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PNRA - Grass Roots Breakfast Sandwich Survey

We have done a proprietary grass roots survey on the state of the new Panera (PNRA) breakfast sandwiches. We surveyed over 30 stores in the following states - CT, ME, MA, NY, DE, SC, FL, GA, IA, IL, KY, TN, TX, CO and CA. The following conclusions can be made from the survey data:

(1) The stores generally indicate the new breakfast sandwiches are well received.

(2) In about half the calls, we were given a wide range on the number of sandwiches sold per week - 200 to 500 per week.

(3) On the margin, it appears that the new sandwiches are bringing in new people, but there is clearly people switching from the souffle.

If you would like to see the comments by region please call for the details.
  • She is noticing some new faces in the store asking for the grilled sandwich
    But everybody is trying , Old and New customers
    Customers ask for it even after 10:30 - They want it for lunch too
    The new ones are healthier
    They are very popular in the store right now
    She is positive about new people coming to the store looking for it
    The most popular is the one with sausage
    Much better than the souffle
    But basically the old customers who used to eat the souffle are now trying the sandwiches
    The one with bacon is the best seller
  • They sell about 300 of the grilled sandwiches per week
    They sell about 60 to 80 sandwiches per day
    People still like the souffle but they are more difficult to eat because you'll need utensils
    He said that they were selling 3 to 4 dozen a day.
    She thinks people are switching from the egg souffle for the grilled one
    She is new in the store, but she can say the new sandwiches are really popular - The staff eats it instead of the souffles
    They sell 300 of the grilled sandwiches per week vs. about 200 of the souffle per week
    He thinks everybody is switching because it's healthier and tastes better
    He is observing some new faces but nothing major
    The old customers are the ones changing to the new sandwiches
  • She mentioned that they were selling as well as the souffles . She said this without me asking.
    People are definitely trying the new ones
    They sell about 20 to 25 everyday
    After trying the grilled sandwich some people stay with it and some people go back to the souffle
    It's easier to eat the sandwich
    Everybody wants to try it because it's new
    It's the best thing ever , she said about the new sandwich
    She stills like the souffle
    They are selling about 15 per day (of the new one)
    They are selling basically to the same customers
  • She's not selling so much souffles anymore
    He can't talk to me right now because he's busy
    He also said they've been selling the grilled sandwiches for an year now - it's about even (they sell the same amount of sandwiches and souffles)
    Panera, CO - They don't carry the breakfast sandwiches. He said, we're supposed to be getting them in June/July
    He said, We sell about 50 a day, and about 70 on the weekends.
    They are selling 50 grilled sandwiches per day and they used to sell 60 or more of the souffles per day now they are selling less than 20
    The souffle has a lot of butter and eggs , it's not so healthy
    They sell 80 sandwiches per day and about 17 souffles
Comments that stand out:

SONC - Comments from Piper Jaffray Conference

When SONC preannounced on May 9th and lowered 3Q08 sales and FY08 earnings expectations, the company stated that March same-store sales were significantly below its targeted 2%-4% range, turned positive again in April and continued to strengthen during early May. Today, the company said that May sales picked up and returned to the +2%-4% range.

Value vs. Margins - Earlier in 3Q08, SONC was heavily promoting its Happy Hour program in order to drive traffic. These increased transactions came at the cost of lower than average checks. In order to once again drive profitable transaction growth, the company began in May to promote its value message along with a product at a higher price point, such as a premium sandwich like the Island Fire Burger and a $0.99 shake.

Labor cost pressures. Sonic responded to last year's minimum wage increase by raising prices by 4%. Looking back, the company thinks that the magnitude of the price increase may have hurt transaction growth so the company will not use a blanket price increase this July to offset the minimum wage increase. Instead, Sonic will be more price-sensitive and focus its increases to specific trade areas.

The company also mentioned that its restaurant margins in the first half of the year improved primarily as a result of favorability on the labor line, which may have come at the expense of the customer experience. The company recognizes that this type of trade-off will hurt its brand so there could be more pressure on restaurant margins going forward as the company focuses more on providing better customer service and feels more pressure from the minimum wage increase relative to last year.

Franchisee development. Drive-thru openings are increasing this year, but management stated that it is seeing a slowdown in new store development (still highlighted a strong development pipeline). Franchisees are continuing to invest in the system, however, by putting more money into retrofits and rebuilds.

MCD Shares up Big Today - Trade or Trend?

Last Thursday, retailers, for the most part, reported better than expected May comparable sales and the Morgan Stanley Retail Index (MVR) was up 3.4%. The next day, however, the MVR, reversed these gains entirely and declined further, closing down 6.7%.

Right now, MCD is trading up 4.0% in response to its better than expected May same-store sales results. Once investors read beyond the headlines and realize that U.S. margins are declining as a result of increased discounting (please refer to my earlier post MCD's Top-Line Momentum Continues...Will Margins Follow?), MCD shares could follow this same downward trend.

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MCD - MCD's Top-Line Momentum Continues...Will Margins Follow?

