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

    Retirees: 7 Lessons from 2008 for the Next Crisis

    When the last big market crisis hit, many retirees ran to the sidelines. Next time, there are better ways to manage your portfolio.
  2. Economics

    Industries That Thrive On Recession

    Recessions are not equally hard on everyone. In fact, there are some industries that even flourish amid the adversity.
  3. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  4. Fundamental Analysis

    Is a U.S. Industrial Recession on the Horizon in 2016?

    Find out why the industrial economy may be teetering on an industrial recession and what could prevent it from going over the cliff.
  5. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  6. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  7. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  8. Fundamental Analysis

    Gloom and Doom for Global Markets in 2016?

    Learn about the volatility in global markets during the beginning of 2016. See why famous investors are saying some economies could see recessions.
  9. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  10. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
RELATED FAQS
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do interest rates increase during a recession?

    Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
  3. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
COMPANIES IN THIS ARTICLE
Trading Center