Why Do Investors Love Panera?

With shares of Panera Bread Co. (NASDAQ:PNRA) trading at around $187.50, is PNRA an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

To answer the question in the title, it’s because consumers love Panera. Yes, the food is good, but the real appeal for Panera is the atmosphere. The only other place that offers a similar atmosphere is Starbucks. However, Panera is bigger in regards to space offered, which often means more comfort. The WiFi is the key draw at Panera. Other restaurants have attempted to match Panera’s approach, but in most cases, it’s just not the same. There is something warm about Panera that is difficult to match.

As far as numbers go, Q1 same-store sales increased 3.3 percent year-over-year. Check growth increased 5.7 percent, but transactions declined 2.4 percent. That being the case, there is more than one way to look at this situation. However, let’s keep it simple. Revenue increased 13 percent year-over-year. Therefore, whatever Panera is doing is successful.

Panera has a stellar balance sheet, and operating margin increased 10 bps in Q1. The latter was mostly thanks to lower operating expenses. This is a tribute to Panera’s consistent focus on efficiency.

Looking forward, a big positive is a strong product pipeline. Chairman and CEO Ron Shaich understands that the industry is an ever-changing landscape, and that he must adapt to future trends before it’s too late. Another important note about Ron Shaich is that he’s passionate about what he does, which is an important trait for a leader. It filters down.

On the negative side, Panera has reduced its guidance for same-store sales to 4.0 to 5.0 percent from 4.5 to 5.5 percent. Some analysts are worried about the decline in transactions over the past two quarters. This is a justifiable concern. If Panera can continue to increase the average sale, then it won’t matter, but the consumer isn’t in the best of health at the moment. Perhaps Panera would be wise to sell a few smaller and more affordable items as snacks and/or deserts in order to get more people through the door. That said, Panera has proven time and time again that it knows what it’s doing. It doesn’t need outside advice.

Other negatives include increased competition and more consumers eating at home to save money. The latter relates to the decline in transactions. This also might be one of the reasons why there is a 6.60 percent short position on the stock. Another potential reason for the relatively high short position is that Panera is trading at 31 times earnings. This will be visited further soon.

The following can be looked at as a positive and a negative. Panera is investing heavily in IT. This investment isn’t likely to pay off for at least one year. Therefore, it could impact earnings over the short term, but it should pay off in the long run.

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The chart below takes a look at some basic fundamentals for Panera, Starbucks Corporation (NASDAQ:SBUX), and Einstein Noah Restaurant Group (NASDAQ:BAGL).

Trailing P/E 30.59 31.68 20.25
Forward P/E 23.03 23.79 13.43
Profit Margin 8.22% 10.80% 2.78%
ROE 23.18% 28.97% 19.84%
Operating Cash Flow 298.51M 2.55B 38.51M
Dividend Yield N/A 1.30% 3.60%
Short Position 6.60% 1.30% 2.40%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.