Sorry, Panera Bread - You're No Chipotle Mexican Grill

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A Panera Bread Restaurant Ahead Of Earnings Figures
Patrick T. Fallon/Bloomberg/Getty Images
One of the original darlings of the fast-casual movement has a problem. Shares of Panera Bread (PNRA) opened lower on Thursday after posting problematic quarterly results.

The chain of 1,880 bakery-cafe restaurants saw revenue climb 2 percent to $672.5 million during the fourth quarter, with net income declining 11 percent to $48.5 million or $1.82 a share. This may not appear to be very inspiring, but it's not as bad as it seems. The prior year's holiday quarter included an extra week. Back that extra week out and sales would have clocked in substantially higher and profitability would have been nearly even.

The real reason that the stock took a hit on the report is that it sees earnings per share either coming in flat or declining slightly in 2015. Panera's been aggressively buying back shares to improve its per-share performance, so even the best-case scenario of flat earnings-per-share growth likely means that net income itself is going to fall this year. Analysts were holding out for marginal improvement.

Contracting Margins

Panera's doing a decent job when it comes to drawing in customers. Same-restaurant sales rose 3.3 percent relative to the prior year at company-owned eateries, fueled by folks spending more and a 1.3 percent uptick in the number of transactions. It's also been able to keep growing, tacking on 114 net new locations in 2014. The rub on the bottom line is that margins continue to contract.

Panera blames food cost inflation and expenses related to rolling out new initiatives for keeping profit growth in check. The meandering restaurateur is doing a lot to try to get back on track. There's the buildout of delivery hubs and implementing operational and marketing innovations. The most ambitious push -- the mobile-friendly and tablet kiosk-rich Panera 2.0 platform that it's starting to roll out -- costs an average of $125,000 per restaurant before considering the extra staffing requirements.

However, with net income declining slightly in 2014 and the company now forecasting another step back in 2015, investors are left wondering when the turnaround will materialize.

Dough Nuts

Panera was an early champ in the fast-casual movement. Investors often lumped it in with Chipotle Mexican Grill (CMG) as two chains benefiting from patrons trading up from fast food and down from casual.

The comparison wasn't fair. Chipotle was and continues to be a cult fave, consistently posting big gains in comps. Panera was coasting along with solid comps, but nothing as heady as Chipotle. The market played along. Shares of Panera have popped fivefold through the past six years. That's not bad, but the stock has been marching in place since the start of last year now that bottom-line growth isn't happening.

Chipotle also experienced food cost inflation last year, but it was able to come through with a substantial springtime price hike across its menu in 2014. Panera's stuck absorbing the costs, and it's obviously stinging the bottom line at a time when it's trying to speed up and upgrade the customer experience.

There's only one Chipotle in fast casual, and unfortunately for Panera these days, there's also only one Panera.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Chipotle Mexican Grill and Panera Bread. Try any of our Foolish newsletter services free for 30 days. To feast on our favorite high-yielding dividend stock ideas for any investor, check out our free report.
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