Panera Bread's Results Are Nothing Pretty

| About: Panera Bread (PNRA)
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Yesterday, Panera Bread reported 3Q 2007 results.

3Q 2007 Highlights

  • Revenue up 33% to $273.21 million from $204.95 million in 3Q 2006
  • Cost of sales $257.1 million from $188.71 million in 3Q 2006
  • SSS up 2.6% (3.4% for company-owned; 2.1% for franchise-operated)
  • Average weekly sales down 0.1% to $38,051 ($37,136 for company-owned; $38,711 for franchise-operated)
  • Net income up 10% to $11.94 million ($0.37 per share) from $10.88 million ($0.34 per share) in 3Q 2006
  • Profit margin 4.4% from 5.3% in 3Q 2006
  • Diluted share count 32,163,000
  • Opened 35 new bakery-cafes (19 company-owned; 16 franchise operated)
  • Closed 2 bakery-cafes
  • 1,168 total bakery-cafes in operation (493 company-owned; 675 franchise-operated)

4Q 2007 Outlook

  • Expecting EPS to come in between $0.53 and $0.59
  • Estimating SSS growth to come in between 1% and 3.5%
  • Average weekly sales expected to be $39,700 to $40,700
  • Expecting bakery-cafe openings of 60 to 65 (39 to 41 company-owned; 21 to 24 franchise-operated)
  • Expecting October SSS to come in between 0.3% and 0.6%

Fiscal 2008 Outlook

  • "Initial growth target" for EPS is 10%-20%
  • Expecting to open 160 to 175 new bakery-cafes
  • SSS of 1%-4% expected
  • Expecting average weekly sales of $38,400 to $39,600
  • Expected operating weeks 68,000 to 68,500

Analysts were on average expecting an EPS of $0.36 on sales of $276.38 million. so Panera's margins are better than what the Street was expecting, but even so this quarter isn't much to be proud of. Margin inconsistency continues and the outlook isn't incredibly pretty. Panera's sales growth is superb right now, margins are what's holding the company (and stock) back. Without steady margins, it's very difficult to tell where the company is going. I certainly believe management is capable of fixing the company's troubles, but they need to do something. Opening new bakery-cafes and saying that the environment is currently tough isn't the most convincing thing I've ever heard.

However, Schaich says management does have a plan to fix these problems, and I'm certainly willing to wait. I think Panera has a lot of potential if the company can overcome these problems. It's all a matter of time, patience, and a good strategy. This management team is not dumb; they have quite a bit of experience with the company and business in general, so for now I'm happy holding onto my shares. I'm not buying more, but I'm definitely not selling.

Mr. Market probably won't be treating the stock too kindly in the short-term, mainly because Panera's high EPS estimate of $0.59 is what the Street was expecting on average. At this point I'm not pleased with how many estimates and expectations management is throwing out in these press releases. Worry about the business, not what this month's sales will be or how many operating weeks the company will have in fiscal 2008. There are much better and more productive ways for management to be spending its time. If they really do have a strategy to steady margins and solve the recent problems, I'm sure it will be worth the wait. But it will not be a quick process (judging by the pretty conservative 2008 growth estimates), which will be important for us to remember going forward.

For now, my confidence in the company is so-so, not too high and not too low. I know the problems the company has are fixable, it's just a question of finding a smart and efficient way to fix them. Hopefully management can figure that out.

Disclosure: Author has a long position in PNRA