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Conclusion: We just shorted PNRA in the Hedgeye Virtual Portfolio.

PNRA has posted strong results year-to-date, but the stock is now flashing as immediate-term overbought in Keith’s model with TRADE support down at $92.35.

The timing of the overbought level being triggered lines up with my fundamental view as the company will be lapping its most difficult same-store sales growth comparison in Q4.  As I have said before, I think the company’s guidance for 4-6% comp growth in Q4 is somewhat aggressive as it relies on a significant acceleration in transaction growth that I think will be difficult to achieve.  Year-to-date, average check growth has driven about 6.5% of PNRA’s 8.4% comp growth. 

Management’s Q4 comp guidance assumes 1-3% transaction growth and 3% average check growth.  Although the company’s transaction growth trends did improve during the third quarter on a two-year average basis after slowing in 2Q10, this 1-3% growth target implies a 110 to 210 bp uptick in two-year average trends from 3Q10 levels. 

Panera is relying on the success of its recently launched MyPanera Loyalty Program (nationwide rollout was completed in mid November) to boost comp growth during the fourth quarter.  Specifically, the company is expecting an approximate 1.5% lift to comp growth from the new loyalty program and an additional 1.5% lift from sequentially increased media spending during Q4.  Through the first 27 days of Q4, same-store sales were up 4.4%, which implies a 120 bp acceleration in two-year average trends from the third quarter.  Despite this strong start, comparisons get more difficult throughout the quarter, and management’s expectation for such a sharp sequential increase in transaction growth seems like a stretch, even in light of the company’s new loyalty program.  I do not doubt that over time, this program will drive frequency, but a +1.5% lift in the first quarter it is rolled out still seems aggressive.


Howard Penney

Managing Director