Normally when average check is in a decline for a restaurant, it's a bad sign that guests are tightening their purse strings and spending less which can be a concern of tough times ahead. However, in the case of Panera Bread (NASDAQ:PNRA) the average check decline is not only not a worry but it is actually somewhat of a good thing. I'll explain using information from the earnings release and conference call.
Second-quarter growth of 0.4% for transactions and 0.1% for same-store sales was the first quarter of positive year-over-year growth in transactions since Q3 2012 despite average check decline.
Adjusting for Easter, transactions were actually up 0.8%.
For the first 27 days of the third quarter, same-store calendar-adjusted sales were up 2.0%.
Panera Bread has been successful at expanding its breakfast business by 3.3%. Breakfast traditionally carries with it lower check averages for obvious reasons, it now is 20% of Panera's business and 30% of the transactions. As breakfast sales continue to rise, it will lower the average of all checks. A lower average check due to rising breakfast sales is a good thing.
If you look at the breakfast specifically or pre-11am day part and the post-11am day part separately, the average check went up for both parts. People on average are spending more money at breakfast and people on average are spending more money at lunch and dinner at Panera. The average check from a faster growing breakfast business masks the fact that average check is in fact growing at all meals individually.
Adding to this was a decrease in catering business. Catering business has the highest average check by far at $135 each and according to the company has historically grown at two to three times faster than the stores. The catering business saw some slowdown which is a concern but at the same time it is only 8% of Panera's business so it's not nearly as important as breakfast and after-breakfast sales.
Conclusion: breakfast and after-breakfast should be looked almost as two different businesses. Each one is growing average check and shouldn't be a concern for investors. Follow the each day part separately to guage the overall financial health of Panera Bread.
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