"You don't need a silver fork to eat good food.."
Chef Paul Prudhomme
Last November 15 on SA I wrote an article showing the possibilities of Panera Bread's (NASDAQ: PNRA) management splitting the stock to enlarge its shareholder pool to broaden its thin trading volume, stimulate greater interest in its terrific product and prospects and in time start paying regular dividends.
My interest in the company sprang from two sources - one business and one personal. On the business side I'd been summoned early last fall, before my article appeared, by a casino client whose CEO was concerned about a disconnect between his patron demo and the dining options on his property. His team had mulled various solutions that included changes to the 24-hour coffee shop, adding another casual dining outlet, or abandoning a long standing policy opposed to leasing restaurant outlets. "We ought to take a look at something like Panera" he said. I smiled because I'd been a long-time fan of the bakery café chain. "It's a simple business model," I replied. "Great wholesome food, priced right, moved fast from prep to plate by friendly faces. Sounds like a few field visits are in order. Besides, I'm hungry."
Together we dropped in at a few Panera cafes over a few days and fairly stuffed ourselves with lunches and dinners there. We also brought some of their take out bakery products for tasting among marketing and food and beverage team members. For reasons unrelated to Panera per se, a decision was ultimately made to expand the 24-hour coffee shop and add a healthy food options outlet - both company owned and operated.
However during the time we did our on-site reconnoiters of Panera bakery cafes, my own private curiosity about the company - as an investment - grew. After learning much about its products and operations I was sorely tempted to buy the stock. But in the end I found its share price off-putting for the size of investment I had contemplated. I was concerned about its relatively thin trading volume, its dominant institutional ownership profile and whether it would ever move off its policy of returning shareholder value exclusively by stock repurchases alone. So I didn't buy the shares and still remain on the sidelines now despite their healthy upside move since.
But having researched the company, its management, eaten lunches there regularly and compared their overall quality to peers, I remain a fan of the company. I'm not an active options player so for the time being I'm confining myself to the sidelines until such time as I sense a shift in management sentiment toward broadening its ownership base. If and when that time comes, I'll become a shareholder because I think the company has one of the best business models among its restaurant peers. And at such time I'll buy the stock and share my rationale with SA readers.
Panera's Q1 earnings call is tonight after the market close. If there's a beat it will be partially due to 2.0.
For those SA readers more comfortable on options plays than I am on thinly traded shares here's the basics to contemplate:
Price at writing: $215
52-week range: $165.17 to $225.32 (the day I wrote my SA article the shares were at $152).
Average volume: 583,000
Market cap: $5.226b
P/E (TTM): 37.25
EPS : 5.79
Consensus on Q1 2016 $1.51 a share u from $1.41 a share.
(Note: Panera has beat consensus for last two quarters before this evening's call).
Revenue est.: $678m up from $648.5m yoy.
Panera's 17% gain from 2015 exceeds the S&P performance for the period by 6%.
Same Store Sales est.: 4.6%
Share repurchase program: The company repurchased $375m for 2015 and has $284m in dry stock repurchase powder left in its authorized program.
Management guidance: For Q1 $6.50 EPS
Why we like the stock beat or miss:
There are tons of metrics out there to breed a level of confidence or lack of same in a potential earnings beat. Some of them are fairly sensible, others not much more than pure finger in the wind guesswork. To a great extent it depends on those numbers the observer relates best to given his or her own career experience. As for me, as a casino executive the measures of a consumer business have always been in a) the numbers of bodies b) the spend levels of bodies c) the average weekly shekels coming into the till over time. Applying this point of view to Panera here's the numbers that impart a level of confidence to me:
Average weekly net sales of Panera:
Some of this increase could come out of the hide of Chipotle Mexican Grill (NYSE:CMG) during the year when their business tanked during fears over sanitary issues at their stores.
And this is one reason why some analysts remain chary about the positive weekly numbers representing net new customers in the Panera base. I view it differently. To me it relates to the stickiness of the Panera experience.
