Can Big Tables and Free WiFi Make You Rich?
Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I was chatting with my wife one recent Saturday morning, discussing our schedules for the upcoming week. She is on the board of a professional association, the members of which are women, and range from undergraduate science students to C-level professionals. This group is both social and charitable in nature, with its primary focus to provide a place where women in science and technology fields can network together, grow their skills, learn how to be more competitive in the market, and improve a range of other life skills.
The various board members are scattered over a large geographic area around greater Los Angeles, and in order to accommodate the needs of the membership, the location of the monthly board meeting tends to move from place to place. But one thing that doesn’t change is the restaurant they meet at: Panera Bread (NASDAQ: PNRA). When I asked my wife why they always meet there, her answer was simple: “They have free Wi-Fi, and really big tables,” she said.
Wow. That’s it?
“No,” she conceded when I pressed a little. “The tea and coffee are good, and they have nice soups and sweets.”
“What about Starbucks (NASDAQ: SBUX)?” I replied. I will admit that I am an avid Starbucks fanboy and shareholder, and I was feeling a little betrayed, especially knowing how my wife is also addicted to the skinny caramel lattes. Why was she cheating on our beloved Starbucks? They have sweets, too! And sandwiches! Okay, so they're not fresh made. But they have them!
Shaking her head and sighing, she realized that, like many of our conversations, this one was quickly becoming another “investing” talk. She decided it was time for a field trip. “I have to show you,” she said, taking me by the hand and dragging me out to the car.
We drove the 2.2 miles from our house to the nearest Panera Bread. I had been there before, several times in fact. And as usual, the food was great, delivered to us very quickly by a cheerful young man following a short wait after ordering. As we ate, I took the opportunity to really look around. One of the things I realized was that there was plenty of space; and while the restaurant was busy (it was just before noon on a Saturday,) it was not uncomfortably crowded.
I also observed that there were larger groups of guests; larger than any Starbucks I have ever been in would be able to accommodate comfortably, especially for an extended period of time. And I observed two separate groups that had computers at their tables. There are ten members of the board that my wife chairs, and their meetings can last close to 2 hours. “And,” as my wife said, “you can’t put that many people in a restaurant for 2 hours without them spending some money.”
The anecdote is nice, but is Panera a smart investment?
Let’s take a look at the numbers, shall we?
PNRA Revenue TTM data by YCharts
I have also added the revenue performance for three other well-know restaurant brands to this chart, including Chipotle Mexican Grill (NYSE: CMG), Buffalo Wild Wings (NASDAQ: BWLD), and restaurant behemoth Darden Group (NYSE: DRI). While all of these companies are competitors in that they serve food, they all operate different restaurant experiences than Panera. Don’t look at this as a comparison of competitors, but a comparison of similars. The reason I have added them is to illustrate a point: Americans are still eating out, and doing it a lot.
However, that trend has slowed a little bit since the “great recession.” According to a recent Harris Interactive Poll, 7 in 10 Americans are cooking at home more to save money. How much that trend is a sustained shift in consumer choice, or just a reflection of the current economic climate, remains to be seen.
How much dough for Panera?
With that said, the Panera story is tied to their ability to grow. How much of a premium is that growth opportunity going to cost? Let’s take a look at the P/E ratio:
PNRA PE Ratio data by YCharts
Price to Earnings doesn't tell us that much if we don't know what the potential for continued growth is. And while there are a number of factors that can make a difference in how large these different businesses can individually become, looking at P/E while comparing revenues to similar businesses gives us a measure for how far the business has come, and can offer a starting point to understanding what the future opportunity just may be:
PNRA Revenue TTM data by YCharts
As you can see, Darden’s established stable of brands, including Red Lobster, Olive Garden, Longhorn Steakhouse and others, generates nearly $8 billion in annual sales. While the upside as an investor is limited, there is a predictability to the performance and results that should make for limited downside. However, with such an array of brands to manage, there’s always the potential for “deWorsification” if the company tries to grow too quickly through expansion, and loses focus on its core brands.
Then you have the other three, all with P/E ratios ranging from 26 to 35, clearly showing that Wall Street is counting on growth. With Chipotle, you have the most expensive of the group by far, and with Buffalo Wild Wings, the one that is growing fastest. Panera, based on revenues, is by far the largest of the three, and isn't growing (at least percentage-wise) as quickly as the other two.
But to me that's where the comparisons end. Panera, frankly, caters to a larger audience than both Chipotle and Buffalo Wild Wings, with a concept that limits itself with a targeted demographic, where Panera can be both a place to sit and enjoy a meal with friends (or for a 2-hour meeting,) and somewhere for a quick bite while out shopping. It's the power of "fast casual." Add in that the company hasn’t gone outside of the US and Canada, and the story is even more compelling.
Panera Bread's worth the bread
Panera is the way to go. As the chart above shows, Panera shareholders have done the best over the past few years, and all of the metrics we looked at above indicate that new investors will also be rewarded. While Panera's P/E is closer to its historical high, it's still a better value than Chipotle.
Panera has grown with leaps-and-bounds over the past decade, yet there is still plenty of room to run. Factor in the July 24 quarterly report that shows earnings-per-share growth (27%) is growing faster than revenues (18%,) and you have a company that is clearly demonstrating the ability to manage costs while expanding. That makes the premium for growth well worth the price.
After lunch, my wife asked me what I thought. I admitted to her that it made sense why they met there, but I needed a Grande Skinny Latte to think about it. And you know what? Truthfully, the Starbucks just down the street felt a little cramped after being in the Panera.
But I liked the coffee better.
elihpaudio owns shares of Starbucks. The Motley Fool owns shares of Buffalo Wild Wings, Chipotle Mexican Grill, Darden Restaurants, Panera Bread, and Starbucks and is short Starbucks. Motley Fool newsletter services recommend Buffalo Wild Wings, Chipotle Mexican Grill, Panera Bread, and Starbucks. 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. If you have questions about this post or the Fool’s blog network, click here for information.
