Reviewing Panera Bread's 4Q Results

Panera Bread (PNRA) reported 4Q 2006 and fiscal-year 2006 results Thursday after the market close.

4Q 2006 Highlights

Revenue up 25% to $232.91 million

Total costs and expenses $202.44 million

Comparable bakery-café sales up 2% (company-owned up 1.6% and franchise-operated up 2.2%

Franchise loyalties and fees brought in totaled $16.58 million

Operating income $30.47 million

Net income of $19 million ($0.59 per share) up from $16.16 million ($0.51 per share) in 4Q 2005

Diluted share count 32,114,000

52 bakery-cafés opened

Fiscal 2006 Highlights

Revenue up 29% to $828.97 million from $640.275 million in fiscal 2005

Total costs and expenses $738.179 million

Average weekly sales down .5% to $40,320 (company-owned $39,024 and franchise-operated $41,091)

Comparable bakery-cafe sales up 4.1%

Franchise loyalties and fees brought in totaled $61.53 million

Operating income $90.79 million

Net income up 23% to $58.85 million ($1.84 per share) from $52.183 million ($1.65 per share) in fiscal 2005

Diluted share count 32,044,000

155 bakery-cafés opened

1027 total bakery-cafés operated; 391 company-owned, 636 franchise-operated

Fiscal 2007 Guidance

For the 1Q 2007:

EPS of $0.47 to $0.50

Expecting comparable bakery-café sales growth of 0% to 1%

Expecting average weekly sales of $38,700 to $39,200

Expecting to open a total of 27 bakery-cafés (12 company-owned and 15 franchise-operated)

For the year:

EPS of $2.26 to $2.34

Expecting comparable bakery-café sales growth of 2% to 4%

Expecting average weekly sales of $39,000 to $40,000

Expecting to open a total of 170 to 180 bakery-cafés (85-90 company-owned, 85-90 franchise operated)

These results came in below analysts earnings estimates of $0.63 per share for the quarter and $1.88 for the year. What's odd is that, on average, analysts didn't change their estimates even after Panera reported that they were lowering their guidance. Panera also missed analysts' sales guidance of $233.47 million. What's disappointing is that Panera missed their lowered 4Q EPS guidance of $1.87 to $1.90. This was still a quarter of great growth, but management will need to be more conservative with their guidance going forward or even stop giving quarter-to-quarter guidance (which would be my preference.)

All in all, I'll take this quarter. The company is expanding at a good rate, sales and income are growing very nicely, and the franchise-operated units seem to be doing quite good as well. Earnings came in below guidance and what analysts were expecting, but I'm still very pleased with the progress the company made in the quarter. The outages and storms in the Midwest definitely did their part for keeping earnings slow (40% of Panera's bakery-cafés are in the Midwest). Panera will easily be able to handle this quarter with their strong balance sheet, so I'm not worried about this too much and I believe management will be able to get things going as expected into fiscal 2007.

The company is forecasting a strong 2007; it's within reason, but strong nonetheless. Assuming they meet the low end of their fiscal 2007 EPS guidance ($2.26), the forward P/E is at 25.4, very reasonable for a company growing earnings and expanding at such a fast rate. If they were to meet the high end of their EPS guidance ($2.34), the forward P/E would be at 24.53. These estimates are in line with what analysts expect for fiscal 2007, an EPS of $2.30 on average (in the range of $2.20 to $2.35). Analysts are expecting sales of $1.03 billion for the year, which to me seems a little bit on the high side of things. It'll be interesting to see if Panera can meet these optimistic expectations, a lot depends on the weather and obviously how many large obstacles the company has to face.

Cash flow and balance sheet numbers weren't included in the release, but I'll be interested to see how Panera did in those two areas. Most of the cash generated by the business is going back into expansion, so I'd guess that the cash position will see a decrease from the 3Q considering the company's short-term trouble in the Midwest. Management is very smart and has experienced blips before, so I believe they'll be able to work around this pretty easily.

This is a company with a great concept, experienced management, and a good amount of resources, so I'm not concerned a bit. If these troubles persist through the next few quarters it may dampen my enthusiasm, but over the long-term I feel Panera still has great potential remaining. Panera hit a bump in the road this quarter and probably will have relatively "slow" growth in the 1Q 2007 as well, but the business hasn't changed and they're still going to open new cafés, as they should be.

The TTM EPS now stands at $1.824. For the 1Q 2007, analysts are expecting an EPS of $0.53, while management gave guidance of $0.47 to $0.50. Analysts are expecting revenue to come in at $238.18 million. In the short-term, I'm not concerned about Panera meeting expectations. As long as management keeps running the business and can keep expanding like they've been able to, I'll continue to have high hopes for the company in the long run.

The stock closed down Friday 1.22% at $57.41.

PNRA 1-yr chart

Disclosure: Author is long PNRA.