EPS and Revenue Results
On Tuesday, October 22nd, Panera Bread Co (PNRA) released disappointing results to the street. The bread making company previously known for its growth prospects managed to eek out EPS consensus numbers on share repurchases equivalent to $0.02 and a one-time favorable tax benefit worth $0.13. Absent of these benefits, Panera earned an EPS of $1.33, missing the consensus of $1.35.
On the top-line, Panera missed expectations by $12.1 million. Analysts were expecting $584.6 million in revenue as management announced revenue of $572.5 million.
Tale of the Tape
The real story behind the dramatic drop in share price is in the same store sales. Panera has now lowered comp expectations and missed consensus estimates for comparable stores opened for more than a year 3 quarters in a row, with the recent Q3 by the largest magnitude. For Q3, analysts were expecting company owned comps of 2.9% and franchise comps of 2.7%. Announced numbers were respectively, 1.7% and 0.9%.
We believe this increased deceleration in Q3 is due to deteriorating fundamentals that are in addition to cited throughput problems. We believe that:
1. Panera differentiation has materially shrunk as offerings close to, if not identical to the fundamental Panera offering have started to take revenue share including but not limited to: Corner Bakery, new Boulange offerings from Starbucks, and Noodles Co.
2. Consumer discretionary spending in the casual dining space has been diminished and displaced by large ticket items. We cite recently reported weak restaurant results at Ruby Tuesday (RT), McDonalds (MCD), and Yum (YUM) as evidence of a widespread restaurant sector slowdown.
3. Cannibalization by new store openings and increasingly lower quality locations of new stores themselves.
As a result of these fundamental issues, comp growth of company owned stores has hit a low of 1.7% and slowed further to 1.6% in the first 27 days of Q4. Average comp growth in the last 10 quarters has been approximately 6%.
Future Uncertain as Guidance is Taken Down Across the Board
4th quarter EPS guidance was taken down to a range of $1.91-1.97 from a previously guided $2.05-2.11.
Although full year 2013 EPS guidance was dropped by $0.02, the management number includes the one-time tax benefit. Ex-items, guided FY13 EPS implies $6.64-6.70 versus a previously guided $6.75-$6.85.
4th quarter comps guidance was taken down to 0-2% from a previously guided range of 3-5%.
Hints of a Deeper Problem
We believe fundamental issues in Panera's business model and core offerings are beginning to take root and are more serious than just throughput constraints. In addition to citing "throughput constraints", Panera CEO Ron Schaich stated that a need for "self-examination" and a "thorough review" of the current business operation were necessary to address the slowdown concerns. We believe this self-examination process could take as long as 3 to 4 quarters to bear fruit, if at all.
In addition, Ron stated that Panera now has a "less differentiated experience", which hits at the knees of what has taken Panera to success in the past and alludes to a more serious problem.
Furthermore, management has deviated from past protocol, Panera has decided to omit detailed guidance of FY14, instead opting to only state "below the low-end of the long-term growth target of 15% to 20%". We believe FY14 EPS to be in the range of 0-10%.
How Shares Will Trade From Here
Expect Panera to sell off lower than current levels in early morning trading. We expect he sell-off to be greater than the one exhibited on the earnings miss on July 23rd, which closed 7.1% lower. We cite management guided growth decelerating to 0% (lower leg) and FY14 uncertainty as the main catalysts.
Longer term, the omission of FY14 guidance will keep a lid on shares until Q4 results announced in February as management "intends to provide more detailed guidance for fiscal 2014 in February 2014."
We believe Panera Bread at these levels is over-valued and rate it as a Sell, with a price target of $120.