PNRA - Eating Wheaties!

Panera Bread raised its 2Q EPS guidance by $0.06-$0.08 to $0.48-$0.50 due primarily to better than expected company-owned same-store sales growth of 6.1%-6.4% (versus its initial guidance of +5%-6%). This good news release was partially offset by the fact that the company also stated that its 2H EPS results will be more negatively impacted than originally planned by rising gas prices (an incremental $0.02 to $0.03 negative hit). The 6%-plus same-store sales number, however, signals a huge uptick in top-line results from 1Q08 and FY07, up 3.3% and 1.8%, respectively. Our grass roots survey (posted on June 10) indicated that PNRA's new breakfast sandwiches were performing well, which could account for some of the same-store sales and margin upside (the new sandwich generates a higher penny profit than all of its other breakfast offerings).

Additionally, a big part of the bearish story about Panera has centered on the company's declining operating margins, which have been down every year since 2004, and yesterday's press release mentioned that management's renewed focus on driving higher gross profit per transaction started to yield better margins in the current quarter.

PNRA's stock price has recently reflected the change in wheat prices and yesterday's company announcement also removed some of the uncertainties around the company's exposure to this volatile commodity (up 20% from May). Management stated that it is has now locked in about 95% of its wheat requirements for 1H09 at $10/bushel (down more than 30% from the average $15 paid in 1H08). With wheat moving up so much in the last 3 weeks, this will be welcomed news to investors. Interestingly enough, the company wanted to lock in its 2H09 requirements as well, but suppliers are not offering commitments on basis for that time period.


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