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PNRA | NO “CHOPPY” OCTOBER HERE

Panera Bread (PNRA) is on our Hedgeye Restaurants Best Ideas list as a LONG.

 

Yesterday after the market close PNRA reported 3Q15 numbers followed up by a conference call this morning at 8:30am ET.

 

HEDGEYE OPINION

Although PNRA missed on the top-line, in our eyes it was a solid performance overall, especially relative to some other companies that have already reported. PNRA represents one of our top ideas in the restaurant space and as you will see in the valuation section below, we see roughly 30% upside in the name, up to $240 per share.

 

3Q15 EARNINGS RESULTS

PNRA reported revenue of $664.7mm versus consensus estimates of $667.6mm. Broken out by segment; sales for Bakery-cafés were $584.1mm versus consensus estimates of $585.6mm, Fresh Dough to Franchisees $46.3mm versus consensus estimates of $47.0mm, Royalties and Fees $33.7mm versus consensus estimates of $33.7mm.

 

System-wide same-store sales (SSS) were 2.8% versus consensus estimates of 3.0%, Company-owned SSS were 3.8% versus consensus estimates of 3.5% and lastly Franchise SSS came in well short of expectations, at 1.8% versus consensus of 2.5%. Breaking down the company-owned comp, PNRA saw 1.0% traffic growth and 2.8% check growth in the quarter. Transaction growth was up in every day part, pre-11am day part was up 1.7%, while the post-11am day part was up 0.7%. Traffic, although positive and well ahead of the industry average, was still short of consensus expectations, which were calling for a 1.6% traffic number. Notably, the company commented that in the first 27 days of Q4 comps at company owned restaurants were 3.4%

 

Moving to the bottom-line, PNRA reported EPS of $1.32 ex-items beating street expectations of $1.31 by $0.01.

 

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NOTEWORTHY COMMENTARY

  • As of 3Q15, the company had completed the conversion of 291 bakery-cafes to Panera 2.0, with 108 conversions completed during Q3, which is more than one per day
  • Catering grew by 12% in the quarter, evidence that the Hub investments are paying huge dividends for the company, management believes this will be a $1bn business over time
  • Consumer products is expected to grow to a $175mm business by the end of 2015, has grown at a 60% rate for the last four years
  • The widening divergence in the company-owned versus franchisee comp is evidence of the positive impact of initiatives such as Panera 2.0
  • Delivery is still in tests, big decisions to be made about whether it should be handled internally or through an outside party
  • Structural wage inflation and the affordable care act continue to be pressures, accounting for 110bps of deleverage in this quarter
  • Breakfast continues to grow faster than lunch and dinner, salad sales also increasing
  • Core G&A declined 4% in the quarter
  • 100% of artificial ingredients to be removed by the end of 2016, currently at 90%

 

MANAGEMENT GUIDANCE

Management reaffirmed full year 2015 guidance, of company-owned comparable SSS growth for FY2015 to be in the range 2.0 to 3.5%. Management is still targeting the conversion of approximately 300 company-owned bakery-cafes to Panera 2.0. Operating margins are still expected to be down 100 to 175 basis points. The company is still targeting 105 to 115 system-wide new bakery-café openings in fiscal 2015. In addition, the company reiterated EPS growth of flat to down mid- to high-single digits for the full year.

 

VALUATION

We believe that management has the company headed in the right direction and are executing well on key initiatives. With that, and our belief that they will continue to outperform their competition we reiterate our positive outlook for the company and its stock performance. We expect PNRA’s multiple to expand over time as investors and analysts see the viability of Panera 2.0, as it will greatly improve sales potential and profitability over time.

PNRA | NO “CHOPPY” OCTOBER HERE - CHART 7

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


Don’t Believe the Fed’s ‘Serial Over-Optimism’

Don’t Believe the Fed’s ‘Serial Over-Optimism’  - Fed forecast cartoon 03.02.2015

 

As investors wait for the final denouement from the Fed today, we’re reminded of a slide from our Q4 Macro Themes deck about the Fed’s forecasting track record.

