A Restaurant Stock to Sink Your Teeth Into

Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The first time you visit a restaurant owned by Panera Bread (NASDAQ: PNRA) you are immediately a repeat customer. Its selection of offerings, highlighted by the inclusion of freshly-baked breads, is becoming renowned for being both appetizing and healthy.

As the company's expansion continues at even greater profitability and sales per store, the stock remains a worthwhile portfolio holding for most accounts. No longer just a stop for lunch after a strenuous gym workout, the franchise has sold me, and likely many others, as part of a daily routine. This gain in acceptance appears to have been fueled solely by the quality of its offerings and the store atmosphere.

Along with food lovers, those looking for a wide selection of coffees and other beverages are the ones who make their way to Panera locations on a regular basis. Comparable-store sales, to be precise, advanced 3.3% year over year in the March quarter. All of these factors, with a touch of store-base expansion (the unit count is climbing 7% annually), are a recipe for strong profit growth prospects.

In fact, thanks also to margin expansion, share net could well climb upwards of 20% this year. Given this estimate, the stock is trading at a P/E of nearly 23x. The company's growth outlook and clean balance sheet add to its value when considering free cash flow.

Contrasting Panera with a retailer that has many more years under its belt, Bed Bath & Beyond (NASDAQ: BBBY), there are some similarities to be found. Although BBBY is a big box seller of home goods, it also fills a niche providing something between a department store and a specialty retailer. The company also operates several more specialty type concept stores, as well as 264 or so World Market units, purchased in June 2012.

Bed Bath & Beyond is expanding at a more modest pace than Panera at this stage, with plans to boost the store count about 3% in 2013. Still, like Panera, comps are rising steadily in the 2% to 3% range, illustrating the staying power of its operating model. This is probably due to the assortment of bed and bath textiles from top designers, as well as the "Beyond" categories, including kitchen and furniture items etc.

BBBY shares have bounced back of late and good holding for long-term portfolios. Despite this, the stock is trading at a lower P/E ratio than its competitors and has a lower beta score, meaning less volatility (see Financial Ratios). 

The third retail chain I would like to discuss is specialty retailer Zumiez (NASDAQ: ZUMZ). I've seen the retailer of outdoor sporting goods, particularly action sports, in Manhattan and found that it operated exactly 500 stores as of this February.

Skateboarding, surfing, snowboarding, and motocross have passionate followings, and Zumiez is there to meet their needs better than larger sporting goods outlets would. Apparently, too, the activities are attracting more and more participants, based on the rising same-store revenues and overall rapid sales improvements.

Management is intent on building its presence further, with plans to add 58 stores in 2013. Store expansion, especially when combined with strengthening comps are typically a good sign. Zumiez will need to stabilize margins, as currently spending on e-commerce initiatives are a drag on the bottom line. Product margins are healthy at more than 30% and thus I believe the company can continue to generate profit growth at a decent rate. If so, the shares could well remain on a recovery path.

Fool's Summary

Personal customer experiences influenced this review of several retail stocks. In all, the three have positive outlooks and are recommended holdings.

What I believe separates a good retailer from a challenged one is that it can expand profitably without cannibalizing itself or aiming to extend itself too far. Higher-than-average returns on invested capital, a factor shared by two of the three (BBBY and ZUMZ) can be a positive factor. Panera should fare well as it continues to rapidly expand and grow its same-store sales through in-store improvements. 

Investors can be forgiven for thinking that a company that has returned almost 2,500% since going public probably has its best days behind it. But in the case of Panera Bread, there's reason to believe that the best is still yet to come. The stock has been on an absolute tear over the past five years, and you're invited to find out why -- and what else there is to look forward to -- in The Motley Fool's brand-new premium report on Panera. Included are key areas that investors must watch, as well as opportunities and threats facing the company both today and in the long term. Don't miss out on this invaluable investor's resource -- simply click here now to claim your copy today.

Damon Churchwell has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond and Panera Bread. The Motley Fool owns shares of Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus