PNRA faces some big hurdles in the coming months, especially in 4Q11.  While we think trends remain on track this quarter, sales have softened a bit of late.  For the industry as a whole, the bar has been raised on sales trends, given the significant downturn in consumer confidence and the lack of any significant improvement in the jobs picture. 


On the surface it looks like that PNRA's second half comp guidance seems achievable given that a 5% comp (guided to 4.5% to 5.5% same-store sales growth in both 3Q11 and 4Q11) during the third quarter implies a 175 bp deceleration in two-year average trends. 


The biggest risk to guidance seems to come in 4Q11, as the difference in transaction growth between 3Q11 and 4Q11 is driven by the distribution of media.  PNRA will print the highest year-over-year growth in media in 3Q11 as the company is rolling out the “Make Today Better” campaign.  For fiscal 2011, year-over-year media spend will be up approximately 40% system-wide.  Also in 4Q11, PNRA will anniversary the MY PANERA loyalty program primarily in 4Q10.  


Being conservative, management’s guidance assumes a fairly significant slowdown in two-year average traffic trends during the second half of the year, which is warranted given that the company intends to raise prices in September, resulting in a 3.5% price increase during 4Q11 versus the 2.5% expected in 3Q11 and reported in 2Q11. 





It was encouraging to hear management talk about the potentially negative impact on traffic as a result of the incremental price increase as companies often talk about price increases as being wholly incremental; management also attributed the expected deceleration in traffic trends to economic conditions. 


The biggest risk to Panera’s second half comp targets stems from the assumed sequential improvement in mix.  PNRA reported modest check compression of 50 bps during 1Q11, which worsened to 100 bps during 2Q11.  Management attributed this negative mix impact to the company’s new loyalty program, which offered increased discounts and specific to 2Q11, to the later introduction of its Summer Salad Celebrations versus the year prior. 


Going forward, management expects menu mix to turn positive and guided to flat to +1% mix impact on check during 3Q11 and 1-2% mix impact in 4Q11.  PNRA’s comp guidance relies on this mix improvement in the back half of the year but the comparisons get much easier as the company took a big hit on mix during 4Q10 (reported +0.3% versus +3.3% in 3Q10), largely as a result of the launch of its loyalty program. 


That being said, although we need to see a big improvement in mix quarter to quarter, the guidance assumes fairly even mix trends on a two-year average basis.


It will be important to watch how customers respond to Panera’s upcoming price increase and how customers fare overall in the current economic environment, but given recent trends, PNRA’s comp guidance seems reasonable in 3Q but somewhat more aggressive in 4Q11. 


From a commodity perspective, Panera is expecting 4.5% inflation for the full year 2011 and roughly 4-5% for 2012.  Wheat is the most important commodity for Panera, in terms of the percentage of its commodity spend that the grain accounts for.  In 2008, soaring wheat prices impacted Panera’s restaurant level margins severely.  A new strategy of buying at least six months out and buying in short periods of time has benefitted the company through inflationary periods but, as management said in early 2010, has allowed some benefits of commodity deflation to elude the company’s P&L. 


Coming into 2010, the company had 80% of its wheat costs locked in at just over $8 per bushel and wheat costs for 2011 were locked “approximately flat” to wheat costs in 2010, according to management.  As the chart below shows, wheat is currently tracking approximately flat year-over-year, at roughly $7.25 per bushel, and could be down year-over-year in early 2012.  In the near term, crop damage in the U.S. caused by drought, flooding, and other events will provide support for wheat prices.  Over the longer term and for 2012 overall, global demand may slow if economic growth remains stagnant.  As always, the U.S. Dollar, and the factors that influence it will be a primary driver of what wheat prices restaurant companies face next year.





Howard Penney

Managing Director


Rory Green


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