 

In short, don’t trust the Fed’s "dot plot."

 

Don’t Believe the Fed’s ‘Serial Over-Optimism’  - 10 28 2015 Fed dot plot

 

For folks putting too much stock in central planner sagacity, consider that the Fed’s “dots” suggest interest rates hikes will extend into 2018. No worries, if you believe the Fed's growth forecast out that far. Note that continued economic growth into 2018 would imply one of the longest expansions ever. 

 

Believe those dots at your own peril.

 

By our tally, the Fed’s GDP forecasts have consistently overestimated growth, every year over the past 5 years, to the tune of 100 basis points. You know where we stand, #GrowthSlowing and rates #LowerForLonger.

 

Editor’s Note: Hedgeye CEO Keith McCullough is hosting a LIVE + INTERACTIVE online event today at 2:10pm ET offering immediate market reaction and commentary on the Fed statement. Click here to listen in.


Invite To Macrocosm: The Dock Debates

We are proud to present our first annual conference Macrocosm: The Dock Debates in Stamford, CT on Wednesday, November 18th from 12 - 7pm.  

 

Hedgeye CEO Keith McCullough will moderate five panels with experts on various macro topics including Currency Wars, Consequences of QE, Europe, Demographics and Healthcare. Panelists include David Einhorn, Jim Rickards, Michael Aronstein, Daniel Lacalle and Jurrien Timmer among others. Click here for the full roster and bios. 

 

Importantly, there will be ample time allocated at the end of each debate for interactive audience Q&A.

 

This event is off the record (i.e. not open to any media) and seating is limited so please contact sales at for pricing and availability.

 

Invite To Macrocosm: The Dock Debates - Macrocosm1


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Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


Hedgeye Was Short (And Remains Short) Twitter | $TWTR

Takeaway: It paid to listen to Hedgeye Internet analyst Hesham Shaaban on Twitter.

Twitter’s long-term growth prospects look increasingly suspect. Shareholders learned that lesson the hard way after the bell yesterday. The stock has fallen 7% after the social networking site reported declining “monthly average users.” In other words, fewer eyeballs viewing ads and lower revenue guidance.

 

Hedgeye Was Short (And Remains Short) Twitter | $TWTR - zz vv

 

The miss was no surprise to us here at Hedgeye. In fact, the bearish case on TWTR has been the mantra of Hedgeye Internet & Media analyst Hesham Shaaban since issuing his original Black Book on the stock, pre-IPO on Nov. 2013. 

 

Since then shares are down 30%.

 

Hedgeye Was Short (And Remains Short) Twitter | $TWTR - 10 28 2015 twitter chart

 

Hedgeye Was Short (And Remains Short) Twitter | $TWTR - 10 28 2015 keith twtr

 

Hedgeye Was Short (And Remains Short) Twitter | $TWTR - z vv

 

Here’s a small snapshot of a research update sent out to subscribers this morning.

 

Hedgeye Was Short (And Remains Short) Twitter | $TWTR - 10 28 2015 twitter note

 

And two recent HedgeyeTV videos of Shaaban laying out our bearish Twitter thesis.

 

The Crossroads: Here’s What Twitter Management Needs to Do, 9/3/2015

 

Why Twitter's Problems Run Deep, 6/15/2015

 

Editor's Note: If you’d like to learn more about our institutional research offerings or access our Twitter research please ping sales@hedgeye.com.

 


Retail Callouts (10/28): KSS Greatness Agenda Part 2, Tory Burch, BGFV

Takeaway: KSS Greatness Agenda Part 2. Tory Burch says no IPO, likely waiting for a better public market premium.

