Panera Bread Driving Sales With Drive-Throughs

Jul.16.12 | About: Panera Bread (PNRA)

Panera Bread (NASDAQ:PNRA) recently announced that it would increase the number of restaurants with a drive-through from 120 to 200, a 67% increase, during 2012. The company won't say exactly how much additional revenue is generated by drive-throughs, but founder Ron Shaich told USA Today that about half of drive-through sales are incremental.

In 2005, during its early stages of a drive-through rollout Starbucks (NASDAQ:SBUX) reported first year new store sales revenue at drive-through locations averaging $1,000,000 compared to $715,000 at traditional sites. Between 2005 and 2012 Starbucks increased the percentage of domestic locations with drive-throughs from less than 15% to more than 40%.

Panera Bread executives said on their first quarter conference call that about 20-30% of new stores built this year will include a drive-through. Including retrofits of existing locations, roughly 12% of Panera locations will be equipped with a drive-through by the end of 2012. Panera Bread's locations are primarily in suburban areas where there is high receptivity to drive-through convenience.

Panera Bread is a major player in the fastest growing segment of the U.S. restaurant industry: fast casual. Fast casual sales increased 8.4% in 2011.

Chipotle (NYSE:CMG) executives have rejected the idea of adding drive-throughs. Significant new location additions and increased brand awareness will continue to drive Chipotle's explosive growth. Panera Bread combines those growth catalysts with drive-throughs and the following innovative measures to ramp up sales per unit:

  • A burgeoning loyalty program,
  • The rollout of national media advertisements,
  • Catering expansion.

PNRA is currently trading at 21.8x 2013 earnings and 18.5x 2014 earnings, which is a significant discount to Chipotle. PNRA also trades at a discount to Starbucks, another major competitor.

Forward P/E

2013 2014
Panera Bread 21.8 18.5
Starbucks 23.4 19.1
Chipotle 35.4 28.5
Click to enlarge

I recommend Panera Bread stock based on the growth catalysts noted, relative valuation, and its position in an expanding domestic sector.

Disclosure: I am long PNRA. I may add to my position in PNRA before earnings are released on July 24, 2012.