Panera Bread Co's Place In The Rush For Fast Casual Dining

The fast-casual segment of the restaurant industry has been thrown into the spotlight as high profile names egregiously outperform benchmarks.

El Pollo LoCo Holdings Inc's LOCO first month as a public company highlights this. At $36, shares are trading 52 percent higher than they opened and more than double the original pricing. Retail investors and professionals alike echoed the idea of not wanting to miss the next Chipotle Mexican Grill, Inc. CMG.

Panera Bread Co PNRA is one of few names that has disappointed investors during the fast-casual boom. Growth lags peers, but an initiative is in place to reverse the trend.

Valuation & Growth

At $161.20, Panera is trading at 23.6 times forward earnings and about 1.6 times EV/sales. Applying Chipotle’s mammoth 40 forward earnings and 5.6 EV/sales multiples to Panera gives $283 and $542 price points.

Regardless of whether the multiples are justified (Chipotle’s valuation, especially, is hotly debated), there is clearly a difference in growth profiles.

Panera’s second quarter sales increased 7 percent year-over-year, while Chipotle recorded a 29 percent jump. Comparable sales rose 0.1 percent versus 17.3 percent, and 19 new stores were opened, compared to 45 for Chipotle.

Despite the growth differences, though, penetration rates are not wildly different. Panera has 1,818 locations compared to Chipotle’s 1,681.

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Panera 2.0

Knowing that growth trails what it could be during the boom of the fast casual segment, Panera launched a turnaround strategy called "Panera 2.0."

Developed for an increasingly digital world, the bakery looks to change how it interacts with customers, and the strategy could have massive implications for same-store sales.

Customers will be able to order from their cell phones or computers and have food brought to them while sitting in the restaurant. Increased comfort and the sense of a traditional restaurant have many speculating that customers will be continuously drawn to the store.

Carryout customers are also targeted by Panera 2.0. In the case of the workday, for example, speed is one of the most important factors when diners choose where to buy lunch. With the ability to order via the Internet, purchases can be placed from work and quickly picked up from a carryout shelf when ready.

Analyst sentiment has been impressively positive for the initiative.

Barclays writes, “The rollout of PNRA 2.0 is in the early stages (~30 stores in 3 markets), with technology to lead the industry… With near-term expectations low, we see limited downside, and a favorable risk-reward.”