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.
PANERA 2.0 UPDATE
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.
OTHER GROWTH DRIVERS
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.
Editor’s Note: Below is an abridged commentary culled from various tweets posted by Hedgeye CEO Keith McCullough shortly after today’s Fed announcement.
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Anyone who understands cyclical growth slowing and deflation understands that the Fed made the right move. If they were to hike into a slowdown, they would be the catalyst for the next US recession.
Hedgeye reiterates the Slower (and Lower) for longer view
For those of you who were calling for the SEP hike = #wrong
"hike appropriate when we have labor and INFLATION improvement" July = #Deflation
We are just one more bad jobs report away from no DEC hike either.
USD and Rates should probably stay higher into what the manic media will read as a "good" GDP. Don't trade the headline - look for the next catalyst.
I guess the Fed thinks Oil crashing (-22% in the last month) is "stability." Here's a chart of Oil instability (OVX = 30-40, sustained!)
Newsflash: the "pace of job gains" always peaks at the end of an economic cycle. Non-farm payroll "pace" of gains stopped accelerating in FEB.
In other news, Biotech $IBB -1.9% on an up day - hyper growth expectations finally slowing too.
Where the real action is at today is on the "easy money" trade - Housing $ITB ripping +1.6%
This is the joke that has become Wall St selling "bullish economic" research- stocks only fly on slowing economic news!
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FOX Sports NFL Insider Mark Garafalo, Hedgeye CEO Keith McCullough and FBN’s Sandra Smith debate the fallout from Deflategate with Fox Business anchor Maria Bartiromo.
According to McCullough, "I have a problem with any central planner, in this case Goodell, head of a cartel, taking advantage of his position of power and manipulating the media."
For those of you who have been following us since we called the US economic cycle top in late 2007, you know that there’s frequently an opposite faction to our most important Global Macro Themes – it’s called Wall Street consensus.
Not that we keep score or anything, but if you go back to what we thought were 3 of the most important (already in motion) Global Macro Risks 1-year ago today, they were: #Inflation Slowing, Rates Falling, and Cross Asset-Class Volatility bottoming.
All of those calls were based on forward looking indicators born out of a repeatable research and risk management #process. Today, the biggest disconnect between our indicators and consensus is #GrowthSlowing in the 2nd half of 2015 (in both the US and Europe)...
Takeaway: PHS cooled off in June, but only modestly. Whereas 1Q & 2Q could be fairly characterized as "Great", 3Q data thus far remains merely "Good".
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
Today's Focus: June Pending Home Sales & MBA Mortgage Applications
It’s 98O & humid in CT and the dog days of late-July and the months of normal seasonal underperformance for the housing complex are upon us. With purchase applications flat for two consecutive weeks, Pending Sales retreating modestly and rates meandering in breakout-breakdown limbo, the data too is panting to maintain its 1H pace of improvement.
Last week was in interesting one for housing. June Existing Home sales expectedly re-coupled with the multi-month strength observed in Pending Sales to make a new post-crisis high while New Home Sales for June were a big miss. In contextualizing that divergence, we posited that the key point to remember is that there’s a timing mismatch between the two series. EHS reflects closings, so June EHS was actually reflecting contract signings from April/May, whereas NHS was reflecting contract signings in June.
Thus, today’s PHS print for June – which represents June contract activity and the apples-to-apples compare for the latest NHS print – would be the arbiter of Trend, particularly with the Existing Market currently representing over 90% of total transaction activity.
Pending Sales in June retreated from the 9-year highs recorded in May, dropping -1.8% sequentially (the largest drop in 18-months) and declining for the first-time in 6 months. On a year-over-year basis, growth decelerated -200 bps sequentially to +8.2% YoY. Notably, June represented the finale in positive comp dynamics, with base effects putting progressive pressure on reported growth through the balance of the year. PHS weakness in June also augurs for sequential softness in EHS for July set for release on 8/20.
Short-term Considerations: A modest retreat off of decade high levels of activity is still “Good” on an absolute basis but the transition from Great to Good has been the defining characteristic of the 3Q data to date. Indeed, with Purchase Applications flat for a second week and tracking -1.1% QoQ in 3Q, the large-scale reversal in housing fundamentals and subsequent re-inflation of investor optimism around housing we’ve seen over the last 2-3 qtrs is now in its twilight.
Medium/Longer Term Bottom Line: This isn't to say that Housing's age of outperformance has ended. Our view remains that we are in a secular recovery and the complex will again show solid absolute upside/outperformance in the seasonally strong 4Q15/1Q16 period, especially with HPI re-acceleration and heading into an election year.
About Pending Home Sales:
The Pending Home Sales Index is a monthly data release from the National Association of Realtors (NAR) and is considered a leading indicator for housing activity in the US. It is a leading indicator for Existing Home Sales, not New Home Sales. A pending home sale reflects the signing of a contract, but not the closing of the transaction, which occurs 1-2 months later. The NAR uses data from the MLS and large brokers to calculate the Pending Home Sales index. An index value of 100 corresponds to the average level of activity during 2001.
The NAR Pending Home Sales index is released between the 25th and the 31st of each month and covers data from the prior month.
About MBA Mortgage Applications:
The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis.
The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.
Joshua Steiner, CFA
Christian B. Drake
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