Panera Bread Company (PNRA)

TOP CONTRIBUTORS

John Tan

Lawrence Gu

Andrei Popovici

Panera Bread Co. (NASDAQ: PNRA) operates the signature restaurant chain Panera Bread, selling hand-crafted breads, sandwiches, salads, and drinks. Panera Bread bakery-cafes are often associated with the concept of “fast casual”, a mixture between fast food and more upscale casual dining. Customers still pay for their food at the counter, like a traditional fast food restaurant, but Panera arranges tables and chairs to be conducive to group meetings..

Most Panera Bread restaurants are located in suburban strip malls and regional malls. As of December 29, 2009, Panera had 1,380 bakery-cafes, spanning 38 states, as well as some locations in Canada. Traditionally, companies like Panera have suffered in recessions, which decrease the frequency with which consumers eat out at restaurants.^[1] However, Panera’s strategy during the recession has been “to stay consistent and not to react to the recession”, keeping costs constant and offering new salads and sandwiches. ^[2] As a result, Panera’s “fast casual” niche (between casual dining and fast food) contributes to its relative success; this positioning allowed it to avoid discounting wars and maintain its margins by attracting customers with a higher quality product perceived to be a good value for the money. Panera bread has a great meal of BaconTurkey Bravo with 28G of fat per meal.

Business Financials

Over the past three years, Panera Bread's revenues have increased steadily, driven mainly by growth in the number of new restaurants. However, operating income has wavered, primarily the result of increased commodities prices.

In FY2009, Panera Bread's revenues reached $1.35 billion, a 4.1% increase over its FY2008 revenues, while net income rose 28% to $86 million. Operating margins have increased by over 1% for each of the last seven quarters, with FY2009 operating margin reaching 10.4%.^[3] Comparable bakery-café sales growth increased by 0.5% overall in FY2009 (dragged down by lower comp sales in stores opened in FY2008. Comp sales picked up in Q4 FY2009, reaching 5.4%.^[4] Panera plans to open 80-90 new stores in FY2010, with more than half to be company-owned.

FY2010 Q1 Earnings Summary

Panera reported a net income of $26 million ($0.82 per diluted share) for the first reporting quarter of FY2010, a 52.9% increase compared to $17 million of net income in Q1 FY2009.^[5] Note, however, that these figures do not impact the share repurchases from Panera's $600 million share repurchase approval.

Panera attributes this expansion in net income due to gradual operating margin improvement of approximately 260 bp compared to same reporting quarter of FY2009, which is a direct result of leverage from comparable bakery-cafe sales increases.^[6] Unlike other stores that slashed prices during the recession, Panera focused on protecting top-line growth by creating more efficient processes such as better inventory management. As such, Panera-owned bakery-cafe sales in first quarter FY2010 increased 10% versus comparable period in FY2009.^[7]

FY2010 Q2 Earnings Summary

Panera posted net income of $27 million ($0.85 per diluted share) for the second quarter ending June 29, 2010. This figure resulted to a 31% year-over-year increase compared to net income of $20 million ($0.65 per diluted share) in Q2 FY2009.^[8]

Operating margins for PNRA during the second quarter improved about 230 basis points compared to Q2 FY2009.^[9] This was driven mostly by leverage from comparable store sales increases, purchasing efficiencies and category management initiatives. This is also the ninth consecutive quarter of YOY operating margin expansion of 100 bp or more. For example, comparable bakery-cafe sales increased 9.9% in the second quarter FY2010 compared to Q2 FY2009, and franchise-operated comparable bakery-cafe sales increased 10.1%.^[10]

FY2010 Q3 Earnings Summary

Panera posted net income of $22.8 million ($0.75 EPS), an increase of 20.7% compared to net income of $18.9 million ($0.61 EPS) one year earlier.^[11] Revenues were $372 million, a 11% increase compared to $335 million same quarter last year. Bottom-line performance was in-line with analysts, which expected profits of $0.75 EPS and revenues of approximately $373 million.^[12]

Panera attributes positive performance to sales at restaurants open at least one year, which rose by 6.9%.^[13] During this quarter, the company opened 10 new restaurants and 12 new franchises opened.^[14] The company now stands at 1,421 restaurants opened by the end of quarter as transaction growth was 0.2% and average check growth came to 5.3%.^[15]

FY2010 Q4 Earnings Summary

Panera posted a 23% increase in net income from $30 million same quarter last year to $37 million.^[16] This translates into $1.21 EPS, higher than $1.17 EPS from analyst consensus estimates. Fourth quarter revenue also increased to $428.2 million from $367.0 million from same quarter last year. Overall, bakery-cafe sales increased 18.5% to $371 million and franchise royalties and fees rose 5% to $22.2 million.^[17] As the company continues to increase its prices and increase the number of locations, it continues to increase its operating performance. Shares for example jumped 10.7% on earnings release date as the number of customer transactions at its owned restaurants grew 2.9%, with the amount customers paid on average growing by 2.3%, primarily due to rising prices. For the fiscal quarter, PNRA opened 21 new restaurants and franchisees opened 12. Panera currently operates 1,453 restaurants at end of the quarter. LOL

