Panera Bread Company (PNRA) is on the Hedgeye Restaurants Best Ideas list as a LONG
HEDGEYE OPINION
I love Boston!
I have been working out of the Hedgeye Boston office for nearly a year now! Ron’s Boston marathon references on the earnings call take on new meaning for me now. What makes PNRA a best idea LONG is the notion that the company has already begun to make investments to offset the negative MACRO environment.
The investments include:
- Panera 2.0, a comprehensive guest experience platform enabled by digital.
- Accelerated growth of catering, delivery, and rapid pick up
- Panera at Home
- Early in understanding the growing importance of wellness and doubled down on menu transparency and clean food
- Creation of a loyalty program that is now the industry's largest
The investments the company is making have driven seven straight quarters of incremental entrees served. While the number of entrées served is a new method for PNRA to calculate traffic, it is a more classic method used by a number of restaurant companies. While some critics might say this is done just to make the numbers look better, it calculates a more accurate view of the number of people eating at a PNRA.
As we stated in our Sneak Peek note last week, we expected Q3 to be a sloppy quarter for PNRA, and our prediction was not far off, as the company came in strong overall, despite a noticeable industry slowdown. As expected, spending on Panera 2.0 conversions did not slow down, putting pressure on the P&L while these restaurants get on line.
PNRA reported 3Q16 EPS of $1.37 vs FactSet $1.34 and bakery-cafe margins rose 30bps to 15.6% vs FactSet 15.4%. Going forward, their 4Q16 company-owned comps guidance of 3.5-4.0% and EPS guidance of $1.96 - $2.01 (increased from previous guidance of $1.94 – $2.01) are guiding incidence that their initiatives will yield positive growth for the company going forward.
Lastly, the evidence that PNRA has turned the corner can be seen in the company’s TTM EPS growth rate. Prior to this 3Q16, the company TTM EPS growth rate was declining. Sequentially, the TTM EPS growth has gone from (1.3%) to 3.8% in 3Q16. By June 2017, the TTM EPS growth rate could approach 20%!
NOTABLE COMPANY THOUGHTS
“To build expanded runways for growth we have been focused on delivery, catering and Panera at home as well as new formats for development. We believe that over time we will not only win our fair share of the existing $40 billion delivery category but we also believe we can grow the category as we fulfill a significant unmet need for an elevated, delivery experience with higher quality, healthy food,” (Ron Shaich, Founder, CEO)
HEDGEYE – Management sees the niche that needs to be filled and are charging full-speed ahead to fill it. It will be interesting to see how their new delivery technology capabilities will help this cause.
“I should note that the end of Q3 66% of all Panera Company cafés had been converted to Panera 2.0 with over 50% of those cafés having been converted within the last four quarters. With this rapid rate of conversion, driving profitability in the future, investors should take note that startup and transition costs associated with immature Panera 2.0 cafés do weigh on our P&L during approximately the first four quarters post conversion,” (Ron Shaich, Founder, CEO)
HEDGEYE – We saw this as an issue coming down the pipeline, as peak spending on Panera 2.0 conversions would come into play.
“To add to our successes in Q3, we have essentially delivered on a commitment to convert approximately 200 Company cafés to Panera 2.0 in 2016. Specifically, we have converted 194 cafés YTD. Moreover, given the positive impact we see with Panera 2.0, we now plan to convert an additional 30 to 40 Company cafés to 2.0 during the fourth quarter.” (Ron Shaich, Founder, CEO)
HEDGEYE – Reiterating our stance that aggressive spending on Panera 2.0 conversions is an issue we see cropping up in the near term.
“Because we are seeing significant incremental sales and comps from delivery, we're moving quickly to roll out the program broadly throughout the Panera system. At the end of Q3, 178 Company cafes were offering delivery. Indeed, that's 20% of Company cafes offering delivery at the end of Q3. In addition, delivery is now available in 76 franchise bakery cafes across nine franchise groups. And we remain on pace to roll out delivery to 15% of our total system, including franchisees, up as you know from our initial target of 10% of the system and to accomplish that by the end of 2016. In fact, today 13% of our total system is already offering delivery as of the end of Q3. In addition, and based on our initial success with delivery, we are now planning to have in place delivery in 35% to 40% of our total system by year end 2017.”
HEDGEYE – Delivery will be a big business for PNRA and has the potential to change how the street views the overall company over time.
QUICK COMPS
- System-wide SSS: +1.7% vs FactSet +2.8%
- Company –owned SSS: +3.4% (two-year comps +7.2%) vs FactSet +3.7%
- Franchise SSS: +0.2% vs FactSet +1.2%
Revenue: $684.2mm vs FactSet $680.1mm
Sales:
- Bakery-café: $593.4mm vs FactSet $591.5mm
- Fresh dough to franchisees: $52.6mm vs FactSet $51.2mm
- Royalties and fees: $38.2mm vs FactSet $38.6mm
Bakery-café operating margin: 15.6% vs FactSet 15.4%
Operating margin: 7.6% vs FactSet 7.6%
Outlook:
- EPS $1.96 – 2.01 vs. FactSet $2.00
- Company –owned comps +3.5-4.0% vs FactSet +3.9%
- Expect to come in at the low end of 90 to 100 system-wide bakery-café openings in fiscal 2016
- Average weekly net sales performance for new company-owned bakery-cafes is now expected to be modestly above the high-end of the previously provided target range of $45,000 to $47,000
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst