The Fast Part of Fast Casual Gains Importance for Panera
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Fast casual remains very popular with diners. Chipotle (NYSE: CMG) has demonstrated once again that diners remain concerned about what they're eating, and they don't want to wait for their meals. Now the fast casual chains face another challenge: high comparable store sales growth expectations. Panera (NASDAQ: PNRA) could be an attractive investment here if its efficiency plans succeed.
Comparable Store Sales
Comparable store sales figures show that established fast casual restaurants can still bring in more diners. Going by results from the second quarter of 2013, the fast casual market doesn't look saturated. Chipotle posted 5.5% comparable store sales growth, while Panera reported 3.8% comparable store sales growth at its company-owned restaurants. Panera's franchise operated stores reported a slightly lower 3.5% growth rate, but the bread maker still achieved 3.7% growth overall.
Yum! Brands (NYSE: YUM) has restaurants around the world, so the company provides separate regional same-store sales figures. Yum! hasn't been doing very well in China this year. The chicken supply chain problems earlier this year and customer concerns about the bird flu seem like temporary issues for Yum!, but the restaurant owner still reported -20% same-store sales growth in China for the second quarter. Yum! did post 1% same store sales growth in the United States, though. Poor results from China could convince this company to increase its efforts in the United States.
Yum!'s latest fast casual initiative could challenge Panera. The Associated Press reports that Yum! plans to open up a new fast casual concept restaurant based on KFC that will be called KFC eleven. The KFC eleven concept differs from the fast casual strategy Yum! rolled out last year. Cantina Bell items showed up at regular Taco Bell restaurants. Yum! has now created a new restaurant brand instead of simply upgrading the KFC menu to compete with fast casual chains.
The KFC eleven concept could pay off for Yum!. Panera and Chipotle aren't just about rapid service - these fast casual restaurants also offer ambiance and a place for diners to hold meetings. A fast casual version of KFC could be attractive to business customers during lunch hour. KFC eleven doesn't look like an immediate threat to Panera, though.
Chipotle and Panera both plan to boost their comparable store sales figures by serving food faster. Chipotle Co-CEO Montgomery F. Moran clearly emphasized lunch hour service speed in the restaurant's second quarter 2013 earnings call. According to the transcript at Morningstar, Chipotle managers' bonuses will depend on metrics that the restaurant calls the four pillars of throughput, and Chipotle will also use performance on these metrics to decide which managers get promoted to restaurateurs.
The Chipotle earnings call comments could help explain what Panera Chairman and Co-CEO Ron Shaich meant when he stated that Panera planned to improve peak hour throughput. If Panera managers focus on preparing their restaurants to handle more diners at lunchtime, the chain's same-store sales could rise. Panera did warn that this plan could result in additional short-term costs, but this decision looks worthwhile.
Panera may also be a better value than Chipotle right now. With a forward P/E of 31 and a PEG ratio of 1.84, Chipotle remains expensive. Panera had a forward P/E of 22 and a PEG ratio of 1.44 when the market closed on July 23, 2013, and the bread maker's shares fell 6.9% after hours. Panera even looks fairly priced in comparison to a traditional restaurant owner. Yum! Brands has a forward P/E of 18 and a PEG ratio of 2.09, although it does offer a 1.9% dividend as well. Panera still isn't cheap, but with 11% revenue growth and 16% income growth for the quarter, a growth premium seems reasonable.
Panera seems confident that more diners want to visit its restaurants during lunch hour, so demand appears healthy. The fast casual chain also noted that it might add more restaurants in fiscal 2013 than it originally expected. Even if Panera does incur short term costs to upgrade its restaurants, the fast casual trend still looks like it's working in this restaurant's favor. Buying the dip might be worthwhile with this stock.
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Eric Novinson has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and 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!