I've seen its corollary in my own field many times. When temporary disruptions among competitors arise, new business flows to other casinos. When that factor disappears a certain percentage of customers will always tend to remain with the switched-to property. It all depends on how those customers found the experience at the new venues. My sense is that if Panera profited from Chipotle's woes last year, that a good percentage of those lost patrons will now include the bakery café experience in their regular dining out patterns this year. In other words a permanent plus for Panera.
Average check: This number grew 2.2% yoy. I believe this is a bigger positive than may first appear since it is not all related to price movement but to new menu choices introduced last year.
Labor costs: Here's another area some analysts worry about. And this one with good reason. Labor costs as a percentage of total costs went from 30.7% to 32%. Pressure from employees and government on minimum wage hikes and other issues continues to mount. That's one of the central reasons Panera launched its 2.0 program to speed, simplify and digitize its order processing and customer services processes this year.
And the success of Panera 2.0 forms the central thesis of why we see continued upsides for the company and its shares. It is a proactive program on many levels:
1.Eventually the company's objective is to extend 2.0 to all its 1,972 stores. Thus far, in 2015 it achieved its goal of extending its conversion to a total of 410 stores and moving ahead. It is this program that can contribute mightily to contain the percentages of labor cost rises Panera could face. Savings in this area will all fall directly to the bottom line.
2. The 2.0 program has been so deftly thought out through the arrival of the customer by a) enabling them to pre-order take-out by smartphone and have their food waiting for them when they arrive. Or by using a touch screen on arrival to order and immediately proceed to the delivery area or table. b) By smarter utilization of employees who will now have the time to address any customer problems immediately and above all, engage customers more frequently and improve the overall service ethic of the presentation.
3. Catering: This segment continues to be among the highest profit centers of any dining establishment. It combines higher average order checks with reliable repeat volume and exploits both the individual consumer market and the surrounding business-based revenue. Whether from office, factory or retail floor, employees of businesses in the core trading area of Panera cafes now have more employee eating areas than ever. And those employees have birthdays, anniversaries, holiday parties and award ceremonies on a constant basis. Because so much of its menu offers tasty, healthy, cold food and bakery choices, Panera's initiatives in building its catering revenue base are part of the way average check value will continue to increase going forward.
4. Panera in the supermarket.
We are beginning to see Panera products like its soups popping up on supermarket shelves. While this area does not portend to translate into massive revenue gains unto itself, what it does achieve is building a competitive brand position in prepared foods that we believe results in building in store traffic at the bakery cafes.
Institutional Ownership remains a barrier to many potential investors so making bets on the options may be the only play to make money on this solid performer.
Our lament last November on Panera was that its institutional ownership profile and thin trading base slammed the door in the faces of many potential shareholders - including yours truly.
I strongly believed a three-for-one split at the time could price the shares within the range of a whole new segment of investors. Management has stuck to its knitting on stock repurchases as being the only strategy they see for the moment in rewarding shareholders. Here are the latest numbers:
Panera is 97.6% institutionally owned with a total of 23 million shares, totaling $4.8 billion in value. Perhaps after the market closes today we might have some additional insights as to why this remains the case. Clearly for a management group this good in running the business, there is a rationale for this kind of ownership configuration. It is hoped that among the questions that may be asked of management during the call is to provide greater transparency to its small coterie of individual shareholders as to why this is the case.
In any event this is one terrific company. Whether it meets, beats or misses consensus Q1 earnings later today Panera still remains in our view a pregnant opportunity for investors. Whether it's with individuals with investing profiles that do not shrink from triple figure stock prices or deft options traders who can move in and out of positions without ever having to worry about the performance of management, Panera is a company worthy of a good hard look either before or after today's announcement.
About the author: Howard Jay Klein is a 25 year+ c-level casino executive and consultant who has conducted studies in all revenue streams inside casino resorts including gaming, entertainment and food and beverage. He is the author of Mastering the Art of Casino Management and the publisher of The House Edge premium site on Seeking Alpha.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.