Panera Bread (PNRA, Financial), which owns, operates and franchises retail bakery-cafes in the United States and Canada, is a stock that is worth holding in the portfolio. Panera Bread stock has seen good times in the last one year with the stock moving higher by 38.0%. However, I am of the opinion that the stock still holds long-term value and is among the better companies in the U.S. restaurant sector from a consumer preference point of view. In this article, I will discuss some of the key reasons to be bullish on Panera Bread.
Without any second thought, the most important thing for a restaurant is consumer preference and consumer satisfaction. In a recent consumer satisfaction survey, Panera Bread ranked third with Chick-fil-A and Chipotle Mexican Grill (CMG, Financial) taking the first two positions. Chick-fil-A is unlisted and Chipotle Mexican Grill is trading at premium valuations. Panera Bread is therefore an attractive investment option among the top fast-food chains according to consumers. I am not bearish on Chipotle Mexican Grill, but I will prefer Panera Bread based on relative valuation.
An existing trend in the US fast-food industry that will get bigger with time is shift to a healthy food menu. McDonald's (MCD) has been suffering for the same factor as consumers shift to relatively healthy fast-food options. Panera Bread has taken several initiatives that will attract consumers from a healthy menu perspective.
In May 2015, Panera Bread shared progress on commitment to remove artificial additives by publishing a list of artificial colors, flavors, sweeteners and preservatives that the company has eliminated or intends to eliminate from the menu. Initiatives like these are bound to attract healthy menu conscious consumers who are growing in numbers.
In June 2015, Panera Bread announced a “food as it should be” campaign and became the first national restaurant company to voluntarily post calories on menu boards. The company also started offering chicken raised without antibiotics and the removal of artificial trans-fat. I am mentioning these initiatives to show that Panera Bread is focused on healthy menu and that will help the company maintain decent comparable restaurant sales growth.
In addition to these initiatives related to the menu, Panera 2.0 initiative that includes digital access, improved operations, food innovation and store design, is having a positive impact on the company’s growth. For three stores that have already seen 10 quarters of operation after conversion to 2.0, the cumulative gross retail store increase has been 33.6%. Therefore, the initiative is working and should help Panera Bread sustain decent comparable store sales growth in addition to the menu offering positive trigger.
Looking at the valuations, Panera Bread is trading at 30 times FY16 PE. However, I feel that valuations are not stretched because Panera Bread will continue to exhibit steady growth and the impact of Panera 2.0 will be for the long-term. Also, Chipotle Mexican Grill is trading at FY16 PE of 36 and Panera Bread seems relatively attractive.
As a final positive point, Panera Bread appointed Drew Madsen as the president of the company. Madsen served as president and COO of Darden Restaurants Inc., the world’s largest full-service restaurant company. I am of the opinion that Madsen’s expertise will help Panera Bread in the coming years to sustain growth through innovative strategies.
Panera Bread is therefore an attractive investment option to consider even at current levels for investors who intend to buy the stock with a long-term horizon. Among restaurant players in the United States, Panera Bread will continue to deliver strong numbers.
