Why Panera Bread Faces 'Significant Competitive Intrusion'

Karen Houlthouse of Goldman Sachs resumed coverage of Panera Bread Co PNRA on Monday with a Sell rating and $139 price target. The analyst sees "significant risks of competitive intrusion" from newer, more food-forward and varied menu concepts.

"The combination of entrepreneurial, food-focused Millennials, strong valuations for early-stage fast casual restaurant IPOs, and low interest rates have facilitated the creating of new brands and the new funding of aggressive growth," Houlthouse wrote in a note.

The analyst adds that new restaurant concepts that target the millennial consumer are "proliferating" and that key consumers "broadly prefer" these new concepts that offer "much more obvious health, wellness, and "real food" cues."

Houlthouse notes that it is "unclear" if Panera's "2.0" initiative is resonating with consumers. The analyst states that Yelp reviews have been mixed as consumers appreciate Panera Bread's table service and are not responding to mobile initiatives which are leading to order accuracy errors, particularly for to-go orders.

Houlthouse also states that Panera Bread's return profile of Panera 2.0 is "unclear." The analyst assumes a sales lift of seven percent (the midpoint of remodel lifts) suggests an internal rate of return of "only" 10 percent, below the average seen in the Quick Service Restaurant/fast casual segment as of late.

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