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Panera Bread Co.'s (PNRA - Analyst Report) third-quarter fiscal 2013 adjusted earnings of $1.35 were in line with the Zacks Consensus Estimate but increased 8.9% from the year-ago quarter’s earnings of $1.24 per share. The company’s higher top line boosted the earnings growth. Earnings were also within management’s previously provided guided range of $1.32–$1.36 per share.

Quarter in Detail

In the third quarter, the restaurant chain’s total revenue increased 8% year over year to $572.5 million. Quarterly revenues were benefited by an 8.4% rise in company-owned bakery-café revenues and 7.4% increase in franchise royalties and fees and a 5.9% increment in the fresh dough and other product sales to franchisees.

However, revenues lagged the Zacks Consensus Estimate of $585 million by 2.1%. We believe that the lower-than-expected comparable sales (comps) led to the miss.

System-wide comparable net bakery-cafe sales in the quarter increased only 1.3%, much lower than the year-ago quarter’s level of 5.8% and second-quarter comps of 3.7%. Muted growth in comps can be attributed to a 0.5% decline in transaction, offset by 2.7% improvement in average check.  

Panera has witnessed 1.7% and 0.7% rise in comps at company-owned units and franchised-operated restaurants, respectively. Company-owned comps growth fell short of the guided range of 2%–4%.

The company’s operating margin remained flat at 11.3% as lower bakery-cafe margins were completely offset by the drop in general and administrative expenses, as a percentage of total revenue.

Store Update

During the quarter, Panera opened 17 company-owned bakery-cafes and 15 franchised bakery-cafes. For 2013, the company maintains its target of unveiling approximately 115–125 system-wide units.

Fourth-Quarter Fiscal 2013 Guidance Lowered

Panera has trimmed the fourth-quarter outlook. The company now expects earnings in the range of $1.91 to $1.97, down from the previous estimates of $2.05 to $2.11. Panera has cut down its earnings projection owing to an expectation of lower operating margin in the fourth quarter. The current earnings guidance reflects an annual growth of 9%–13%.

The company anticipates fourth-quarter company-owned comparable sales growth to be flat to up 2%, lower than the prior estimates of 3%–5%.

Operating margin is now expected to decline 100 basis points (bps)–150 bps in the fourth quarter versus its prior projection of flat to down 50 bps. The company is now investing heavily in several initiatives to improve its operational efficiency, better customer service and enhanced core enterprise systems. These investments will lead to higher costs, thus affecting margin.

Fiscal 2013 Guidance Reduced

For full-year fiscal 2013, Panera revised its comps, margin and earnings guidance. Comps are expected to increase in the range of 2% to 2.75%, down from the previously guided range of 3% to 5%. Lower-than-expected third-quarter comps were the reason behind such slashed comps guidance.

The company now expects operating margin to be flat- to down 50 bps as compared with a flat guidance in the prior quarter. Increased investments in the company’s initiatives may impact the fiscal 2013 margin.

Finally, the company has tightened its earnings guidance for fiscal 2013 in the range of $6.77–$6.83 from $6.75–$6.85. Earnings per share include 200 bps of beneficial impact from the 53rd week in fiscal 2013.

Our Take

Though the quarterly earnings met the Zacks consensus Estimate, revenues missed the same in the last two quarters due to lower-than-expected comps growth. This combined with a reduced guidance for comps, margins and earnings put Panera on the back foot this earnings season. Continuous decline in transaction in the last three quartersis also an overhang.

However, the Zacks Rank #3 (Hold) company’s newly launched menu items, increased media exposure and off-premise catering program are expected to boost sales. Faster resurgence of high-end consumers is also expected to contribute to Panera’s growth.

Other Stocks to Consider

Some other players in the restaurant industry which look attractive at the current level include Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report), Cracker Barrel Old Country Store, Inc. (CBRL - Snapshot Report) and Bob Evans Farms, Inc. (BOBE - Snapshot Report). While Red Robin holds a Zacks Rank #1 (Strong Buy), Cracker Barrel and Bob Evans Farms carry a Zacks Rank #2 (Buy).

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