The growth thesis, of course, doesn’t just rely on increasing customer acceptance and traffic but also hinges on continued successful expansion. Panera derives some money from franchise royalties, and its franchisees mostly purchase their dough directly from Panera, but the company makes most of its own dough from sales at its own bakery/cafes. It plans to continue expansion through both segments.
Panera also has a strong balance sheet, with $297 million in cash (or about $10 per share) and nominal debt of $6.7 million. Last year, the company generated about $137 million in free cash flow.
And now, the risks
Panera has ample competition, even beyond the two big competitors named above, both of which have been embarking on interesting initiatives lately. Starbucks bought bakery La Boulange last summer, a move that was viewed by many as a way the coffee giant can help spruce up its own food offerings.
Meanwhile, Chipotle has not only been experimenting with Asian fare, but in January it started up a catering business to provide customized fare for parties of 20 to 200.
Cosi Inc (NASDAQ:COSI) is a pretty terrifying penny stock with a major turnaround to pull off (it’s only reported one — tiny — quarterly profit in 10 years ), but its comfy-cozy restaurants and fancier quick-serve fare also obviously compete with Panera’s panache.
While McDonald’s doesn’t bring to mind anything close to Panera’s higher-end fare and comfy surroundings, the fast-food giant’s healthy offerings and low-price lures don’t necessarily put it out of the running for some similar customers, particularly when times are tough.
Food prices will dog many restaurant companies this year, and hiking menu prices doesn’t always go over well with the consuming public, particularly in tough economic times. In addition, Panera’s reliance on its dough facilities could cause major problems should the supply get disrupted . Also, like many other restaurant companies, coming health care mandates will add some profit-pinching factors when it comes to insuring employees.
Last but not least, labor costs are always difficult for restaurants, and one might wonder how good a job Panera is doing at rewarding its employees. The company mentions utilizing “wage discipline” in 2012 in its most recent Form 10-K. That kind of discipline may not go over too well with hard-working employees.
Foolish bottom line
Overall, Panera fits into the universe of companies that have more than traditional bottom lines in mind, and therefore fits perfectly into the Prosocial Portfolio.
The article Panera: A Tasty Stock Purchase originally appeared on Fool.com and is written by Alyce Lomax.
Alyce Lomax owns shares of Chipotle Mexican Grill (NYSE:CMG) and Starbucks. The Motley Fool recommends Chipotle Mexican Grill, McDonald’s, Panera Bread, and Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald’s, Panera Bread, and Starbucks.
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