Panera Bread Beats on Earnings, Lowers View - Analyst Blog

Panera Bread Company PNRA posted better-than-expected first quarter 2014 results but lowered its expectation for the full year. Adjusted first-quarter 2014 earnings of $1.55 per share were at the higher of management's guided range of $1.49–$1.55 per share and beat the Zacks Consensus Estimate of $1.52 by approximately 2.0%, possibly due to an improved top line performance.

However, earnings declined 2.5% year over year due to higher total cost and expenses and lower margins, which offset the impact of higher revenues.

Quarter in Detail

In the first quarter, the restaurant chain's total revenue increased 7.8% year over year to $605.3 million. Quarterly revenues benefited from a 7.6% rise in company-owned bakery-café revenues, an 8.7% increase in franchise royalties and fees and an 8.5% increase in fresh dough and other product sales to franchisees.

Revenues beat the Zacks Consensus Estimate of $667.0 million by a meager 0.5% due to sluggish comps. The company posted sluggish comps during the first quarter of the year, reflecting the impact of a severe winter that hurt customer visits, partially offset by the shift of Easter to the second quarter.

System-wide comparable net bakery-cafe sales in the quarter increased only 0.1%, lower than 3.3% in the year-ago quarter and 1.1% in the fourth quarter. Both company-owned and franchised-operated units posted muted comps.

Comps at company-owned units were up 0.1%, comparing unfavorably with year-ago comps growth of 3.3% and last quarter comps of 1.7%. Comps at company-owned units reflect average check growth of 2.9% and a year-over-year transaction decline of 2.8%.

Panera Bread witnessed comps increase of only 0.1% at franchised-operated units during the quarter, far less than a 3.3% increase in the year-ago quarter and a 0.5% increase in the previous quarter.

The company's operating margin declined 240 basis points (bps) to 11.1% due to higher expenses incurred by the company for its initiatives to improve operational capabilities and an increase in marketing expenses.

Second-Quarter 2014 Guidance

The company expects second quarter 2014 results to be negatively impacted by the shift of Easter holiday to the second quarter of the year. It expects earnings per share in the range of $1.70 to $1.76, down 0.2% to up 1.0% year over year from the year ago figure of $1.74. Also, it is far lower than the Zacks Consensus Estimate of $1.86. The company indicated that company owned net bakery sales for the first 27 days of the second quarter were up only 0.4%.

Full-Year 2014 Guidance Narrowed

The company narrowed its earnings per share guidance for the year and expects it in the range of $6.80 to $7.00 compared with the previous expectation range of $6.80 to $7.05. The guidance reflects continued investments throughout 2014, which will aid transaction growth and lower share count (though less compared to 2013 levels). The Zacks Consensus Estimate of $6.93 lies within the management's guidance.

The company also narrowed its guidance for comps at company-owned units and expects it in the range of 2.0% to 3.5% compared with the prior range of 2.0% to 4.0%. However, it expects comparable net bakery-cafe sales growth and transaction growth to improve in the second half of 2014 owing to the initiatives taken by it.

The company retained its margin guidance and expects it to decline in the range of 75 to 125 bps year over year. The decline reflects higher expenses associated with significant investments planned for the company's bakery-cafes.

Our Take

After posting an average four quarter negative surprise of 3.64% in 2013, the company began 2014 on an encouraging note and posted better-than-expected results. Though revenues went up year over year, earnings experienced a decline on higher expenses. The company is busy working on initiatives that require heavy investments. These investments would aid transaction growth in the long-term but are hurting the bottom line currently.

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 #3 (Hold). Some better ranked stocks in the restaurant industry include Ignite Restaurant Group, Inc. IRG, The Wendy's Company WEN and Jack in the Box Inc. JACK. While Ignite Restaurant and The Wendy's sport a Zacks Rank #1 (Strong Buy), Jack in the Box carries a Zacks Rank #2 (Buy).