Panera Bread: Beating the Consensus Yet Again
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Yesterday, Panera Bread Co. (NASDAQ: PNRA) reported strong results for the second quarter ended June 26, 2012. The company reported Q2 diluted EPS of $1.50 representing 27% year over year increase, beating consensus estimate of $1.43 and guidance of $1.40-$1.43. This makes 2Q12 the 18th consecutive quarter for which the company posted earnings above the consensus estimates and mid-guidance. PNRA eliminated concerns regarding its ability to drive positive traffic with an impressive 7.1% same store sales growth rate. The company’s solid earnings were driven by stronger than expected SSS growth and improved margins. The following table summarizes the company’s performance with respect to the prior year and consensus estimates.
|
|
Reported (2Q12) |
Prior Year (2Q11) |
Consensus Estimate |
|
Revenue |
$531 million |
$450 million |
$518 million |
|
Diluted EPS |
$1.50 |
$1.18 |
$1.43 |
|
Company-owned SSS |
7.1% |
4.4% |
4.5%-5.5% |
|
Operating Margin |
13.6% |
12.7% |
12.9%-13.2% |
Panera’s sales gains were broad based, with SSS up across all day parts in the quarter, as has been the case for every quarter since 3Q09. Encouragingly, both one-year and two-year SSS trends accelerated as the quarter progressed, with company-owned SSS up 5.4% in April, 6.6% in May, and 9.3% in June. Panera’s new units also continue to perform well, with average weekly sales at company-owned locations of $48,484 through the first half of the year versus $43,449 last year and average weekly sales at franchised locations of $47,109 versus $44,550 last year. Restaurant-level margins exceeded expectations by rising 200 bps to 21.1 despite the peak of year-over-year wheat cost inflation. As a result, the operating margin increased 90 basis points, to 13.6%.
Development Targets and Updates
- Panera opened 17 company-owned and 16 franchised units in Q2, bringing the total system to 1,591 locations. Management looks confident in achieving 8% unit growth with 115-120 new units system wide in 2012.
- PNRA expects marketing spending to increase roughly 26% in 2012. Also, MyPanera loyalty program now has more than 11 million members.
- The installation of drive-through windows continues to be a key development initiative, with 40% of new locations in 2012 expected to feature a drive-through window, yielding a year-end total of 200 drive-through locations.
Raised 2012 Guidance and Promising Q3 Outlook
Following strong sales and margin trends, management has raised 2012 EPS guidance to $5.72-$5.78, versus prior guidance of $5.58-$5.63 and upgraded consensus estimates of $5.72 ($5.69 previously). Company-owned SSS is now expected to increase 5.5%-6.5% versus prior guidance of 4.5%-5.5%.
The sales momentum of the second quarter has been carried forward so far in July with 5.9% SSS growth against the consensus estimate of 4.5%-5.0% for the third quarter. As a result, Q3 company-owned SSS guidance was set at 5.0%-6.0% against a 6.0% comparison. Q3 and Q4 earnings per share are anticipated at $1.16-$1.18 versus consensus of $1.19 and $1.66-$1.70 versus consensus of $1.67, respectively. We still expect an upside to traffic guidance of 0.75%-1.25% in 3Q driven by greater advertisement spending (1.5% of sales in 2012, up from 1.3% of sales in 2011 and 1.1% in 2010) and thus, the Q3 guidance appears a little conservative.
Our Take
PNRA is among the fastest growing chains in the restaurant sector with huge potential for additional expansion. PNRA possesses multiple opportunities to drive SSS growth over the near term through increased brand awareness, greater marketing, menu innovations and its loyalty program. In addition, the company could potentially generate higher AUVs and ROIs through acquisitions and increased development in urban markets. The company has strong fundamentals (See: Panera Bread: Strong Fundamentals Likely to Continue) and we expect good results in the future as well.
Panera is trading at a forward P/E of 22.59 which is at a premium to its competitors like Starbucks Corporation (NASDAQ: SBUX) which is trading at 22.11x and Tim Hortons Inc (NYSE: THI) which is trading at 13.70x. PNRA’s expected revenue and EPS growth of (15.40%, 23%) is better than Starbucks (14.3%, 20.4%) and Tim Hortons (10%, 15.1%). Also, PNRA deserves a premium for a model that can more than double its store base and grow earnings 20%+ for the next several periods. Panera's risk/reward profile appears attractive considering what we believe to be a conservative 2012 guidance. We are also attracted to the company's compelling same-store-sales drivers, defensive qualities with low average-check, robust long-term unit growth plan (50%+ cash-on-cash returns) and 20% annual EPS growth. We maintain our buy rating.
TheAnalystBlog has no positions in the stocks mentioned above. The Motley Fool owns shares of Panera Bread and Starbucks. Motley Fool newsletter services recommend Panera Bread, Starbucks, and Tim Hortons. 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.
