In past years, Panera Bread (Nasdaq:PNRA) has stood out in the crowded casual dining industry by reporting soaring revenue, even in the midst of a severe recession. From 2006 through 2008, the company averaged 26.7% annual sales growth. The top-line performance captured the eyes of investors hungry for growth. In 2008, the stock rose 50.2% in comparison to the S&P 500, which crumbled nearly 38%.

But life was not all that sweet for Panera. Despite ringing up an dazzling top line, management proved inept at rising to the challenge and reporting profits to match.

IN PICTURES: Learn To Invest In 10 Steps

Sweet, but With a Bitter Aftertaste
After years of proving inefficient and unable to manage expenses, investors may be relieved that the company finally reported second-quarter earnings growth this week of 24.7%. Unfortunately, the income statement see-sawed and revenue inched up just 3.1%.

I've long had mixed feelings about Panera. From a consumer perspective, the restaurant offers a great atmosphere, quality coffee and tasty food for reasonable prices. These characteristics have drawn me to become a loyal customer. Yet from an analyst perspective, I've had trouble wrapping my head around why investors rewarded a company that financially, appeared to be clumsily managed. So despite this quarter's tepid sales growth, I actually like Panera more today as an investment than I have in the past.

Year YOY Revenue Growth YOY Profit Growth
2008 21.8% 17.4%
2007 28.7% (1.7%)
2006 29.5% 12.8%

In recent quarters, management showed drastic signs of improved operations. More impressively, they did it in the midst of a major economic downturn. The company was able to leverage expenses despite slowing sales growth. The company also improved its operating margin 140 basis points via several management initiatives.

Don't Click "Buy" Just Yet
As thrilled as I was to see operational improvement in Panera, I'm still not ready to whip out a bullish call on the stock. Here's why:

  1. First, the company needs to continue to shows its ability to effectively manage costs for several quarters. After years of maintaining a sloppy income statement, it will take more than a quarter or two of improvements to convince me things are in order.
  2. Second, the stock sells at 22 times its trailing earnings; that's expensive given that I expect the restaurant industry to greatly contract in the next several years. It's particularly expensive given that robust restaurant brands that operate on a large global scale like McDonald's (NYSE:MCD), YUM! Brands (NYSE:YUM) and Burger King (NYSE:BKC) are all selling for less than 17 times trailing earnings. In all honestly, I don't think any restaurant enterprise is worth more than 20 times earnings in this environment.
  3. Lastly, since 2004, Panera has nearly doubled its store count from 741 to 1,345. By operating in a narrowing industry, Panera is going to have to find a way to grow organic sales and stop relying on expansion plans. The way management handles this maturing phase will make or break the company's future.

The Bottom Line
There are few restaurant stocks I would even consider looking at as investments these days, but Panera is truly a cut above the rest. That said, I wouldn't touch the stock until I see price multiples contract. I think the company has issued some overly rosy guidance, predicting 21-32% EPS growth in the coming quarter. If investors are disappointed in a few months, perhaps a more appropriate price will quickly become available. (For more, check out Sinking Your Teeth Into Restaurant Stocks.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing

    Build a Retirement Portfolio for a Different World

    When it comes to retirement rules of thumb, the financial industry is experiencing new guidelines and the new rules for navigating retirement.
  2. Investing News

    Canada in Recession

    On September 1, 2015, Statistics Canada reported that the economy has contracted by 0.5% in Q2 2015, after falling 0.8% in previous quarter.
  3. Economics

    Is a Recession Coming?

    In the space of a week, the VIX Index, a measure of market volatility, spiked from 13, suggesting extreme complacency, to over 50, evidencing total panic.
  4. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  5. Investing

    What’s Holding Back the U.S. Consumer

    Even as job growth has surged and gasoline prices have plunged, U.S. consumers are proving slow to respond and repair their overextended balance sheets.
  6. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  7. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  8. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. The New Deal

    A series of domestic programs designed to help the United States ...
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  6. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!