Company Overview

Panera Bread offers handcrafted, fresh-baked, artisan items such as breads, bagels, muffins, scones, rolls and sandwiches, as well as soups, salads, and specialty coffee drinks. The restaurant chain distinguishes its products by emphasizing nutritional value and quality (such as antibiotic free chicken and whole grain bread), especially when compared to hamburger-based fast food restaurants such as McDonald's, Burger King, and Wendy's, which focus on affordable pricing.^[18] Panera also differs from traditional fast food in its focus on providing longer dining experiences to its customer - for example, by offering free Internet access in its buildings.

Panera opened 69 new bakery-cafes in 2009 - 30 company-owned and 39 franchise-operated – and is targeting approximately 80-90 new openings in 2010.^[19] The company’s growth strategy is two-fold. First, management seeks to expand into new markets, such as the Western states and Canada. Second, Panera wants to open bakery-cafes in existing markets. Although this strategy could increase Panera Bread’s penetration, market saturation may limit gains.^[20]

Business Model

The company generates revenue through sales from company-operated stores, fees and royalties from franchisees, and sales from fresh dough facilities. At the end of 2009, the company itself fully owned 585 restaurants, which generated $1,152 million in revenues (85.2% of total revenues).^[21] Furthermore, franchisee groups owned 795 additional, franchised restaurants.^[22] The franchises themselves grossed $1376.4M in sales. Although its franchises only generate a small percentage of the Panera Bread’s total revenue, they are important to the company’s brand name recognition. In addition to restaurants, the company operates 23 fresh dough facilities that supply dough to both company-operated restaurants and franchises. The 23 facilities generated $121 million in sales to franchises in 2009 (9.0% of total revenues).^[23]

In 2010, Panera supported nonprofit organization, Panera Cares, began a series of experiments designed to allow customers to pay as much or as little as they wanted for their purchases.^[24] The experiment was meant to provide lower income customers a subsidized price by higher income customers who would pay higher than the "suggested price." On average, 60-70% pay in full, while 15% leave a little more and another 15% pay less or nothing at all.^[25] Note however, that though Panera is considering expanding this charity model, the overall business model and profits/losses will not be affected as Panera will bear no losses of its nonprofit Panera Cares should the experiment fail.^[26] Instead, the charity model provides an upside to Panera's brand image, noting its out-of-box approach to corporate responsibility and creative method toward creating brand recognition.

Panera plans to continue its accelerated growth stage into 2011, with plans for increasing 95 to 105 units, with each unit representing roughly 7% of growth.^[27] These new openings will comprise of both company-owned and franchised units, with company-owned units representing a little more than 50% of the mix. Panera plans to take advantage of the recent economic downturn in efforts of gaining market share in a restaurant industry that is fraught with price cutting.

FY2009 PNRA Profit by Business Segment^[28]

Product Niche

An important aspect of Panera Bread’s business is its product niche—artisan fast food, also termed “fast casual”. This niche protects the company from ``direct`` competition in the fast food industry as well as the casual dine-in industry. It targets consumers who seek meals of higher quality than those offered by traditional fast food chains, yet do not have the time to dine in or have a sit-down meal in a restaurant. Although there are many restaurants that also offer this mixture, these restaurants tend to be local, and therefore do not benefit from a national brand name and a large advertising budget, which become increasingly important during times of recession. On the average, each individual Panera Bread bakery-cafe expends $1M on furnishings and decorations, arranging tables and chairs to be conducive to group meetings (as opposed to most fast food restaurants, which are oriented around quick, in and out dining). Yet, as at other fast food restaurants, customers pay before they receive their food, giving them the freedom to finish their meal and leave without having to ask for the bill and pay gratuity.

Panera’s product niche does give it flexibility in raising menu prices because consumers perceive its products as having high quality, especially in comparison to traditional fast food restaurants. The company markets its brand name to associate it with the concept of fast casual dining - an alternative to traditional fast food. The company invests 2.6% of its total revenues in marketing campaigns. Each individual restaurant is required to give 0.7% of its sales to the national advertising fund, and spend 2% of its sales on local advertising. The company’s marketing strategies focus on product merchandising (such as the promotion of new menu items), instead of product prices. It also frequently sponsors charitable events as a marketing tool. Most Panera Bread restaurants donate their leftover breads and other foods to local charities at the end of each day.^[29]

Geographic Distribution

Panera Bread currently operates in 36 states. The chain is not very well established in the West and Southwest regions, which means that these two regions are attractive markets for expansion. Furthermore, the company's management has indicated that it intends to expand into Canada (Toronto and locations in Ontario) through franchising agreements.^[30]

