Panera Tops, Ups View

Panera Bread Co. (PNRA - Analyst Report) posted third quarter 2012 adjusted earnings of $1.24 per share, comfortably surpassing the Zacks Consensus Estimate of $1.19 and year-ago-quarter’s earnings of 97 cents per share. The better-than-expected results were driven by solid top-line growth and superior operating margins.

Inside the Headline Numbers

The restaurant chain’s total revenue escalated 17% year over year to $529.3 million in the third quarter and beat the Zacks Consensus Estimate $522.0 million.

System-wide comparable net bakery-cafe sales in the quarter expanded 5.8%. The company-owned comparable net bakery-cafe sales increased a handsome 6.2% driven by transaction growth of 0.6% and average check growth of 5.6%. A pricing action of approximately 3.0% and positive mix impact of approximately 2.6% drove average check growth. Franchise-operated comparable net bakery-cafe sales also grew 5.5%.

The company’s operating margin enhanced 80 basis points backed by better bakery-cafe margins. However, increased costs induced by year-over-year rise in wheat prices and higher zero margin produce sales to franchisees offset the margin gain to some extent.

Store Update

During the quarter, Panera opened 17 new company-owned bakery-cafes and 19 franchised bakery-cafes. As of September 25, 2012, the company operated 1,625 bakery cafes, of which 792 were company owned and the rest were franchised.

For 2012, the company anticipates to be at the high end or marginally above the earlier forecasted unit development target of 115–120 units.

For 2013, the company expects to unveil approximately 115-120 system-wide units.

Outlook

Panera expects earnings to be in the range of $1.72—$1.74 per share for the fourth quarter (earlier guided range $1.66—$1.70). The company anticipates fourth quarter company-owned comparable sales in the range of 5%–6%.

For full-year 2012, Panera raised its earnings per share guidance from $5.72–$5.78 to $5.86–$5.88, reflecting a year-over-year earnings growth of around 29%. In the prior quarter, management had boosted its guidance from $5.58–$5.63 to $5.72–$5.78 per share (26–27% year over year). Prior to that quarter, management had increased its guidance from $5.50–$5.55 to $5.58–$5.63 per share.

Company-owned comparable net bakery-cafe sales growth is expected to be in the range of 6.0%–6.5% (previously 5.5%–6.5%). In the prior quarter, management had boosted its guidance from 4.5%–5.5% to 5.5%–6.5%.

For full-year 2013, Panera issued earnings per share guidance in the range of $6.85—$7.00 (up 17-19% year over year). Management aims to achieve company-owned comparable net bakery-cafe sales growth in the range of 4.5%–5.5% for fiscal 2013. The company's operating margin will likely be in the range of flat to 50 basis points of increment in fiscal 2013.

Our Take

We remain optimistic on the stock based on Panera's earnings and revenue beat, strong 2013 outlook, continued margin improvement and increases in its full-year guidance in three consecutive quarters amid a sluggish business environment. The company's dominant position in the bakery-cafe business and more stable traffic than most of its restaurant peers also inspire optimism around the stock. The company is also likely to enjoy a favorable effect from 53rd week operation in fiscal 2013.

However, stiff competition and wheat price inflation are expected to remain headwinds. Panera, which competes with Chipotle Mexican Grill Inc. (CMG - Analyst Report), currently carries a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We are maintaining our long-term “Neutral” recommendation on the stock.