KSS - Kohl’s part 2 of Greatness Agenda to include smaller stores, Off-Aisle, and Fila Outlets

(http://phx.corporate-ir.net/phoenix.zhtml?c=60706&p=irol-newsArticle&ID=2102879)

 

The only thing better than a Greatness Agenda is a Greatness Agenda part 2. There wasn't much meat to this press release outside of the new concept announcements (Fila Outlet Stores, KSS Off Price, and 5-10 35k sq. ft. stores) and Mansell reiterating the $21bn in sales by 2017. That sales target has nothing to do with the four pillars the management team adamantly insists are performing at or above plan despite the fact that the actual proof measured by comps in our book has been far below the 3% annual comp the company needs to report if it wants to hit its sales targets. Just to hit the 1.5% - 2.5% guide for the year KSS needs to print a 2H comp of 2% - 4% after a 0.7% in 1H against much tougher compares.

That leads us to believe that if KSS isn't going to hit its $21bn organically. Meaning its going to put more emphasis on non-core business to manufacture a little bit of top line growth with little concern about what that does for either margins or returns.

 

KSS remains one of our top short ideas. The bigger call on the name is that annual earnings are likely to never grow again. To put that into context, we’ve got numbers between $3.25-$3.75 from 2016-18. That’s 30% below the consensus, which has earnings marching over $5.00.

 

Tory Burch - Tory Burch and Roger Farah say they have no plans to go public and they enjoy running a privately held company.

(http://wwd.com/markets-news/designer-luxury/tory-burch-roger-farah-conversation-10269643/packages/10269350/)

 

Ms. Burch can say all she wants that she has no intention of going public -- but that was not always the case. Farrah was brought in from Ralph Lauren to drive the next leg of growth and then take it public. But a couple of things have happened since. 1) the 'space' imploded' in the equity market, and 2) trends at Tory Burch have been a lot closer to Kors, Coach, or even Ralph Lauren than Kate Spade (which is crushing it). Our sense at this point is that Farrah will do his 'thing' at Tory over the course of a couple of years until the growth characteristics of the company will allow it to go public at a premium multiple regardless of the liklihood that Coach will still be clinging to unrealistic margin and growth targets.

Retail Callouts (10/28): KSS Greatness Agenda Part 2, Tory Burch, BGFV - 10 28 2015 chart1

 

BGFV  - 3Q15 Earnings

The headline earnings number and revenue were a little weak, but that underscores the actual trends in the business. Earnings were down 20% in the quarter on a -0.4% comp. The mid-point of the 4th quarter guide if we back out the benefit from the 53rd week implies earnings down 30% in the 4th quarter as QTD comp trends are down in the LSD rate. Add to that the fact that BGFV just hired a consultant to assess growth plans and try to fix the P&L after the e-comm launch ate away 200-300bps of margin.

Retail Callouts (10/28): KSS Greatness Agenda Part 2, Tory Burch, BGFV - 10 28 2015 chart2

 

ETH  - 1Q16 Earnings

Retail Callouts (10/28): KSS Greatness Agenda Part 2, Tory Burch, BGFV - 10 28 2015 chart3 B

 

TGT - Target tests international expansion through online portals

(http://www.startribune.com/target-tests-international-expansion-through-online-portals/336408791/)

 

FDX, UPS, AMZN - FedEx and UPS expecting 12% and 10% increases in holiday shipping volume respectively.

(http://about.van.fedex.com/newsroom/global-english/fedex-forecasts-record-volume-this-holiday-season/)

(https://pressroom.ups.com/pressroom/ContentDetailsViewer.page?ConceptType=PressReleases&id=1445948452077-607)

 

RAD, WBA - Walgreens Boots Alliance to Acquire Rite Aid for $17.2 Billion in All-Cash Transaction

(http://tinyurl.com/q53d73g)

 

CHS - Chico's FAS Announces Shelley Broader as President and Chief Executive Officer

(http://chicosfas.com/investor-relations/press-releases/press-release-details/2015/Chicos-FAS-Announces-Appointment-of-Shelley-Broader-as-President-and-Chief-Executive-Officer/default.aspx)

 


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

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