Panera Bread: Management Caught Up on Short Term Outlook

Yesterday Panera Bread (PNRA) reported 2Q 2007 earnings.

Highlights

Revenue up 28% to $253 million from $197.14 million in 2Q 2006

Same-store sales up 2.1% (1.7% for company-owned and 2.3% for franchise-operated restaurants)

Average weekly sales down 0.9% to $38,273 ($37,050 company-owned and $39,056 franchise-operated)

Total costs and expenses up to $234.11 million from $175.72 million in 2Q 2006

Operating margin 7.5% from 10.9% in 2Q 2006

Net income down 10% to $12.64 million ($0.39 per share) from $14.05 million ($0.44 per share) in 2Q 2006

Profit margin 5% from 7.1% in 2Q 2006

TTM EPS $1.785

Diluted share count 32,250,000

Opened 39 bakery-cafes (17 company-owned; 22 franchise-operated)

Acquired 32 bakery-cafes from franchisees

Sold one bakery-cafe to franchisee

Closed five bakery-cafes (three company-owned; two franchise-operated)

Now a total of 1,135 bakery-cafes-- 475 company-owned, 660 franchise-operated

3Q 2007 Outlook

Expecting EPS of $0.32 to $0.38

Expecting SSS to grow 2.5% to 4.5%

Expecting weekly sales of $37,900 to $38,900

Planning to open 35 bakery-cafes (21 company-owned; 14 franchise-operated)

Fiscal 2007 Outlook

Expecting EPS of $0.86 to $1.02

Expecting SSS growth of 2.25% to 4.75%

Expecting average weekly sales of $38,800 to $39,900

Planning to open 110-124 bakery-cafes (59 to 66 company-owned; 51 to 58 franchise-operated)

Also expecting July SSS growth of 3.6% to 3.9%

Well, these results certainly aren't that great but they did meet the average analyst EPS estimate of $0.39 and beat the average sales estimate of $250.6 million. Even so, this quarter is not heading in the right direction and I'm not completely confident that management will be able to stabilize and raise margins in the near future. Food and labor costs both took an especially large jump this quarter. These costs aren't going to go away, efficiency and consistency are, in my mind, what must be improved as soon as possible. Results have been erratic and inconsistent for a decent amount of time now, and at the heart of that is management's inability to manage costs. It's a fixable problem, but management needs to act now. It's clear costs are outgrowing the bottom line, the question is how to stop this trend. Management needs to get things going.

The main thing bothering me right now, other than decreasing margins, is management's detailed and often updated short-term forecasts. They have consistently given forecasts, revised them, and as a result the stock gets hammered. My advice? Stop giving these meaningless forecasts and focus on long-term results and strength within the business. Management is getting way, way too caught up updating investors on the short-term outlook. This does not need to happen, but unfortunately it probably will continue to go on. As long as good results are coming in I don't so much mind companies doing this, but when you have a company like Panera where the results are inconsistent and not looking so good, there are better ways for management to spend its time than figuring out what things will look like next quarter.

I still like this management team, but have been unimpressed with them as of late. I'm sure they know what needs to happen (raise margins and keep them steady), but whether or not they know how to execute is the problem. At this point, I'm leaning to the answer that they do know what to do and how to do it, but I am going to wait before adding to my position. Panera has and produces plenty of cash, so the company can handle this bump in the road. I remain comfortable
with my initial position, but I'd like a little more proof that management is working on fixing margins as well as if the business is still producing good amounts of cash. We will get a better idea of this over the next couple quarters.

For the 3Q 2007, analysts are expecting an EPS of $0.43 on sales of $270.27 million. These estimates will probably be lowered a good amount before the 3Q results are released with Panera's EPS outlook of $0.32 to $0.38. The market probably won't be treating the stock real well over the next few months either, we might get some really attractive prices. Stay tuned.

Disclosure: Author has a long position in PNRA

PNRA 1-yr chart