Published:
February 25, 2008
Panera
Bread Co. (Nasdaq: PNRA, $38.25) operates a chain of
more than 1,100 bakery cafes in the U.S. Roughly 40% of its
current locations are owned directly by the company, with the
remaining 60% operated under franchise agreements.
PNRA operates in about 40 states and has
traditionally focused on opening locations in malls rather
than as standalone locations.
Competitive Advantages: PNRA's main
competitive advantage is its brand name and the loyalty of
its customers. According to a series of surveys reported in
The Wall Street Journal, Panera has the highest level
of customer loyalty among so-called "fast-casual" restaurant
chains. Fast-casual chains are restaurants that offer the
speed of fast food chains and the food quality and
atmosphere of more traditional full-service restaurants.
The firm has developed a reputation for using fresh
ingredients and preparing items from scratch in-house. For
example, PNRA freshly bakes all of the bread used in its
restaurants -- dough is delivered
daily to all locations. This quality
gives Panera a leg-up on most
fast-food chains.
And PNRA's use of fresh and higher-quality ingredients also
plays into another key trend -- Americans' increasing desire to
eat healthier foods. Consumers are shying away from unhealthy
foods like burgers and fries and moving toward alternatives like
natural and organic foods -- Panera has several menu items that
are lower in fat or cholesterol or use all-natural ingredients.
Some fast-food chains have begun to adapt their menus to try and
target PNRA's traditional market. For example, McDonald's (NYSE:
MCD) has
introduced a line of salads and gourmet sandwiches, as well as
specialty coffees. But these chains still don't have the
capability to offer the menu variety of Panera.
And the firm also offers something else that fast food chains
do not -- a better atmosphere. PNRA locations are designed to
feel like cafes with comfortable furniture and
restaurant-quality lighting. Often locations offer services
such as wireless Internet access to encourage consumers to
linger in their cafes.
Growth Drivers: Panera has two main growth
drivers -- growing its base of locations and growth in sales at
existing cafes. As for the first, the company still has
only 1,100 locations, all in the U.S. That's a fraction of the
13,700 locations McDonald's has in the nation. And PNRA has just
begun to tap into international markets. The chain plans to open
is first stores in Canada this year and has no exposure to
either Europe or Asia.
All told, PNRA should be able to continue opening up 160-180 new
stores per year over the next few years. Eventually, the company
believes it could have as many as 4,000 U.S. locations without
poaching on existing restaurants.
Growth at existing locations has become more difficult in recent
quarters with PNRA reporting declining comparable store sales
growth -- there's still growth, but not at quite the level of a
few years ago. Comparable store sales is a key metric used in
the restaurant business, measuring growth in locations open for
more than one year.
Nevertheless, longer-term PNRA has an outstanding record of
comparable store sales growth. And
management has taken steps to
re-accelerate growth including
introducing popular new menu items.
Valuation and Outlook: Panera stock has been
hit due to concerns over slowing consumer spending and weakening
comparable store sales trends over the past year-and-a-half. But
management has already taken steps to help reverse that trend.
Meanwhile, the shares trade at a bargain basement valuation. The
stock sells for less than
17 times 2009 earnings and sports a
long-term growth rate of +18%; the firm's
PEG ratio is
currently less than 1.0 -- unusual for a well-established growth
stock.
Expansion into new markets coupled with management's menu
initiatives should help to re-accelerate growth in coming
quarters, offsetting the effects of weaker consumer spending.
And management has also raised prices lately, helping to offset
increases in the cost of food ingredients. That should help keep
margins high.
As sales growth recovers, PNRA could easily trade to a PEG of
1.5, sending the stock into the low $60s over the next two
years -- for a gain of more than +50%.
Paul Tracy
Editor
StreetAuthority
Market Advisor
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