Panera Rising: How Much Room to Grow Is There in Fast-Casual?

Source: http://www.flickr.com/photos/scelera/

Source: http://www.flickr.com/photos/scelera/

It’s been a bumpy ride for Panera Bread (NYSE:PNRA) shareholders over the past few days — hell, it’s been a pretty bump year for the restaurant chain. Shares are set to close the five-day period down nearly 9 percent, and as of Thursday’s close, the stock was off about 3.8 percent year to date. The decline has been anything but consistent. The stock tripped into January at about $176, sank as low as $164 before climbing to a near 52-week high above $190, and is now, at the end of March, back below where it started.

Here’s what’s been going on. In February, Panera posted mixed fourth-quarter and full-year results. Fourth-quarter earnings increased 12 percent on the year to $1.96 per share, spurred by both strong performance and $139 million in share repurchases during the quarter. Revenue increased 16 percent to $661.7 million as comparable-store sales increased 1.7 percent. For the year, earnings increased 16 percent to $6.81 per share, beating the mean analyst estimate of $6.66. Revenue increased 12 percent to $2.39 billion, in line with analyst expectations, and systemwide same-store sales increased 2.3 percent for the year.

Comparable-store sales growth was somewhat soft, which put some investors on edge, and first-quarter guidance came in below expectations at the time. Looking ahead to the first quarter of 2014, Panera is targeting earnings in a range between $1.49 and $1.55 per share, well below the current mean analyst estimate of $1.70 per share. For the year, Panera is estimating earnings in a range between $6.80 and $7.05 per share, below the current mean analyst estimate of $7.31 per share. The company is targeting full-year comparable-store sales growth in a range between 2 and 4 percent.

Panera Bread CEO Ron Shaich reaffirmed these targets at the company’s investor day on March 25. However, explicitly absent from Panera’s outlook were any projections beyond fiscal 2014.

“Given that the rollout of some of these initiatives could result in choppy earnings growth in the near and medium term, the Company is also noting that it will not at this time provide earnings guidance beyond fiscal 2014,” Panera said in a statement.

Shaich added: “We are pleased to share with the investment community the strategic initiatives we have been developing for several years to improve our competitive position, expand our growth opportunities and ensure we have the necessary capabilities for the future. As already reflected in our guidance for fiscal 2014, we anticipate that these investments may depress both margins and earnings growth in fiscal 2014 and 2015. However, we believe these initiatives will enable us to better meet our customers’ ever-evolving needs and provide the platform for significant growth and expanded earnings.”

Significant growth and expanded earnings is the name of the game for the fast-casual segment at large right now. At least, within the format that Panera and peers like Chipotle Mexican Grill (NYSE:CMG) occupy. Whereas same-store sales increased 2.3 percent at Panera in 2013, they increased 9.3 percent at Chipotle, and while Panera is planning to open between 115 and 125 stores this year, Chipotle is planning on opening between 180 and 195.

One of the reasons for Chipotle’s success over the past year has been its aggressive marketing strategy. The company aggressively pushed its commercials on YouTube and a sponsored Hulu series called Farmed and Dangerous. The company has enjoyed significant media attention and consumer praise for its sourcing methods, which it highlighted in the commercials and Hulu series. A recent appearance by Joshua Brau, director of Chipotle’s Food With Integrity program, at the 33rd Seafood Expo North America also raised some curious eyebrows. A competent seafood lineup could bring even more customers through the doors at Chipotle. Moreover, seafood is a much harder direction for Panera to expand in.

For its part, Panera’s expansion may ultimately be routed by Starbucks (NYSE:SBUX), which is increasingly threatening to do what Panera does, just bigger and, depending on which side you fall on, better. Starbucks has been experimenting with more sophisticated bakery, juice, food, and tea offerings, which could sweep the feet out from beneath Panera’s stance in the fast-casual market. The recent introduction of alcohol to certain locations also arguably puts the company one step ahead of its competitors.

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