What to Look for Next at Panera

What to Look for Next at Panera

In its last reported quarter, Panera had some bad news. The company dropped its annual earnings-per-share expectations, and comparable-store sales were weaker than the market had hoped. But, on the upside, the company also increased its operating margin and earnings per share. The business has plans to keep pushing forward, but there are still plenty of obstacles to overcome.

The bright side
Year to date, Panera's comparable-store sales were up 3.5% over last year at the end of last quarter. That's a solid result in a time when many retailers and restaurants are struggling. McDonald's could only manage a 1% increase in U.S. comparable sales in its last quarter -- that fell to 0.2% in August.

Panera's increases at the top drove the company to a 13.9% operating margin, up from 13.6% last year. Much of that came from "wage discipline," which simply amounts to bakeries being conscious of how much they spend on labor costs. Additionally, Panera got a boost from lowered dough costs, which it expects to see throughout the year.

The obstacles ahead
Even with the good news, there was bad news to be found. Comparable sales dropped over the course of the quarter and, by June, the increase was only 1.9%, compared to the previous year. Not only did things drop off, they also compared poorly to other restaurant chains. Chipotle kicked out a 5.5% year-over-year increase in comparable sales last quarter.

The margin outlook isn't very rosy either, and Panera expects third- and fourth-quarter operating margins to be level with the previous year, at best. The company is facing increases in its labor costs in the second half of the year, and expects to see a negative impact from inflation costs.

The overall outlook
While the second half of the year is going to be weaker, Panera is still sitting in a decent position. Sales growth continues, even if its pace has slowed over the summer, and the company's catering business is bringing in solid revenue. Compared to most of its competition, Panera looks very strong -- with Chipotle being the exception.

Luckily, Panera is substantially cheaper than Chipotle. Panera's price-to-trailing earnings ratio is only 26, while Chipotle is running hot at 44. The company's stock was pushed down due to its last earnings report, and has yet to recover. There's certainly some risk in the company's near-term future, with comparable sales declining, but things still seem strong for the long run. I'll be looking for more strength in the catering business, a solid increase in comparable sales, and for the company to keep operating margin close to its current position.

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The article What to Look for Next at Panera originally appeared on Fool.com.

Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, McDonald's, and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, and Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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