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The fast-casual restaurant industry’s outlook is not highly positive. Same-store sales are projected to grow in low single digits this year, showing a still sluggish U.S. economy. Many analysts project slower traffic for casual dining restaurants, especially during weekdays. However, bakery-cafes will be less affected since they aim at higher-income families and their pricing maintains good margin levels.
I will comment on three bakery-cafes to determine which one will be positioned to better profit this year.
A price to consider
Krispy Kreme Doughnuts (NYSE: KKD) operates as a branded retailer and wholesaler of doughnuts.
The company posted revenue of $120.6 million in its first quarter 2014, up 11.2% year over year. Net income increased 32.7% to $8 million and EPS reached $0.11. These results were driven by good performances in all four of the company’s segments.
Krispy Kreme’s revenue growth outpaced the industry average of 7.6%, showing bottom line improvements and thus, better earnings per share. In addition, the company has a solid financial position with reasonable debt levels by most measures. Net operating cash flow grew to $14.39 million, up 38.87%, showing the increase in net income.
The company’s strong 37.50% earnings growth plus other driving factors have pushed the stock price up 180% in the past year, surpassing the rise in the S&P 500 during the same period. Year-to-date, the stock has appreciated nearly 90%.
Turnaround for the company, however, is pretty much still in its early stages. Expanding aggressively is what management plans to do by adding stores locally and internationally. Currently, Krispy Kreme possesses 733 locations in 22 countries, but by adding small freestanding factory shops, the company will increase brand recognition and product availability. Core product offerings are being diversified as well, which should bring more customers and revenue. Plus, more doughnut flavors are under development and high promotional activity is pushing the brand’s beverage business.
Looking to expand
The Cheesecake Factory (NASDAQ: CAKE) operates in the restaurant and bakery businesses.
The company announced an EPS of $0.47 for its first quarter, surpassing the year-ago level by 27%. Revenue reached $463 million, showing a 6.3% increase year over year. Top line and comps growth, along with margin expansion, drove these results.
Cheesecake is putting a special focus on containing its costs and expanding internationally. Food costs, particularly, have not increased as much for the company throughout this year, which is encouraging. Commodity inflation has moderated on an annualized basis, and management expects it be about 2.5% in fiscal 2013.
The company positions its restaurants as upscale casual, so good pricing actions should drive more profits. Plus, it has big plans for expanding in the Middle East, which is already in course, and in Latin America. Mexico City will host the first opening in fiscal 2014.
However, Cheesecake has been rather slow in expanding overseas compared to its peers. So, I would encourage a more aggressive expansion. In addition, 90% of stores are located in or near malls, which are exposed to seasonal traffic fluctuations and changes in consumer shopping habits.
A strong company and business
Panera Bread (NASDAQ: PNRA) operates as a bakery-cafe concept with 1,541 company-owned and franchise-operated bakery-cafe locations in the U.S. and Canada.
The company posted modest first-quarter figures. EPS reached $1.59, up 13.6% year over year, driven by top-line growth and operating margin expansion. Revenue increased 13.6% to $568 million. However, a reduced guidance for same-store sales and a reduction in transactions in the past two quarters is showing an alert for Panera.
This restaurant chain can proudly exhibit a track record of 20%-plus growth in EPS for five years straight, and a steady margin improvement despite sluggish market conditions. In fact, Panera has been one of the few casual dining chains that showed a continuous expansion in a slow economy. Comparable store sales have grown 5.3% on average annually from 2009 to 2012, a great performance for this industry. Plus, the chain will open 115-125 new restaurants this year, securing more income in the future.
Like Cheesecake, Panera aims for higher-income guests, allowing it to offer higher-priced menu alternatives. These consumers have been able to withstand the crisis in better shape and help the company remain healthy. Panera’s most recent efforts are into driving customers towards higher-margin products, such as breakfast sandwiches, seasonal salads, and pastas. These offerings are gaining traction, especially the new pasta menu and protein menu categories, allowing higher income. Plus, Panera is pushing forward its 13.8 million-member My Panera loyalty program, which is a long-term growth driver.
Finally, I would point out that the company is shifting away from a franchisee-based model towards company-owned operations, acquiring businesses from its franchisees. This transition reaffirms Panera’s business model, contrasting it to its peers’, that focus on growing franchisees.
Krispy Kreme is a solid company and its current price reflects the company’s strengths. However, since the industry outlook is not very promising, I believe this restaurant’s price might not grow a lot more unless it manages to drive these growth levels consistently.
Cheesecake’s outlook is stable, but not very promising. I would not invest in the stock until I hear good results coming from the company’s overseas expansion.
Panera is positioned to keep growing this year despite the not-so-great industry outlook. I believe its business strategy will remain strong.
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Louie Grint has no position in any stocks mentioned. The Motley Fool recommends 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!