Bear of the Day: Panera Bread (PNRA)

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November 15, 2013 |

The Panera Bread (PNRA - Analyst Report) growth story seems to keep hitting the skids this year. After a second-quarter miss and lower guide dropped the stock from $185 to $170 in late July, the name has consistently been a Zacks #4 Rank Sell, taking shares down further below $160.

Then the company's 3rd-quarter report brought little better news, with a miss on revenues and further weak guidance. In their late October message to investors, management revealed they expect Q4 earnings in the range of $1.91 to $1.97, down from previous estimates of $2.05 to $2.11.

Systemic Problems

In the conference call, management also shared that research indicates rising customer dissatisfaction with order accuracy and store level comfort and cleanliness. The company announced that they are responding with a series of initiatives, including...

1. Increased store labor hours that will add roughly 60 basis points to store cost structure in the near-term

2. Technology investments designed to allow store managers more time to “work the floor” and interact with customers, monitor cleanliness, etc.

These fixes explain that the cut in outlook is also due to an expectation of lower operating margins. And even though current earnings guidance reflects annual growth of 9%–13%, Panera anticipates Q4 company-owned comparable sales growth to be flat to up 2%, lower than the prior estimates of 3%–5%.

In the earnings estimates tables below you can get a good look at the analyst response to this guidance. This is what put the stock back down in the cellar of the Zacks Rank.

The middle table shows the number of analysts that raised or lowered their estimates in the recent past. You can see the flood of analysts that were busy revising their numbers lower both before and after this most recent report.

In the bottom table, you can see that in the past 60 days, the full-year 2014 consensus estimate has come down from $7.83 to $7.37. That's a haircut of nearly 6%. While still representing 10% EPS growth, the direction and magnitude of the move is what concerns growth investors most.

Short-Term Pain, Long-Term Gain

Panera is still a viable and thriving dining concept that will continue to grow and increase market share in the casual restaurant arena. But the near-term outlook has many analysts and investors stepping back to a "wait and see" mode.

Here's how the analysts from Raymond James summed up the situation after the October report...

We reiterate our Underperform rating on PNRA and are lowering our 2014 EPS estimate sharply following the company’s 3Q EPS release and conference call. We believe the current store level operating pressures (slower production times, rising order inaccuracies, etc.) are solvable, but it will take time. This creates a period of unusually low near-term visibility.

We also emphasize, however, that we believe the current period of disappointing results is a “growing pains” type of situation, and we retain our long-held confidence that the Panera concept can eventually become a $10-12 billion annual retail sales business (which equates to about a 5% share of the U.S. limited service restaurant sector).

Bottom line: If the company's "fixes" come through, then same-store sales can re-accelerate, and the improvement costs would eventually be more than offset by higher gross profits on sales. But we will know this first when the analysts begin raising estimates again in the next quarter or two. Until then, just keep an eye on the Zacks Rank.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.

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