Panera Can Recover From a Bad Quarter

The third quarter of 2013 started out with mixed results from fast-casual chains. Chipotle reported great results on Oct. 17 even while economic conditions remained tough for restaurants in general. This report shows that fast-casual chains can still grow in this environment, but Panera announced disappointing results on Oct. 22. Fortunately, Panera seems to know where it went wrong. Now the question is if this restaurant can get back on track.

Comparable store sales
These fast-casual restaurants have been adding locations rapidly, so the comparable store sales, or comps, statistic helps explain how much of Panera and Chipotle's growth came from their older restaurants. Chipotle really shined here with 6.2% higher comps for the quarter, and the company expects mid-single digit comps growth for the year. This prediction appears very confident after Panera's report. Panera reported 1.3% higher comps for the third quarter, overall.

With that said, a single quarter's comparable store sales don't provide the entire story. A restaurant with good sales last year has a higher bar to reach this year, and vice versa. Looking back at the third quarter of 2012, Panera did better than Chipotle; the restaurants reported comps of 5.8%  and 4.8%,  respectively. Even considering this history, Chipotle clearly did much better in the third quarter of 2013, but this does show how comparable store sales can fluctuate. Panera will definitely have an easier comparison in 2014.

Chipotle also set a high bar for newcomer Noodles & Company this quarter. This noodles shop has attracted attention because it's earlier along in its life cycle than Chipotle, which could mean more potential for high comparable store sales. Even considering its smaller size, Noodles might still find it difficult to match Chipotle's performance. In the second quarter of 2013, Noodles reported 4.4% higher comps overall.  Many casual-dining and quick-service chains would still love to see numbers like that right now.

Chipotle has shown that a fast-casual restaurant can still post high comparable store sales right now, which suggests that Panera's problem could be company-specific. If Noodles reports strong third quarter numbers on Nov. 6, that would provide further support for this argument. Panera seems to think that its underwhelming results stemmed from efficiency problems. If this is the case, Panera could have an easier problem to fix than other restaurants, which are suffering from weak demand. Note that Noodles disappointed investors last quarter with guidance for 3% comps growth for the year,  so after Chipotle's report a comps beat for Noodles looks possible.

Panera looks like it does recognize the problem though, and it does have plans to address it. The restaurant plans to hire more employees and streamline its menu.  This is encouraging, because a streamlined menu has been one of Chipotle's most important advantages.

Chipotle doesn't offer the wide variety of food that casual-dining chains offer, which lets it focus on quality with the dishes it does offer. The burrito chain did introduce the tofu-based Sofritas recently, an item now being rolled out around the country, but menu additions like this are rare for the company. Sofritas can drive additional sales for Chipotle without having much effect on its streamlined operations. This item is prepared separately from Chipotle's meat products. 

Streamlining the menu could also help Panera serve higher quality food while keeping a lid on costs. Noodles also follows a streamlining strategy by focusing on noodle dishes. In addition, Panera's plan to hire more employees could have public relations benefits.

Final Foolish thoughts
Even though the bread maker reported unimpressive third quarter results, it had the right response. Panera admitted that it didn't measure up to investors' expectations, and it described plans that could lead to better performance in the future. Results from other fast-casual chains suggest that Panera could post much better numbers if its strategy succeeds. This plan won't necessarily pay off for Panera immediately, but this restaurant still looks like a good long-term growth pick.

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Eric Novinson has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill 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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