Why Panera Bread Is Tasty Before Earnings

Oct.12.11 | About: Panera Bread (PNRA)

Panera Bread (NASDAQ:PNRA) is an owner and franchisor of quick service restaurants in the United States. It is consistently profitable and maintains a strong brand. It does not have a lot of national competition in its particular space, which is providing high quality breakfast and lunch food with an inviting atmosphere with free Wi-Fi. One thing in particular sets it apart from most food chains in this environment: Pricing power.

Panera has delivered consistent profits, generating income over the last three years, and every quarter this year. Wall Street recognizes the potential here, as the company has a market value of $3.37 billion and a lofty P/E of 25.6.

The catalyst for a further stock appreciation may be the third quarter earning report, scheduled for after the market close on October 25. The stock is currently trading at $110, which is in the middle of its 52-week range of $88.75 to $133.73.

Reaction to the Second Quarter Earning Report

The company issued a very positive second quarter earnings report only to see the stock sell off from its highs.

From the second quarter press release (pdf):

  • Q2 2011 diluted EPS of $1.18, up 39%
  • Q2 2011 revenue growth up 19% over Q2 2010 to $451 million
  • Q2 2011 Company owned comparable net bakery-cafe sales up 4.4%
  • Two year Company owned comparable net bakery-cafe sales up 14.0%
  • FY 2011 EPS target increased to $4.54 to $4.58 (up 25% to 26% versus FY 2010)

From the market reaction to this kind of news, it is clear that Panera is going to have to continue to outperform in order to increase its share price.

Does Panera have Pricing Power?

The key to getting to those numbers lies in increased sales at higher prices. Anecdotally, the pricing power is there. Prices in my market continue to increase, with prices for salads and sandwiches topping out at the $8 mark, up from $7 earlier this year. Menu board prices for coffee continue to escalate, up 10% this year. There seems to be no let-up in crowds at lunch, despite the struggling economy.

The company rarely discounts its menu prices, but does have the MyPanera loyalty program, which seems to drive additional business, offering discounts completely under control of the company.

Panera isn’t alone when it comes to a high P/E in this area, as both Starbucks (NASDAQ:SBUX) and Chipotle Mexican Grill (NYSE:CMG) carry even higher valuations. If the economy can avoid falling back into recession, there is considerable upside for these restaurant companies to continue to raise prices and margins.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.