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RVB's Market Musings

What began here as an avenue to interact and learn has far exceeded those goals.

If you are a prospective employer, please consider this site a place where you can see my passion for investing...

Sunday, July 16, 2006

Lack of a Cool Title for this Post, Hence Let's Call it "More on Panera"

Barron's ran an article this weekend on Panera (Thanks, Jas, for pointing it out). In the article, several analysts and a money manager are interviewed about the stock. BB&T may have a good piece of info: stores opened last year average less sales than the rest of Panera's stores. This could be a problem going forward. However, I'm not sure how significant this number is just yet, because new stores are seeing even better "honeymoon" openings than last year - new stores now sell 45k per week vs. 41k a year ago. So which number is right? I think it's unclear.

There are some other good points - Panera is showing a lower return on capital and most restaurants are starting to see a consumer crunch. Indeed, it looks as if margins are falling. However, Panera has just now begun to expense stock options, so the data may not be correct (admittedly, I haven't gone back and made the appropriate adjustments yet, I'm waiting for Q2 results). We'll know much more on the call in a few days (the 26th) And as for a consumer crunch - who knows if Panera will be affected? I'm not seeing it, and niether is Ron Shaich, Panera's CEO:
"...looking at this over 25 years I will tell you I have not ever seen any of our businesses and in particular in this business, go up or down in any material way on macro consumer phenomena. You know if anything when there are matters that seem to effect macro, macro consumer issues when there was a fire gas crisis when 911 hit, if anything Panera seemed to benefit in some way as people stayed close to home and we were seen as a neighborhood kind of experience. I would further add that, generally for our consumers – I think our consumers tend not to be the most penny pinching. By their very nature of they have chosen to spend a little bit more for something they perceive as higher quality. And I think you know for most of our consumers, a sandwich one way or the other is not what is going to define their economic health. And you know I – and so I think that what we have traditionally seen is certain concepts that are at the effect of macro consumer trend and larger ticket durable items affected in a material way in recession and in economic crunch. That’s a long way of saying that I hope we are not – I don’t expect that we’re going to be back here in a month or 2 months or 3 months or 6 months saying that the consumer environment has changed, such that our comps or sales have been affected by that. Now, that’s what 20 odd years say to me, we will see what happens."

Most agree that Panera is a great company with a concept that works. But now we're starting to see disagreements about the stock. According to the article, there are 3 SELL ratings, citing 30% downside. Ok, maybe that 30% downside is there. Maybe it's not. But, when the analysts talk about Panera trading "higher than its industry" to strengthen this case, I find that odd. Here is a quick table of some prominent public restaurant companies. It would make sense that Panera gets a higher multiple.

[photo missing - blogger not accepting pic uploads at the moment]

What's more is that because of its price point, it's conceivable that more people will head to Panera, not less. "Hey John - want to go to Applebee's for dinner?" "No, I think we can save some money if we go to Panera instead." I dunno - it's just conjecture.

A few things that I am surprised to now hear the company talk about: 1) It looks like there could be a move to more urban locations - downtowns, etc. The company has avoided this in the past - doing a great job at controlled growth 2) Management has reorganized itself to support the growth. I read this as "Panera knows it's on to something big and now they're getting ready to take it to the next level." 3) I wasn't even looking ahead to 17% unit growth, I was being more conservative. Rest assured if that story plays out, Panera, already a 15-bagger from its IPO, will beat the S&P going forward.

Right now, the market is focused on the negative. The momentum in the stock is clearly down. Technical analysis of the stock paints an ugly picture, too. Yet, the company still appears to be on track to grow 30% this year.

I guess we have to pick a side. Who's right? Mr. Shaich or the analysts? My money's with Ron and when this downward momentum subsides, I'll be checking the story again - to make sure it's still in tact. Then I'll finally be a shareholder.

PS - Panera had its first-ever "Analyst Day" this year. Anyone can view the slides, and I'd encourage all to do so.


At July 18, 2006 9:06 AM, Anonymous jritzema said...

Your table didn't work. I was able to see your resume and report, but I am on UW's network


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