Panera Bread (PNRA, Financial), maker of freshly baked breads, pastries and sweets, reported fiscal Q1 2015 numbers recently. Though the company reported revenue growth compared to the prior year period and lived up to its own expectations, it couldn’t live up to the expectations of analysts. Even the bottom line was lower than anticipated. On the back of such disappointments the market’s reaction went against Panera, and the stock dropped in after-hours trading. But does this mean all’s bad for Panera? Here’s a look at that.
Key numbers at a glance
Panera Bread reported earnings of $1.41 a share on revenues of $648.5 million for the quarter. The top line reflects a growth of 7% year over year, but it missed analyst estimates of $658.62 million. The increase in revenue was mainly due to increased franchise fees and royalties, better bakery-café sales and more food item sales to franchisees. Even the bottom line disappointed the investors as it slipped 9% year on year primarily on the back of sluggish comps and increasing expenses. The positives of higher sales were offset by increasing costs associated with structural wage increases and costs related to its strategic initiatives as these pulled down Panera’s operating margin by 180 bps. The situation turned worse with the $5.6 million refranchising loss.
Panera Bread’s Q1 2015 revenue break-up. Source: Panera Bread
As always, the majority of the revenue came from bakery-cafes at 88.5%, followed by 6.5% from Fresh dough and other product sales to franchisees, and the balance 5.0% came from franchise royalties and fees.
A look at the comps
During the first quarter earnings call, Ron Shaich, Panera’s chairman and CEO, mentioned, “Our company comps increased 1.5% in Q1. Digging a little deeper, by month's comps were up 2.9% in January, up 1.1% in February and up 0.6% in March.” Panera’s franchise operated comparable net bakery-café sales plunged 0.1%. However, systemwide comps improved by 0.7% primarily on the back of the better performance of company-operated bakery-cafés. The 1.5% increase in comps was comprised of year-on-year transaction growth of 0.1% and average check growth of 1.4%. However, the comps growth was not up to the scratch as compared to the sequentially previous quarter when Panera’s company owned outlets grew 3.3%.
Refranchising efforts
During the quarter the company reported refranchising loss worth $5.6 million, and this took a toll on the earnings, no doubt. But this is just a temporary pain for tomorrow’s gain. Panera has been actively working out plans for its refranchising efforts and is making notable progress on its plan of refranchising 50 to 150 bakery-cafes. In the earnings report, Panera mentioned that it has entered into a letter of intent to refranchise 73 bakery-cafes and is on its track to reach its refranchising goals.
The quarter has been an active one for Panera as far as expansions are in discussion. During the three months period the company opened 11 new bakery-cafes and its franchisees opened 14 new bakery-cafes, pulling up the total store count to more than 1,900 bakery-cafes as of March end. According to Ron Shaich, “In the first quarter, we continued to make progress on our initiatives to make Panera a better competitive alternative with expanded growth opportunities…These initiatives include improving the guest experience through Panera 2.0 (inclusive of digital access and improved operational capabilities) and driving consumer excitement through innovation in food, marketing and store design.”
Bakery-café count as of December 2014 and March 2015. Source: Panera Bread
Returning cash to the shareholders
The quarter’s numbers may not have been impressive, but Panera was able to more than make up with its share repurchase program. During the quarter, the company repurchased more than 155,000 shares at an average price of $160.84, resulting in a total purchase price of $25 million – that’s quite a lot of money to give back to the shareholders. The company has also increased the cap of its share repurchase program from the initial $600 million to $750 million. The story doesn’t end here – Panera expects to buy back another $500 million worth of shares by the end of the year.
Parting thoughts
Panera doesn’t have any unrealistic hopes about the future and doesn’t expect to report much improvement in several of its metrics. However with time the company believes the numbers will get much more encouraging as its refranchising efforts start paying off. The company expects the year’s profits to remain flat, mainly being affected by implementation of its new business strategies such as its digital initiative associated with the launch of Panera 2.0. Nevertheless, Panera’s management is on its toes, and its efforts to push customers through the line faster, its introduction of a new exciting menu and its increased media exposure should start paying off soon. Let’s keep a close watch on the company and see how things unfold.
