What My Dad, and Peter Lynch, Taught Me About Panera Bread Co (PNRA)

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Panera serves many menu items that use similar ingredients, which saves them on both upfront costs (they buy in bulk) and lost inventory. Their menu is quite limited–salads, soups, sandwiches–which is a huge advantage over restaurants like Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH). While Ruth’s also has to pay high production costs in Chef’s, equipment, and maintenance to produce their food, Panera does not.

Yet, even with food production costs that are more similar to Yum! Brands, Inc. (NYSE:YUM)’s, Panera is able to charge an average of around $7.50 (at least in the Chicago market) for turkey and chicken sandwiches. Panera doesn’t need to invest in quality via waiters and hosts, yet they have a reputation of being an extremely high quality establishment.

They have it made. They’re able to charge relatively high prices for cheap food.

Don’t think like the street
Wall Street, of course, doesn’t typically look at restaurants this way. Even the average investor will probably look at things like “P/E ratios,” and dividends first. Well, if you go by that you will see that Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH) has a P/E of 21, Yum!’s is 23, and Panera’s is 26. You’ll also see that Ruth and Yum! Brands, Inc. (NYSE:YUM) each pay dividends, while Panera does not; but is that what you should be basing your investments on?

I’d recommend that investors think more like business owners.  If you owned a restaurant you’re biggest concern would likely be costs and revenue; how much revenue are you bringing in, and how much are you keeping.

As you can see by the table below, that’s where Panera’s business model really shines.

Company name Revenue* Cost of revenue* Gross profit*
Panera 2,130,057   1,373,825 61.63%
Yum! Brands 2,904,000   2,164,000 26.42%
Ruth’s Hospitality 398,589 313,447 22.62%

*FY 2012

To be clear, I recently recommended Yum! and I love Ruth’s steaks. I’m not trying to steer you away from either of those investments.

I’m simply wondering aloud if Panera can resume its rapid long-term growth, assuming its short-term “bottlenecks” are worked out.

Panera is on the right side of healthy eating trends, and has grown sales in excess of 25% annually over the past half decade. The MyPanera loyalty program now has nearly 14 million members, and there is plenty of room to add stores both domestically and abroad.

The hard part for Panera is not getting people in the door. The question is simply: will they continue to earn a high enough return on capital, with their new stores, to continue opening them at current levels of over 100 per year.

In my opinion, by thinking like a restaurant owner, you’d have to say that the answer is “yes.” At least that’s what my Dad would say, and I’d have to believe Mr. Lynch would agree.

The article What My Dad, and Peter Lynch, Taught Me About Panera originally appeared on Fool.com and is written by Adem Tahiri.

Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends Panera Bread (NASDAQ:PNRA). The Motley Fool owns shares of Panera Bread. 

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