The restaurant world is increasingly looking like a winner-takes-all market, as nationwide quick service restaurants (QSR) batter locally-owned rivals on price and marketing and the top QSR chains further separate themselves from their rivals. As one of the "Big Three," Panera Bread (Nasdaq:PNRA) is not only seeing strong store traffic growth, but excellent overall profitability.

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Another Great Quarter
Companies like McDonald's (NYSE:MCD), Chipotle (NYSE:CMG) and Panera have been delivering so many great quarters, it almost becomes old-hat. Nevertheless, Panera revenue grew another 18% this quarter, as franchised stores saw over 5.2% same-store sales and company-owned stores saw 7.5% same-store sales growth (leading to system-wide comp growth of 6.3%).

While food costs are an issue across the sector, Panera is managing this trend pretty well. Restaurant margins improved around 10 basis points to 19.6%, and operating profit jumped 27% this quarter.

Find What Works ... and Keep Doing It
Perhaps one of the keys to the success of these three companies, apart from providing food that the public by and large likes, is that they don't muck around with a successful strategy. Panera continues to leverage the perception that it's a healthier QSR option, and categories like salads have been solid growth contributors (up 16% this quarter).

At the same time, the company continues to leverage opportunities like catering (up 25% this quarter) and the breakfast niche. Breakfast has been a tricky category for most QSRs not named McDonalds, but Panera has turned it into a significant profit center. If anything, where Panera still has the most work to do is in making it a more desirable dinner destination. While breakfast is a strong category for Panera, there's arguably still room for improvement here as Panera doesn't have the "coffee cache" of McDonald's, Starbucks (Nasdaq:SBUX), or Dunkin' (Nasdaq:DNKN), despite a solid menu of food offerings.

SEE: How To Analyze Restaurant Stocks

Operations Offer Some Good, Some Bad
Panera deserves credit for not only locking in a lot of its food costs (about 80% or so), but about 95% of what it can lock in. Perhaps not surprisingly for a company with "bread" in its name, wheat is a major cost item and Panera has largely neutralized this item.

Where I do question Panera's operational strategy is in its dual-CEO structure. Sure, splitting the responsibilities for day-to-day management and strategic vision makes a certain degree of sense, but the number of companies that have thrived with a dual-CEO structure can arguably be counted on one hand, with some fingers left over.

SEE: Top Qualities Of An Effective CEO

The Bottom Line
Unfortunately there's that value problem with Panera. The reality is that the most successful restaurants today (McDonald's, Chipotle, Panera) all trade at demanding valuations, as these companies continue to grab share and squeeze their rivals. By the standards of popular, high-growth restaurants, perhaps Panera Bread is not all that expensive, but when it comes to core fundamental valuation, these shares are definitely not going to be found on the value menu.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.



Tickers in this Article: PNRA, MCD, CMG, SBUX, DNKN

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