Expecting Panera Bread To Rebound Soon

The past several months have not been kind to Panera Bread (NASDAQ: PNRA). The stock was trading near $70 last fall after several years of steady growth, then it started dropping early in October, made up some of that lost ground, and then took a real hit in June when the company lowered its expectations for the second quarter. Then, last week it lowered its expectations for the third quarter, which sent the stock down another 9%.

The main reason for these woes is decreased profitability. Analysts like Jeffrey Bernstein at Lehman Brothers have blamed rising commodity prices, while John Gloss of CIBC attributes it to commodities as well as labor costs. The company has looked to customer shifts from home-baked bread and muffins to outsourced products like scones and soufflés. Others have blamed rising fuel costs that have led to more customers staying home rather than driving to eat. Whatever the reason, PNRA's results have not been good, and investors have understandably been selling shares.

I think these problems are solvable, and that PNRA is due for a rebound soon. It's not just because I love the food at Panera and enjoy the cozy atmosphere and the free wireless. I also think these are short-term woes, and that the company's numbers will turn around in the next year or so. For one thing, sales over the past few months have been getting stronger. The company also has looked into raising prices -- it has kept prices pretty low, and has room to charge a bit more. I also like the fact that the revenues have been increasing steadily every single quarter. To be sure, this is in large part due to expansion -- the growth at comparable stores has been fairly modest -- but sales per unit store are among the highest in the industry, and as long as they don't over-expand, their growth will deliver excellent returns.

The key for Panera will be to find a way to deal with these increasing costs. If they do raise prices, this will soften the blow. They may also find ways to produce the menu items that consumers want, and thereby save the costs of outsourcing production. I also think the kind of food Panera serves -- healthy and relatively gourmet at reasonable prices -- is only growing more popular. It's not much more expensive than McDonald's (NYSE: MCD), and it's cheaper than many other chain restaurants with waiter service, and as more Americans move away from unhealthy foods, Panera will be there to benefit.

Type of stock: A reasonably priced upmarket food chain that's growing steadily but has hit a rough patch in terms of profits.

Price target: PNRA is now trading around its 52-week low, just above $40. It's obviously a bit of a risk given the recent results and forecasts, though I think it's a safe buy around $40. But you may see it drop even lower before it jumps up again, and it wouldn't be a bad idea to wait and grab it in the mid $30s.