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Will Panera (PNRA) Miss Q2 Earnings on Incremental Costs?

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Missouri-based restaurant chain Panera Bread Company is set to report second-quarter 2014 results on Jul 29, after the market closes.

Last quarter, Panera delivered a 2.0% positive earnings surprise driven by better-than-expected top line. Let’s see how things are shaping up for this announcement.

Factors to Consider this Quarter

Panera operates in three primary business segments: bakery and cafe operations, franchise operations, and product operations.

We believe Panera’s margin in the second quarter will remain under pressure due to incremental investments in digital initiatives and menu innovations associated with the Panera 2.0 program. Despite the long-term benefits associated with the program, Panera will experience additional costs in the second quarter.

Additionally, with prices for meat and seafood rising due to diseases and widespread drought, commodity costs are expected to rise. This is especially alarming for the company as it operates in an intensely competitive segment and it might dent the profits.

In the prior quarter, the company posted sluggish comps, reflecting the impact of a severe winter that hurt traffic. However, we believe the company will be able to reverse the trend in the coming quarter backed by its extensive menu innovation and digital initiatives. In fact, Panera’s intent to drop all artificial additives from its menu and use antibiotic-free chicken in all of its items should help drive consumer traffic in the second quarter.

Earnings Whispers?

Our proven model does not conclusively show that Panera is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP:  Panera’s ESP is 0.00% since the Most Accurate Estimate stands as well as the Zacks Consensus Estimate stands at $1.75.

Zacks Rank: Panera currently has a Zacks Rank #4 (Sell). We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other companies in the restaurant sector that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Texas Roadhouse, Inc. (TXRH - Free Report) , with an Earnings ESP of +3.03% and a Zacks Rank #3 (Hold).

Buffalo Wild Wings Inc. , with an Earnings ESP of +3.33% and a Zacks Rank #3.

Jack in the Box Inc. (JACK - Free Report) , with an Earnings ESP of +3.51% and a Zacks Rank #3.

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