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Panera Bread Co (PNRA): Do You Expect Too Much?

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Panera Bread (PNRA)It is the best of the times and it is the worst of the times. This is the story of Panera Bread Co (NASDAQ:PNRA) , one of America’s most loved bakery chains.

Panera is combating an unfavorable economy and flat-to-declining restaurant visits across the country. Meanwhile there is an increasing tilt towards eating healthy, which is brightening its prospects. So, where does the company stand?

High expectations

Panera has grown its revenue from $1.3 billion in 2008 to $2.1 billion in 2012 and its earnings per share have increased by more than 24% for the last five consecutive years. So, expectations run high.

In its first quarter, although Panera Bread Co (NASDAQ:PNRA) increased its revenue by 13% year-over-year to $561.8 million and its earnings by 17% to $48.1 million, or $1.64 per share, both fell short of expectations. Analysts had predicted earnings of $1.65 per share on revenue of $566.3 million.

For the full year, Panera is looking at 17% to 19% growth in earnings per share, which translates into between $6.89 and  $7.00 per share. But analysts expect no less than $7.04 per share. Meeting or beating this will not be easy for Panera Bread Co (NASDAQ:PNRA) given the challenges involved.

Challenges

Panera has to deal with a weak restaurant environment and a horde of competitors that equally want to cash in on the eating-healthy trend. In April, researcher NPD Group predicted that traffic in the fast-food sector will slide by 1% in 2013, while overall restaurant traffic remains flat. In this backdrop, Panera Bread Co (NASDAQ:PNRA) is targeting same-store sales growth of between 4% and 5% in 2013.

On the competitive front, the chain’s biggest threats come from Chipotle Mexican Grill, Inc. (NYSE:CMG), which also has healthy food as its unique selling point, and Starbucks Corporation (NASDAQ:SBUX) , which has acquired the bakery cafe La Boulange to strengthen its food offerings.

Chipotle Mexican Grill, Inc. (NYSE:CMG)’s excellent Mexican fare made with premium quality meat has set its popularity soaring. The chain expanded to 1,410 stores in 2012 and is opening another 170 this year. But, it is not immune to competitive pressures and saw its comps dip by 1% in the first quarter.

Not a candidate to be beaten, it is braving competition with new menu offerings like the tofu based ‘Sofritas’ that may soon go for a national launch, and Patron Margaritas. However, Chipotle may have to raise its prices this year, something that it has not done in the recent past. It remains to be seen how customers react to this.

Starbucks Corporation (NASDAQ:SBUX) is obviously a formidable rival, which could grow its same-store sales by an incredible 7% in the US in its most recent quarter. And this behemoth is now concentrating on food in order to optimize the ratio between its food and drinks orders. Currently, two-thirds are still beverages.

It is testing La Boulange offerings in around 439 stores in the San Francisco Bay Area and plans to have a complete roll-out in all company-owned stores by 2014 year-end. The sandwiches and biscuits on the offer can be a big threat to Panera.

Panera’s strategy

To beat the odds, Panera Bread Co (NASDAQ:PNRA) is exploring new markets and adding restaurants there. It is also spending more on promotions and pepping up its menu offering.

Expansion

Panera is a relatively new name and can grow in non-penetrated markets. In New York alone, it arrived just about a couple of years back and is planning to open more restaurants in Manhattan. Panera is adding a total of 115 to 125 stores this year. At March-end, there were 1,673 stores of which about 49% were company- owned.

The company sees high returns on its invested capital and has started owning more of its restaurants. Panera Bread Co (NASDAQ:PNRA) has worked out that it takes roughly $1 million to open a new store and average sales per restaurant are around $2.4 million annually. With a 20% margin, this is approximately an EBITDA of $500,000 and an ROIC of 50%.

In 2003, company-owned stores accounted for 23% of system-wide stores and generated $266 million in revenue. Now, almost half of the stores are owned by Panera and they generated sales of approximately $1.9 billion in 2012.

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