FY2009 PNRA Restaurants by Geographic Region^[31]

Panera Bread's Geographic Distribution

Region	Percent of Total Restaurants
New England	6%[32]
Midatlantic	25%[33]
South	16%[34]
Southwest	2%[35]
Midwest	2%[36]
West	6%[37] Monthly Wheat Prices for the Past Decade[38] Fast food chains and dine in restaurants are responding to the rise of fast casual eateries, leading to greater competition in the industry Both traditional fast food and dine in restaurants are beginning to respond to the success of fast casual. Fast food chains such as McDonald's and Burger King are beginning to offer premium salads and sandwiches, and have created campaigns that emphasize the nutritional value of their food. Meanwhile, dine in restaurants have instituted carryout programs, fast-lunch guarantees, and lower prices, all measures to counter the concept of fast casual. If these trends continue, Panera Bread can no longer enjoy the safety of the product niche that it has occupied, and will face greater competition in terms of pricing and food quality.[39] Panera Bread's product niche gives it the tools to cope more effectively with the challenges facing the fast food industry as well as the challenges facing the dine-in industry. Fast food restaurants chains are often criticized for offering unhealthy food, but the higher nutritional value found in Panera Bread’s products makes it less prone to nutrition campaigns that have hurt chains such as McDonald’s.[40]. Indeed, the health care bill enacted in 2010 includes provisions that will require chain restaurants to publish the caloric content of their menu items, and Panera has gotten ahead of the crowd by becoming the first major restaurant chain to voluntarily publish its food items’ calorie counts; Panera’s lower-calorie fare may help it grab market share from fost food chains among health-conscious consumers. [41] Meanwhile, dine in restaurants are very susceptible to drops in consumer spending. Therefore, Panera’s cheaper items make it an attractive alternative to traditional eateries. However, this does not mean that Panera is immune to these challenges. The company must achieve a balance between quality food and competitive pricing. Restaurants are affected by U.S. Economic Cycles Traditionally, in an economic recession, casual dining businesses have suffered as consumers look to cut costs and eat in more often. Conversely, fast food restaurants have often done well during recessions, as they are perceived as cheaper alternatives to sit-down restaurants. Panera, as a hybrid of these two models, could go either way - consumer perception may be that Panera is a cheaper, healthy alternative and boost its numbers while the economy recedes, or like other casual dining restaurants its sales may suffer as consumers cut their food budgets. Competition Panera Bread must still compete with traditional fast food chains, as well as specialty food cafes, casual dine in restaurants, street vendors, pizza parlors, bakeries, and national, regional and locally-owned restaurants. Many of the company’s competitors have greater financial resources, which translate into greater advertising capacity. These competitors include: McDonald's—is the biggest player in the fast food industry, with a presence in most US markets and many international markets. Recently, the company has introduced salads and premium sandwiches that compete directly with Panera Bread’s offerings.[42] Doctor’s Associates—operates the Subway sandwiches chain. Subway, which also emphasizes nutritional value and freshness in its foods, offers sandwiches that directly compete with those of Panera Bread. Subway has penetrated many US markets and has established an international presence.[43] Starbucks—is one of the biggest players in specialty beverages. Its products compete with the drinks offered by Panera Bread. More importantly, Starbucks’ outlets are used by many consumers as gathering places, making Starbucks a serious rival to Panera Bread's efforts to establish restaurants that are good locations for meetings.[44] COSI—is another fast casual restaurant chain, with many locations in New England, Florida and California. Its revenue is much smaller than that of Panera Bread. As Panera Bread expands further into Western and New England states, it will face stiffer competition from COSI.