Going stale

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Panera Stock Won’t Make You Any Dough — SELL PNRA

Panera Bread (PNRA) missed earnings targets last week and has crashed by double digits over just a few days as a result.

Don’t expect the pain to stop here, as this restaurant stock is likely to continue its painful declines in the second half.

Here are the specifics: Second-quarter earnings for Panera tallied $1.74, up 16% from last year but missing forecasts. Even more disturbing, however, was that Panera same-store sales were up just 3.7% vs. forecasts of 4.4%. Looking forward, same-store sales look to be pacing about 2% growth in the current quarter, so there’s no sign of this slower growth abating.

Another telling detail was that management blamed complexity in the menu, slower orders and problems getting food out fast enough to meet demand. That comes after adding pasta dishes and other items that have apparently slowed service. Also, breakfast sales are very soft — a big problem since this has some the highest-margin items for PNRA. Think bagels or ready-made pastries that don’t require prep work or costly produce and meats in their creation.

No wonder full-year earnings guidance at Panera was reduced 2%. These details hint that there is not just deceleration in traffic, but also that margins could feel the pain if PNRA has to move prices lower to compete.

This kind of painful evolution is overdue. Panera stock is up 260% in the past five years even after this recent earnings pain, and aside from a dip across a few months in 2011, Panera hasn’t really felt any significant rollbacks in share price.

All restaurant stocks inevitably reach the point where the fad of their menu and the expansion of locations can no longer meet the very high expectations of growth on Wall Street. Chipotle (CMG), for instance, went from about $440 a share to about $240 a share over a few months in 2012 thanks to this wall — and though the burrito king has clawed back a lot of those gains slowly during the past 12 months, it remains about 10% below peak valuations.

Other spectacular restaurant flame-outs include doughnut maker Krispy Kreme (KKD) on a small scale and coffee giant Starbucks (SBUX) on a large scale. Both overexpanded and paid dearly in share declines for their mistakes.

Of course, all of these cautionary tales have actually done quite well lately. Krispy Kreme stock, for example, has tripled in the last 12 months — even if it still remains down 50% from its peak in 2003 when it was enjoying cult status. So this is not to say that Panera is going bankrupt and will never again grace a strip mall near you.

It just means that with fast-moving restaurant stocks, investors need to be careful — and they need to expect an inevitable crash as expectations adjust and growth becomes modest before the mature phase of business begins.

Panera is at that inflection point. So don’t touch PNRA stock.

Related Reading

  • Panera earnings details. (Barron’s)
  • Credit Suisse just cut its Panera price target, though the target still remains above current levels. (Watch List News)
  • Panera’s “pay what you can” model is also falling by the wayside. (AP via Yahoo! News)

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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