various outlets.
- These changes in the food menu may offset the margin as the cost of natural ingredients is expensive. Panera will always have an option of revising the menu to balance out the margin, but in a longer run Panera is certain to benefit with the revised healthy menu.
Outlook
Panera is extravagant on its buyback policy and investment in key areas to lay a strong foundation for future growth. Considering the investment in the next quarter, the company anticipates the EPS to be in the range of $1.40 to $1.46, up by 4% to 8% as compared with same quarter last year.
Conclusion
From an investor’s point of view, Panera is always known for striking back. The prices of the stocks were down by 15% in last 6 months, but up 2.2%, on a 3-month basis. The company is also focusing on revising its food menu for a healthier food menu, this again will benefit Panera in a long run. Operating margin is certain to fall for Panera mainly due to its expenditure associated with new strategies, but Panera may be taking two step back for a big leap. Panera 2.0 plan is also anticipated to be implemented nationwide by end of fiscal 2014 and this again will help the performance of the company. I feel investors who eye stocks from food and restaurant industry can consider Panera Bread for their portfolio.