McDonald's global same-store sales were up 7.7% in May, reflecting strong results in each of its segments, primarily Europe and APMEA, up 9.6% and 9.7%, respectively. A calendar shift, which added an extra weekend to this year's May results relative to last year, benefited this 7.7% number by about 2% (this shift will reverse in June, negatively impacting results by the same magnitude). All in, this is still a great number.
  • U.S. - MCD's U.S. same-store sales were up 4.3%, which represents an uptick from recent trends (-0.8% in March and +2% in April). The 2-year trend increased to 5.9% in May from up 2.8% in April. Pricing in the U.S. has been running up about 3%-3.5% so the 4.3% number implies about a 1% increase in transaction counts, which is an improvement off of March and April's implied negative traffic results.
  • What is driving those transactions? The company stated on its 1Q08 conference call that although it is seeing more activity on the Dollar Menu that it remains consistent in the 13%-14% of sales range. Since then, an Ad Age article quoted Gregg Watson, VP of marketing at McDonald's USA , saying that Dollar-menu sales in the U.S. are now roughly 15% of sales, on the high end of the 13%-15% range that's been typical during the past 5 years... This increased range signals that these Dollar Menu transactions are becoming a bigger part of MCD's U.S. sales mix. NPD data points to a similar trend within the entire QSR segment, as the percent of transactions made on deal have grown from 21.5% in 3Q07 to nearly 23% in 1Q08.
  • MCD's higher U.S. same-store sales are translating into an increase in less profitable transactions. That being said, MCD's U.S. company restaurant margins have declined in the last 5 quarters with 1Q08 falling 20 bps on top of a 30 bp decline in 1Q07. Margins declines in light of sales growth typically highlights a real problem and this seems to be the trend at MCD's U.S. business, particularly if 2Q08 marks the first time these dollar-menu transaction move outside of the company's historical 13%-14% of sales range.

Meals on Deals!

We have seen some signs lately that casual dining same-store sales trends are getting a little better or should I say less worse! While this is an important data point, what matter most are the incremental margins attached to those visits. As seen in the chart below from a national survey, there is a noticeable increase in discounting at the major casual dining chains.

Call for details on the different chains!

Ralph Lauren Should have Trained Big Brown

Big Brown is like a poorly managed brand - under investing when it matters most. This is the antithesis of RL where returns just started a multi-year climb and the Street's numbers look low all-around.

Anyone watching Belmont on Saturday hoping for horse racing's first Triple Crown in 30 years walked away sorely disappointed. Hardly any sportscasters' post-mortem can point to a single factor as to why such an incredible horse could place dead last. Maybe it was the quarter crack in his left front hoof that cost three days of training, maybe it was the 9,000 RPM regimen over the preceding four weeks that caught up with him. The bottom line is the Brown lost big time - like so many companies are today.

Pardon my little missive, but there actually is an important overlapping investment theme. The best brands in Softlines invest in content on a very steady basis, and understand that when times get tough they need to double down on investment spend to gain share as opposed to printing too much margin. Metaphorically speaking, Big Brown 'printed too much margin' at the Preakness and the Derby by pushing the envelope and winning by a combined 10 lengths. By the time the Belmont came, there was no more gas. I think that Ralph Lauren is the antithesis of Big Brown.

RL is coming off a year where it invested in geographic infrastructure as well as in new product initiatives. It's about 3-4 quarters ahead of margin weakness experienced by other retailers. Why? Because RL played offense then, and others are playing defense now. RL took it on the chin with an SG&A hit when it saw the need to jump-start its global growth profile (Japan, handbags, dresses, Russia, leather goods, footwear, to name a few). Better than 80% of other brands tweaked SG&A down over the past 2 years, and now are subsequently paying the price in sales and gross margin. RL is at a point where its investments are paying off on the P&L, and as such growth in its cost structure is ebbing at the same time revenue starts to flow. I'll let you do the math as to what this means to operating profit growth. (Ok, I'll do it for you... 0% goes to 25%+ for 3+ years).

Returns are Accelerating. Over the past 6 years, RL has been right-sizing the ship. It has either been in asset acquisition mode (mostly licenses), or organic investment mode. Either way, there was a constant trade-off between operating asset turns and operating margins - the two key levers to driving returns in this business. Now RL is at a point where 95% of licenses are already repurchased, and the major infrastructure to facilitate the next 3-5 years of growth are already in place. This means that asset turns and margins both head up simultaneously, which has a magnifying impact on return on net operating assets. By my math, RL just hit an inflection point which will take it on a run of a 1,000bp boost in returns to somewhere around 27%-28%. The components are in the exhibit below.

Numbers look Very Doable. I simply cannot get the company's recent guidance for the upcoming quarter and year to synch. The Street is looking at a 3% top line growth rate, which represents a 600bp 2-year erosion in growth. I think that the Street is at least 400bp low, and in fact more often than not the sales rate should accelerate - not decelerate. The only factor that might prevent that is the fact that inventory ended the last quarter -2% with sales +20%. The books are very very clean. Any sales erosion (that is already in estimates) is likely to be offset by GM strength. Bottom line is that the Street is looking for a down quarter to the tune of 10%. I think we'll see +10-15%. I'm still of the view that RL will print $4.50 or better this year vs. the Street's $4.00. Similarly, the Street looks at least a buck low in '09 and '10. Tough to find names out there that look like this.

So we've got positive revision momentum, improving returns on a multi-year basis, an added $2bn+ in sales and $2+ in EPS over 2-3 years, and troughy valuations. Not bad at all...

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