Yahoo Finance PNRA Stock: 4 Reasons to Buy Panera Bread Co
Ron Shaich isn't afraid to make a bold statement here or there. The CEO of Panera Bread Co (PNRA) made his latest last month, when he challenged the industry, including McDonald Corp. (MCD) and Subway Restaurants, to clean up their kids' meals.
To back up his proclamation, Shaich's company will not use artificial ingredients and sweeteners in its meals; nor will it attempt marketing gimmicks, like toys, that target children, instead offering sides like fruit and veggies. Panera argues that all fast food and fast-casual restaurants should agree to a similar promise.
Panera is one of the cleanest options available in the fast-casual space in terms of where food is sourced and the number of healthy food choices. The success the company has had also helps to drive the confidence. Over the past year, PNRA stock has jumped 19 percent to more than $215.
And it's riding a wave of health-conscious consumers in order to maintain its edge.
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Panera has an enticing opportunity in catering. The $52 billion catering industry is about as fragmented of an industry that you will find in the food space. And within that fragment, Panera stands as one of the leaders in market share, despite only accounting for less than 1 percent of the total space's sales, according to KeyBanc Capital Markets analyst Chris O'Cull.
But Panera has made major strides to increase its presence in catering. This has come with a number of one-time costs, like the expense to revamp kitchens and the efforts to improve ordering. The technological improvements, though, may help Panera stand out since its ordering system isn't a tactic mom-and-pop catering services can easily replicate.
O'Cull likens the space to pizza delivery, where although Pizza Hut, owned by Yum Brands (YUM), Domino's Pizza (DPZ) and Papa John's International (PZZA) dominate, they're still dwarfed by the market share that local joints accumulatively garner. The big players, though, have benefited from online ordering, since they have the capability to invest in an easy-to-use platform. This is why a company like Domino's has seen a 9.7 percent surge in same-store sales over the past year.
Catering offers a "similar opportunity for Panera," says O'Cull, since Panera has the size to invest in a similar platform, which it has done. Currently, the business accounts for 8 percent of all restaurant sales (franchise plus company-owned store sales), or $400 million. O'Cull sees that climbing to $2 billion.
Online ordering helps it stand out from the lunch crowd. In 2013, Panera's success as a budding fast food name seemed to suddenly hit a wall. Same-store sales weren't growing as fast as they used to, and people noticing long lines within the store were unwilling to wait. "Panera had a high-class problem," O'Cull says. Diners would walk into a location, "see the line then leave. Waits were too long."
But Panera acted quickly in order to try and right this trend. It developed its Panera 2.0 strategy in April 2014, which were initiatives built around technology to improve the diner experience. Included in the upgrades were dining kiosks, so patrons could order food via tablets. It also added food to-go ordering features, which is attractive to those eating lunch during a break in the workday. While Panera is "taking a lot of one-time costs" by adding these features, says Edward Jones analyst Jack Russo, the expense "will fall off over time."
It's all an attempt to try and adapt to consumers eating needs. In another effort, Panera has focused its attention on delivery. O'Cull thinks Panera is perfectly positioned for this, since it serves "very portable products," like sandwiches, salads and soups. This has helped turn-around that same-store sales drag, which increased 4.2 percent at company owned bakery-cafes in the second quarter of 2016, compared to the year prior.
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Panera will continue to grow, despite concerning trends. The restaurant industry faces some worrying trends, which give analysts some pause. For one, the growth of minimum wage laws could increase the cost of labor for Panera, as well as other names in the industry. Also, some analysts are warning that restaurant sales could soon slow down, as people eat at home more to save a few dollars.
This hasn't stopped Panera from growing its footprint, though. It currently operates more than 2,000 stores, which it hopes to increase to more than 3,000 stores by boosting store count 3 to 6 percent per year, Russo says. But it's also adjusting the number of franchisee-run stores. This allows the company to collect the royalty from the franchisee, with less cost to operate the location. The number of company-owned stores now stands at 45 percent, compared to 49 percent two years ago.
You'll have to pay a premium, if you think it's worth it. The reason Panera has become so appealing to investors is because it participates in the fast-casual trend -- one of the fastest growing segments in restaurants -- and it offers healthy, organic, gluten-free options, something consumers want right now. Add on the technology initiatives and the growth in its catering business and "no other restaurant story has all those things going at the same time," Russo says.
But that's also why investors have noticed it so quickly. It now stands at 29 times its forward price-earnings, which is above its historical average of 23 times, as well as above the fast-casual and fast food industry median of nearly 26.
O'Cull believes Panera can handle a valuation higher than history would determine because of the growth in catering. If Panera can consolidate market share in the space, then it "will warrant a premium valuation," O'Cull says.
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But Russo points out that PNRA stock is priced higher than Starbucks Corp. (SBUX), which has a similar growth story and ability. Plus, with it being near its all-time high, Russo would rather wait it out than jump in at this price point, even though he expects "good results from the company for a long period of time."
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