Why This Food Retailer is a Good Buy?
Gayatri is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Panera (NASDAQ: PNRA) enjoyed a strong 2Q with better than expected same store sales and operating margins. Company-operated cafe same store sales were up 7.1% (check up 6.2% and traffic up 0.9%) and 4.8% at franchised units, mainly driven by drive thru convenience, catering and increased brand awareness. On a two-year basis, sales for signature salads & sandwiches rose 22% & catering rose 20% (the 11th consecutive quarter of 20%+). Margins were also quite strong this quarter. Restaurant level margins of 20.5% were up 180 bps over 2Q11. With the following positive metrics, we expect a bullish trend for this stock.
Drive-Thru Retrofits on Track
Quick-Service Restaurants are continuously innovating and improvising their drive thru facility to enhance standard of services as Drive-thru seems to be the need of the day. The new system allows for easier order-taking, which should increase speed, accuracy & service levels. QSR giant McDonalds (NYSE: MCD) is adding double drive-thru lanes to hundreds of locations. With other new developments like Chick-fill-A’s parallel lanes and food delivering belts, Panera doesn’t want to lag behind. Panera provided a drive thru facility in its first location Port Richey last December and many after that. Panera is experiencing good results from its drive thru facilities. Looking forward, about 20-30% of new stores built this year will include a drive-through and roughly 12% of Panera existing locations, mainly in suburban areas, will be equipped with a drive-through by the end of 2012. We are optimistic that Panera can match the success enjoyed by Starbucks (NASDAQ: SBUX) during its early stages of a drive-through rollout (~40% boost in sales with respect to traditional sites).
Commodity price moderation could enhance margins
Wheat costs were roughly up 50% year over year in 2Q. Margins will rise as wheat costs are expected to become favorable in 4Q12. Going in to the second half, we believe that the company wil benefit from moderating wheat prices as it would alleviate margin pressures. Moreover, the company's rolling hedging program could be a useful tool in order to protect against short-term wheat volatility.
Panera is uniquely exposed to diesel fuel, as Panera delivers fresh dough to each restaurant location daily. Every $0.10 change in the price of diesel impacts Panera’s operating profit by roughly $500,000 on a quarterly basis. Thus, investors need to have a close watch over the prices of diesel. Further, Panera noted that 95% of its food and paper requirement have been locked in for FY12; providing an immunity to further fluctuations.
Increased brand awareness
Panera announced to spend 1.5% of sales in direct media expense in FY12 versus 1.3% in FY11. Management seemed optimistic about its marketing efforts to increase brand awareness. We believe that advertising will connect the customers to the brand rather than to any one product or offering. The company launched its first national cable ad campaign in March 2012 and recently a new Ad agency has been hired and will roll out a new campaign in ’13. Another marketing effort has been the Loyalty program introduced in 2010. MyPanera program now has 11 million members, allowing the company to track purchasing information in order to provide customized offerings to loyal customers. These specially-crafted promotions are expected to deliver results in early-2013.
Panera has recently introduced roasted antibiotic-free turkey in its vast menu. As quality is a differentiator, the company also works on improving its supply chain system so that restaurants have access to fresh ingredients (i.e. avocados). New salad and sandwich items with fresh avocado boosted both Signature Sandwich and Signature Salad sales by 22% in 2Q. Looking forward, management seemed enthusiastic about the launch of the cranberry turkey Panini in Q3, and potentially high-quality grilled cheese offering in Q4. In addition, Panera has plans to offer some new pasta products sometime in 2013. We are very optimistic about Panera's strategy of offering consumers the choice to trade up to higher-quality food items; this approach should also support the average check while offering the consumer a compelling value.
The easing of commodity prices and the ability to raise costs slightly has been good for the restaurant business this year and the end of last year. Panera is among the fastest growing chains in the restaurant sector with ample runway for additional expansion. Panera possesses multiple opportunities to drive SSS growth over the near term through increased brand awareness, with greater marketing, menu innovations, and its loyalty program. Thus, we believe the stock is well positioned to outperform.
GayatriSharma has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's, Panera Bread, and Starbucks. Motley Fool newsletter services recommend McDonald's, 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.