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Yum! Brands, Inc. (YUM): What My Dad, and Peter Lynch, Taught Me About Panera Bread Co (PNRA)

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I’ve been fascinated with Peter Lynch’s “power of common knowledge” concept ever since I first read One Up on Wall Street. It’s the  promise that we can use our own personal experiences to gain a competitive edge in the market.

Buying what we know” makes complex things, simpler. Nearly ten years ago, something my Dad taught me about what he “knew,” restaurants, has me feeling optimistic about Panera’s future today.

Yep, even after a bad quarter.

Panera Bread Co (NASDAQ:PNRA)

Dissecting Panera Bread Co (NASDAQ:PNRA)’s “bad” quarter

I’ll get to the conversation I had with my Dad in a moment but, before we ponder the opportunity in Panera, let’s recap Panera’s “bad” quarter.

Panera Bread Co (NASDAQ:PNRA)‘s stock has slumped over the past month, since reporting disappointing second-quarter results, and it now trades about 20% below its 52 week high. In the quarter Panera did show strong sales growth, with same store sales rising at 3.7%, and it also reported a whopping 16% growth in earnings. Some other good news is that the company plans to open 115 to 125 stores this year, and earnings growth is expected to top 18%, annually.

So why did the stock drop 5% on these seemingly good results? What made these good results “bad?” In short, it was expectations.

The company guided down for the third and fourth quarter. While Panera Bread Co (NASDAQ:PNRA) is still expected to grow in double digits this year, it guided down for the full year as well. Much of the reasoning is due to the fact that Panera is simply growing too fast. That’s not the worst thing in the world, but even management has admitted to “bottlenecks” in both staffing and operations during peak hours.

The company now expects to earn between $6.75 and $6.85 per share.This is well below the previous analyst consensus and, these short-term issues, have lead to some analyst downgrades and uncertainty surrounding the stock.

With the stock stuck in neutral, over what may be short-term fears, it may be a good buying opportunity. But that only makes sense if Panera Bread Co (NASDAQ:PNRA) can continue to replicate its previous smashing success, in its new stores.

What my Dad “knew” about the restaurant business
About ten years ago, I sat with my Dad for lunch at the first Panera Bread Co (NASDAQ:PNRA) in our area.

“This is how to make money,” he said, gazing somewhere in the vicinity of the cash registers or bread.

“Selling sandwiches?” I asked.

“No, these guys, whoever owns this place. They have the right idea. Their food doesn’t go bad, their menu is small, their prices are high, and they don’t have any expensive equipment or a ton of employees.” He explained.

My Dad probably didn’t realize it at the time but he had just made a profound case for investing in Panera Bread Co (NASDAQ:PNRA). He was, in essence, proving Peter Lynch right. You see, my Dad wasn’t an investor; he owned restaurants all his life. He knew all of the pitfalls that put most restaurants out of business, such as high labor costs, expensive equipment, and rotting inventory. Somehow, by simply observing their kitchen area and workers, he knew that Panera was wonderfully equipped to manage these common pitfalls.

I often wish I had the foresight to have used his insight and purchased shares of Panera early. However, despite Panera’s rapid growth, their wonderful business model still exists today.

Panera’s business model: A side by side comparison
Panera’s winning business model comes down to one thing: costs. They charge a relatively high price for their food, while avoiding high costs.

Their restaurants exist somewhere in between the high end and low-end markets. Let’s compare Panera with a high end restaurant that I love, Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH), as well as a fast food stock that I recently recommended, Yum! Brands, Inc. (NYSE:YUM).

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