1 Restaurant With Colossal Potential
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There have been a lot of disappointing earnings announcements recently released in the restaurant industry. However, at least one company managed to beat estimates and maintain confidence with long term investors. That company is none other than Panera Bread (NASDAQ: PNRA), who reported better than expected earnings and guided estimates higher for the current quarter. No matter your investing style, whether value investing or long term investing, Panera offers something for you. We'll cover that in a second; first let’s take a look at competition.
As I mentioned earlier, earnings reports over the last couple weeks haven’t been easy on the eyes for companies in the restaurant industry. The slow economic recovery mixed with higher food costs have caused several restaurant chains to struggle. Let's take a look at recent victims of sell offs.
Competition Struggling
The restaurant industry is highly competitive, and that won't change anytime soon. While the following competitors run different businesses, they're all substitutes to Panera's products. Chipotle Mexican Grill (NYSE: CMG) recently released its own third quarter results with impressive revenue growth of 18.4% over third quarter last year. Chipotle also produced a solid 19.6% growth over last year third quarter for Net Income. Even with the impressive growth, it failed to meet high expectations of Wall Street and watched its shares plunge.
Buffalo Wild Wings (NASDAQ: BWLD) also watched its shares plunge after a disappointing third quarter earnings report. Increasing food costs, especially for chicken, ate into margins and will be something to watch going forward. Another issue was the cost of adding new stores, which is merely a short term problem and necessary for long term growth. Look for Buffalo Wild Wings to rebound with a strong 4th quarter sales led by NCAA Football/Basketball and NFL Football.
McDonald’s (NYSE: MCD) delivered a slight miss on EPS but more importantly they reported that global comparable sales were bringing profits down. This is cause for concern with the economic slowdown outside the U.S. This won't be the case forever, and McDonald’s has proven to consistently provide good returns to investors. McDonald’s is still incredibly efficient with an operating margin of 31%, nearly double that of Chipotle. Their net margin is again nearly double Chipotle’s margin, at 20%.
Panera is a leader in the newly described “fast casual” restaurant market. Consumers are weighing options differently these days. It’s not all about the convenience and speed factor, it’s about the experience. There’s a sweet spot for consumers in between the dollar menu drive through at McDonald’s and a more expensive dining experience like The Cheesecake Factory. Panera covers this sweet spot, and it’s proven to be a very profitable market. Below I’ll discuss what the key drivers for success are presently, and what we need to see in the future to capture growth.
Customer Satisfaction
One thing Panera excels at is quality food. A couple great examples were highlighted in their conference call, the first being a grilled cheese sandwich. I know what you’re thinking, a quality grilled cheese sandwich?? The sandwich has Gruyere cheese, organic American cheese with applewood smoked bacon, grilled on all natural white (mishe). I don’t even know what Gruyere tastes like, but it sure sounds delicious.
Another focus for Panera’s quality of food is the freshness of ingredients. With their supply chain they were able to distribute fresh avocados into 1600 bakery cafes. These are real fresh avocados, not the paste that many restaurants use. Using avocados in new salads has resulted in signature salad sales improving 11.6% in the third quarter. Using fresh avocados in the roasted turkey BLT created a 28% increase in signature sandwich sales. Bottom line, quality food and fresh ingredients pays off.
Panera is successful in creating a pleasant atmosphere with a quality menu. What else do they do well?
Customer Relationships
Over 12 million members are a part of the very successful My Panera rewards program. This is a valuable concept for building an economic moat in the restaurant industry. Building a personal relationship with loyal customers is key for sales, and Panera does it in a fun way. Simply scan your card and once the system figures out what you prefer as a customer you receive customized freebies and offers. You can check when rewards are available or simply scan your card and will randomly receive free things as a surprise. Over 8 million customized offers are emailed each quarter, and roughly 30% of emails are opened. That’s a good % compared to similar programs.
Panera has the cornerstones of a great restaurant covered with quality food and one-on-on customer relationships. Going forward, as investors, what do we want to see from Panera?
Future Growth Opportunity
There’s demand for Panera's menu far beyond the store walls. On a two year basis they’ve been able to grow the catering business 50% each quarter. That’s incredible, and going forward we want more more more! This is purely incremental sales dollars.
The third quarter report highlighted Earnings Per Share of $1.24, which is 28% growth over last year. That makes it the 10th of the last 11 quarters with increased EPS by 20% or more. As investors this is exactly what we want to see. Going forward we hope that that quarterly growth continues, fueled by new catering business, marketing campaigns, and improved same-store sales.
Panera is growing at a steady pace through company owned stores and franchises. Year to date 91 new units have been opened and they’re on pace for the goal of 115 to 120 for the full year. The 91 units to date compares favorably to the 72 opened during first three quarters of 2011. Not only have they been successful in opening units, the company owned units have average weekly sales of $47,428 compared to $41,470 last year.
Bottom Line
Every company has risks, and Panera is no different. One of the small risks is that you may be paying for an expensive, by the P/E ratio, stock price. My argument against this is that no matter how you invest Panera is a company with a lot of potential for future growth. No matter what you pay, you will likely be rewarded. Panera isn't a dividend stock, they prefer to reinvest cash into growth opportunities and that's a good sign for future returns.
Panera also is able to contract its expenses and ingredients months into the future which helps their pricing power. This definitely will help improve their margins, economic moat, and competitive advantage. The company has excellent management and in store experience. The food is fresh and made with quality ingredients. There is a vision for future growth through catering and new store openings. Sales are being maximized through reward programs and marketing campaign efforts. There’s a lot to like about Panera as an investor, and I don’t expect that to change anytime soon.
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