[45] The table below shows fiscal 2009 data for the largest publicly traded food service competitors.by revenues. Subway and Dunkin’ Donutes, also major players, are privately owned. Company Revenues (M) Net Income (M) Net Margin Restaurants Franchised % McDonald's (MCD) $22,745 $4,551 20.0% 32,478 81% Yum! Brands (YUM) $10,836 $1,083 10.0% 37,000 Starbuck’s (SBUX) $9,775 $391 4.0% 16,635 47% Darden Restaurants (DRI) $7,218 $372 5.2% 1,773 0% Brinker International (EAT) $3,621 $79 2.2% 1,689 40% Wendy's International (WEN) $3,581 $4 0.1% 6,451 80% Burger King Holdings (BKC) $2,537 $200 7.9% 11,925 88% Jack in the Box (JACK) $2,471 $131 5.3% 2,212 46% CKE Restaurants (CKR) $1,419 $48 3.4% 3,141 71% Domino's Pizza (DPZ) $1,404 $80 5.7% 9,339 91% Panera Bread Company (PNRA) $1,353 $87 6.4% 1,380 58% Data from company FY 2009 annual reports (CKE data from FY annual, ended January 31, 2010). References ↑ "Darden Execs Comment On 'Challenging, Volatile' Consumer Market" Seeking Alpha July 17th 2006 ↑ [1] ↑ [[2]] ↑ [[3]] ↑ [4] ↑ ↑ Panera Bread Company Raises FY 2010 EPS Guidance; Issues Q2 2010 Guidance In Line With Analysts' Estimates ↑ Panera 2Q Net Up 33%; Shares Down On Cautious 3Q View ↑ Panera Bread Reports Q2 2010 Diluted EPS of $0.85, Up 31% Over Q2 2009, on 9.9% Growth in System-Wide Comparable Bakery-Cafe Sales ↑ Panera Bread Reports Q2 2010 Diluted EPS of $0.85, Up 31% Over Q2 2009, on 9.9% Growth in System-Wide Comparable Bakery-Cafe Sales ↑ UPDATE: Panera Sees Transaction Growth Primary Driver In FY11 Sales ↑ Panera 3Q meets expectations, but shares fall ↑ Panera Q3 profit matches view, shares fall ↑ Panera Bread Q3 Profit Rises; Lifts FY10, Q4 Earnings View - Update ↑ Panera Bread Co. Meets Analyst Expectations ↑ Panera Bread surges on strong 4Q results ↑ Panera Bread Profit Rises 23%, Tops Estimate; Boosts FY11 Earnings Outlook ↑ PNRA 10-K 2007, Item 1 ↑ [[5]] ↑ PNRA 10-K 2007, Item 1 ↑ [[6]] ↑ [[7]] ↑ [[8]] ↑ Nonprofit Panera Cares bakery-cafe plans expansion ↑ Panera Co. to open more pay-what-you-wish eateries ↑ Non-profit Panera cafe: Take what you need, pay what you can ↑ Panera Remains on Growth Track ↑ Panera Bread Company FY2009 Form 10-K, Page 46 ↑ PNRA 10-K 2007, Item 1 ↑ PNRA 10-K 2007, Item 1 ↑ Panera Bread Company FY2009 Form 10-K, Page 46 ↑ PNRA 10-K 2007, Item 1 ↑ PNRA 10-K 2007, Item 1 ↑ PNRA 10-K 2007, Item 1 ↑ PNRA 10-K 2007, Item 1 ↑ PNRA 10-K 2007, Item 1 ↑ PNRA 10-K 2007, Item 1< Key Trends and Forces Rising production costs have placed downward pressure on Panera Bread's operating margins Higher wheat prices, fresh dough prices, labor costs, rent, and other input costs have made it more expensive for Panera Bread to continue its operations. Inflationary trends, combined with drops in consumer spending (which pressures management to decrease prices), have created a challenging consumer environment for the company - if the company raises its prices to counter inflation, it might suffer a drop in sales. The effects of rising costs can be seen in the company's fourth quarter, when revenues jumped 29% from the previous year, but net income decreased by 5.6%.<ref> [http://www.panerabread.com/pdf/er-20080225.pdf PNRA 8-K 2007 Q4] </li> <li id="_note-35">[[#_ref-35|↑]] [[http://futures.tradingcharts.com/chart/CW/M Wheat (W, CBOT) Monthly Price Chart]]</li> <li id="_note-36">[[#_ref-36|↑]] [http://gothamist.com/2008/01/16/does_fastcasual.php "Why Fast Casual is Winning" Restaurants and Institutions September 1st 2007] </li> <li id="_note-37">[[#_ref-37|↑]] [[stock:Panera_Bread_Company_%28PNRA%29/Filing/10-K/2008/F5447468#001 | PNRA 10-K 2007, Item 1]]</li> <li id="_note-38">[[#_ref-38|↑]] [http://www.stltoday.com/stltoday/business/stories.nsf/0/9719B90CD753381F86257701000DE450?OpenDocument]</li> <li id="_note-39">[[#_ref-39|↑]] [http://www.shareholder.com/mcd/EdgarDetail.cfm?CIK=63908&FID=1193125-08-37220&SID=08-00#D10K_HTM_TOC84398_8 MCD 10-K 2007]</li> <li id="_note-40">[[#_ref-40|↑]] [http://www.subway.com/subwayroot/AboutSubway/subwayFaqs.aspx Subway's Corporate Website]</li> <li id="_note-41">[[#_ref-41|↑]] [[stock:Panera_Bread_Company_%28PNRA%29/Filing/10-K/2008/F5447468#009 | SBUX 10-K 2007 Item 6]]</li> <li id="_note-42">[[#_ref-42|↑]] [[stock:Panera_Bread_Company_%28PNRA%29/Filing/10-K/2008/F5447468#009 | SBUX 10-K 2007 Item 6]]</li></ol></ref>