The Panera Bread Company (PNRA) is on the Hedgeye Restaurants Best Ideas list as LONG. 


PNRA reported 2Q15 results Tuesday after the close, followed by a rather extensive call yesterday morning. There continues to be plenty of noise within the results as management pulls certain levers and drives key growth initiatives. EPS for the quarter declined 7.5% YoY to $1.61 versus consensus estimates of $1.63. Revenue came in under estimates, reporting $676.7 million versus consensus of $679.5 million, growing 7.2% YoY. Company-owned comparable net bakery-café sales (SSS) increased 2.4% matching consensus, comprised of YoY transaction growth of 1.1% and average check growth of 1.3%. Very important to note that 3Q15 to date (first 27 days) company-owned comparable net bakery-café sales are up 4.7%, continuing the sequential monthly growth momentum (SSS were up 1.9% in April, 2.1% in May and 3.4% in June).





This quarter marked the 5th consecutive quarter of traffic growth for PNRA, showing strong performance versus the competition beating Black Box Intelligence traffic metrics by 290 basis points in 2Q.



Management is showing great responsibility with price increases, modestly increasing prices to offset inflation, but keeping increases well below the competition. Black Box per person average check is up roughly ~3.4% for the quarter, largely reflective of wage pressures and minor commodity pressures across all markets and segments.




Strong progress is being made in converting stores to the Panera 2.0 concept, 77 conversions made in Q2 making it 181 total conversion in FY15 to date. In the 2H management is expecting to complete an additional 225 conversion, bringing the total for FY15 to ~400 stores. Performance of the three stores with 2.0 implemented for the longest period of time, 10 quarters, has been impressive, cumulative gross retail sales increased 33.6% or roughly 10% per year. As the team works on converting more stores, the longer they are in market the larger their impact, three to four quarters seems to be the sweet spot to realize strong growth. Panera 2.0 continues to be a strong growth initiative, projected to make a meaningful large scale impact by the 2H FY16.



Catering grew 9.2% in the quarter, strongest growth seen in some time. Catering now has a focused sales team, and utilizes the delivery hub where possible to take friction out of the store. Delivery continues to be a focus for the company, opened 15 delivery hubs in 2014, bringing the total to 29. Consumer packaged goods is growing and profitable, expected to have $175mm in retail sales in 2015, with a 3-year growth rate of 58% management is expecting this segment to be a $1bn business sometime in the future.



Management maintained guidance for the full year, of EPS to be flat to down mid- to high-single digits when compared to full year fiscal 2014. Full year SSS of 2-3.5%, operating margin contraction of 100-175 basis points, and G&A won’t be as favorable as it was in Q2. New unit expansion of 105-115 new bakery-cafes producing $43-$45k average weekly sales. Q3 comps are expected to come in a bit higher given the strong first 27 days. And management will continue to accelerate the pace of Panera 2.0 conversion in Q3.



Management continuously mentioned an 18 month time frame till they start to see the positive effects of all their investments. We are even more confident than management and believe they are being conservative. We think PNRA will see an inflection point in about 12 months or 2Q16. At this point you will see an acceleration of earnings growth, and a clear line of sight to strong investment payback.

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