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Soft Comps Hurt Panera Bread Q2 Earnings; FY Outlook Narrowed

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Panera Bread Company posted dismal second-quarter 2014 results, wherein both earnings and revenues lagged the Zacks Consensus Estimate.

Adjusted second-quarter 2014 earnings of $1.74 per share was at the higher end of the management's guided range of $1.70–$1.76 per share but missed the Zacks Consensus Estimate of $1.75 by 0.6%. Earnings excluded 8 cents of gain from favorable resolution of an insurance coverage matter. Revenues and margins remained sluggish in the quarter.

Earnings remained flat year over year.


Quarter in Detail

In the reported quarter, the restaurant chain's total revenue increased 7.1% year over year to $631.1 million. Quarterly revenues benefited from a 6.6% rise in company-owned bakery-café revenues, 9.5% increase in franchise royalties and fees and 11.9% increase in fresh dough and other product sales to franchisees.

However, revenues missed the Zacks Consensus Estimate of $640.0 million by 1.4% which we believe was due to muted comps.

System-wide comparable net bakery-café sales in the quarter were flat, lower than a 0.1% increase in the prior quarter. Both company-owned and franchised-operated units posted muted comps. Comps were hurt by a shift in timing of Easter to the second quarter.

Comps at company-owned units grew 0.1%, flat, similar to the first-quarter of 2014. Comps at company-owned units reflect average check decline of 0.3% but a year-over-year transaction growth of 0.4%.

Panera Bread witnessed 0.2% comps decline at franchised-operated units during the quarter versus 0.1% increase in the previous quarter.

The company's operating margin declined 250 basis points (bps) to 11.7% due to investment in key initiatives to improve customer experience, operational capabilities and technology infrastructure, as well as higher food and marketing expenses.

Third and Fourth-Quarter 2014 Guidance

The company expects fiscal third-quarter 2014 earnings per share within $1.40 to $1.46, representing an increase of 4% to 8% from the year-ago quarter.

The company expects earnings per share of $1.89 to $1.98 in the fourth quarter, representing a year-over-year increase of 3% to 8%.

The fiscal third and fourth quarter 2014 targets take into consideration that the company will continue to invest in key initiatives consistent with its strategic plan and buy back shares throughout fiscal 2014.

Full-Year 2014 Guidance Narrowed

The company narrowed its earnings per share guidance from $6.80–$7.00 to $6.65–$6.80 due to lower-than-expected growth in average check and higher-than-expected input costs throughout the year.

The company also narrowed its guidance for comps at company-owned units and expects it in the range of 0.0% to 1.5%, down from 2.0% to 3.5%.

The company lowered its margin guidance and expects it to decline 135 to 185 bps year over year, more than previously expected shortfall of 75 to 125 bps. The decline reflects higher expenses associated with significant investments planned for the company's bakery-cafés, higher input costs and lower comps growth.

Our Take

After inclement weather significantly affected Panera’s comps in the first quarter of the year, it failed to script a major turnaround in the second quarter. Further, we believe the company’s margin will remain under pressure due to incremental investments in digital initiatives and menu innovations associated with the Panera 2.0 program. Further, higher commodity costs will add fuel to fire.

Nevertheless, the company's initiatives like introduction of new menu items, increased media exposure and focus on an off-premise catering program are expected to aid results. However, a weak outlook for 2014 and a continuous decline in transactions cannot be ignored.

Panera Bread presently has a Zacks Rank #4 (Sell). Some better-ranked stocks in the restaurant industry include BJ's Restaurants, Inc. (BJRI - Free Report) , Chipotle Mexican Grill, Inc. (CMG - Free Report) and Domino's Pizza, Inc. (DPZ - Free Report) . While BJ's Restaurants and Chipotle sport a Zacks Rank #1 (Strong Buy), Domino's Pizza carries a Zacks Rank #2 (Buy).

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