Panera Bread Co. (PNRA) unveiled its current business plan at an Investor’s Day conference in Charlotte, N.C., this week. It shared a lot of thoughts about the current growth of PNRA stock and plans for the future.
It was an uncommon move, and PNRA stock took it on the chin as a result, selling off about 8% today as a result.
So what gives? Why did Panera opt to stay quiet on its future … and most importantly, should investors really be abandoning PNRA stock or stick with the company despite this news?
PNRA Stock — Slowing Earnings
The reason for the lack of information from Panera is obvious, but I’ll let the company tell you in its own words. In a release, PNRA chairman and CEO Ron Shaich said:
“As already reflected in our guidance for fiscal 2014, we anticipate that these investments may depress both margins and earnings growth in fiscal 2014 and 2015. However, we believe these initiatives will enable us to better meet our customers’ ever-evolving needs and provide the platform for significant growth and expanded earnings.”
In other words, the company is struggling to find growth and is going to have to spend money and squeeze profits as a result.
And frankly, it would rather not dwell on that.
Of course, investors have been hip to this trend for some time. PNRA posted a rather anemic performance in its Q4 earnings with just a 1.7% increase in same-store sales. Net income also dropped from $54 million in the previous year to $52 million on the quarter — though some $330 million in stock buybacks over FY2013 helped juice earnings per share to Spackle over the shortfall.
The fact that PNRA stock, in the words of its CEO, faces depressed margins and earnings growth in Y2014 is not encouraging considering how weak it performed in the last quarter of 2013.
Panera Performance Stinks
While the recent sell-off has been painful the reality is that Panera has underperformed for a while. In calendar 2013, while the S&P 500 was on a 30% run, PNRA stock put up just 12% returns.
And from January 2012 through the beginning of March 2014 — before today’s sell-off, mind you — PNRA stock was up less than 30% vs. about 45% for the S&P 500.
Now, Panera did grow revenue about 12% from FY2012 to FY2013, which is something to be proud of. McDonald’s (MCD), by contrast, has struggled to attain anything more than low single-digit growth in sales lately.
But top-line growth seems to clearly becoming only from store expansion given the very weak same-store sales, and that means PNRA stock is riding on how fast it can throw up new locations. Of course, the more Panera restaurants that open now, the bigger the weight of sluggish same-store sales a year from now as a result — demanding an even faster pace of expansion to keep up the same rate of growth.
This is hardly a new narrative for restaurant stocks that prey on investor sentiment and rapid expansion to build momentum. Look at Chipotle (CMG), which has soared more than 800% in the last five years thanks to ambitious growth that has taken its footprint from 837 restaurants on Dec. 31, 2008 to at least 1,500 currently.
Eventually, companies like this hit a bottleneck. Thus far, Chipotle has managed to avoid the slowdown in sentiment, rebounding quite nicely from weakness in 2012 thanks to powerful earnings reports — including a 9.3% jump in same-store sales traffic in its most recent numbers, sparking a double-digit run for CMG stock in one trading session on the news.
Panera may be able to reverse course if it can spark interest again with a blowout report like Chipotle did.
But given the company’s reluctance to give guidance and the rather downbeat predictions for earnings and margins, don’t hold your breath.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.