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Panera Well Poised on Strong Comps Despite Industry Woes

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On Nov 28, we issued an updated report on bakery-café giant, Panera Bread Company .

Last month, Panera posted robust third-quarter 2016 results, wherein both the top- and bottom-lines beat the respective Zacks Consensus Estimate.

The company is focused on the rollout of its Panera 2.0 program which includes the achievement of operational excellence along with digital access to Panera through mobile, web and kiosk. Particularly, the program aims at growing sales as well as earnings, while lowering costs.

Under Panera 2.0, the company expects to remove all artificial ingredients from its food items by the end of 2016, thereby increasing its popularity among health-conscious customers.

Notably, companies like McDonald's Corp. (MCD - Free Report) and The Wendy's Company (WEN - Free Report) , have also pledged to shift completely to cage-free eggs and use chicken raised without antibiotics. Additionally, Chipotle Mexican Grill, Inc. (CMG - Free Report) uses genetically modified organism–free ingredients in its food items.

Moreover, Panera 2.0’s enhanced store designs along with innovation in food and operations have started yielding results and are already outperforming the company’s traditional cafes.

The company’s “Food As It Should Be” marketing campaign and “My Panera” loyalty program also continue to drive sales. Moreover, at the end of the third quarter, digital utilization (orders that are both digitally placed and paid) in the company cafes was 22% of sales. This was an indicator of the success of the company’s digital initiatives.

Lately, Panera’s digitally enabled larger party-sized channels such as delivery, catering, Rapid Pick-Up, along with its Panera At Home business, are driving incremental sales at the company and should turn out to be a strong revenue growth driver in the long term. In fact, based on the company’s initial success with delivery, it now plans to have delivery in 35% to 40% of its total system by year-end 2017.

PANERA BREAD CO Price and Consensus

Owing to these initiatives, the company witnessed growth of 3.4% year over year in comparable company-owned bakery-café sales. This came at a time when the restaurant industry faced the third consecutive quarter of negative comp sales in addition to traffic trending down and being negative for seven consecutive quarters.

Moreover, Panera expects company-owned comparable net bakery-cafe sales to grow in the range of 3.5% to 4% for the fourth-quarter 2016. Additionally, the company declared that comps in the first 27 days of the fourth quarter increased 3.4%, indicating that it is off to a strong start in the ongoing quarter.

On the other hand, though the initiatives undertaken by the company under the Panera 2.0 program are expected to yield benefits over the long term, they are likely to affect margins and earnings in the near term.

Moreover, higher investment, labor and pre-opening expenses, along with startup and transition costs related to immature Panera 2.0 cafes, are expected to hurt margins.

Further, a prevailing soft consumer spending environment in the U.S. restaurant space adds to the concerns.

Panera currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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