Panera Bread Co (PNRA), Chipotle Mexican Grill, Inc. (CMG): Tapping the Investment Opportunity in Fast Casual Restaurants

Fast casual restaurants have been one of the fastest growing concepts in the food industry, gaining popularity every year. With people becoming aware of the unhealthy consequences of eating fast food, they are looking for healthier options- but with the ability to eat on the go. With the improving economy, increasing discretionary consumer spending, and growing preference for healthy food, fast casual restaurants are primed for profits: Investors should grab this opportunity to make some fat returns.

Panera Bread Co (NASDAQ:PNRA) is amongst the companies which have successfully tapped the growing fast casual restaurants market, returning more than 200% over the past five years. The big question remains: Is the company still poised to grow, or should investors look to other companies for capital gains?
Panera Bread’s rapid expansion is driving the company’s growth

By the end of March 2013, the company had over 1,673 stores, and had opened 123 new stores in 2012. The number of company owned stores increased to 49% from just 23% in 2003, resulting in annual revenues for company owned stores growing from $266 million in 2003, to $1.88 billion in 2012. The company is still expanding: Plans to open over 115 new stores this year would lead to new sales well above $230 million, assuming similar sales as current locations.

Panera Bread (PNRA)Panera Bread Co (NASDAQ:PNRA)’s growth clearly seems to be accelerating. Management indicated that a same-store sales increase of 3.3% might have been over 4.5%, if not for weather issues in the northeast, and expects next quarter’s comparable store sales growth to be between 4%-5%

Panera Bread’s intelligent steps to increase customer base

To further gain foothold in the industry, Panera Bread Co (NASDAQ:PNRA) has come out with a new pasta menu for dinner; in addition to adding salads and shrimp, as its dinner menu had been the weak point, attracting very little footfall. With the new additions to the menu, the traffic at dinner time should rise, and drive revenues higher without the cost of dumping huge capital.

Panera Bread Co (NASDAQ:PNRA)’s 13 million loyalty program members show the popularity of the brand, and show the huge customer base it can leverage to further increase revenues through intelligent offers. The company expects diluted earnings per share for the second quarter to increase 16%-19% compared to the same quarter last year, an increase of 17% to 19% for the full year.

Another giant in the “fast casual” industry

Chipotle Mexican Grill, Inc. (NYSE:CMG) is another success story in the relatively new fast casual restaurant theme expanding from just 490 stores in 2005 to 1,410 in 2012, with around 170 new stores lined up for 2013. The stores operate like a cafeteria, where customers can choose what fillings they want. Earnings have grown over 270% in the last five years, and the stock has risen massively from $45 in 2008 to above $370 levels today, after a high of $440 last year.

One headwind which has troubled the company is rising food prices. The company has not raised prices with rising costs, thereby affecting margins and decreasing net income. However, management has hinted at a possible increase in prices later this year. Its same store sales growth rate has also been declining: 4.8%, 3.8% and 1% for the last three quarters successively. I think we should wait for the above trends to change before getting into this stock.

Which company offers an attractive entry point?

Ticker Operating Margin Forward P/E P/B ROE
PNRA 13.58% 23.33 6.48 23.18%
CMG 17% 28.9 8.91 23.75%
BWLD 7.39% 21.69 4.47 15.07%

Both Chipotle Mexican Grill, Inc. (NYSE:CMG) and Panera Bread are growing at a good pace but Panera Bread’s valuations offer a much better investment opportunity. Buffalo Wild Wings (NASDAQ:BWLD) is also cheap but its growth prospects are not as promising as Panera Bread’s. Buffalo Wild Wings missed earnings estimates last quarter by $0.12 resulting in a 5% dip in the stock. Since major sporting events are the key drivers for the company to bring in customers, earnings are volatile, which may not please many investors.

Both Panera Bread and Chipotle Mexican Grill, Inc. (NYSE:CMG) boast healthy operating margins, whereas Buffalo Wild Wings doesn’t impress much. In fact, Buffalo Wild Wings (NASDAQ:BWLD)’s operating margin has taken a huge hit, slumping from 12% last year to 8% this year — a 50% decrease — mainly due to rising chicken prices which are up over 40%. The company intends to tackle this issue by selling chicken wings per pound instead of per piece. It remains to be seen if the company is able to stabilize its business by catering to a wider customer base through additions in its menu, and also if it is successful in controlling costs; until then investors are better off without this stock.

Foolish takeaway

All three companies are strong brands in the fast casual restaurant industry, but Panera Bread Co (NASDAQ:PNRA) offers the best investment opportunity. Its growth prospects are similar to Chipotle but it has cheaper valuations. On the other hand, it has a more stable business model than Buffalo Wild Wings. Panera Bread’s new menu offerings may add to the top line very fast, and the stock price may follow the trend and reward Foolish investors.

harsha lohia has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings, Chipotle Mexican Grill, and Panera Bread. The Motley Fool owns shares of Buffalo Wild Wings, Chipotle Mexican Grill, Inc. (NYSE:CMG), and Panera Bread. harsha is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Tapping the Investment Opportunity in Fast Casual Restaurants originally appeared on and is written by harsha lohia.

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