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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...

Thursday, July 27, 2006

PNRA Defense

As I wrote yesterday, I owe y'all a Panera defense. I've gotten it wrong for about 20 dollars now, and those 20 bucks are in the wrong direction. So what the heck is going on here?

1) Big money hates the restaurants. They're afraid the consumer slowdown is affecting them, and to some extent, that feeling is justified. Like mentioned before, The Cheesecake Factory (CAKE) has shown slowing sales, and so has PF Chang's China Bistro (PFCB). Even Panera has shown slowing same-store sales, falling to under 2% in July. On April 5th, I warned that anything lower than a 6% number could spell trouble for Panera. At least I got that one right. So - big money is selling shares by the boatload, and that means trouble for a high PE stock like PNRA.

2) Same-Store Sales Growth numbers have slowed. Is the consumer eating out less? Inconclusive, methinks. Is it weather? Inconclusive. So what is it? Keep your eyes open.

Combine the fear in the restaurants with the same-store sales numbers falling and overall market conditions and we now see PNRA shares off about 30% from their high. It should have been expected - the chart has been nothing short of a technician's nightmare since March (Pardon me if I don't write about that in my formal equity research reports). Plus, Panera's shares have fallen like this before.

Alright, you say, so why did the earnings report yesterday send the stock into a tizzy? On the surface, Panera said it wasn't likely to make as much as they originally said. But, you really had to pay attention on this call because it was confusing. It turns out, that this Crispani pizza thing is a really big deal for Panera. It requires major training, equipment, marketing and so on and so forth.

Crispanis are coming to a Panera near you, sooner than expected. But what used to look like a nice smooth line running at about a 30 degree angle - earnings, expenses, growth, etc could now get a little lumpy. Expenses are jumping from one 10-Q to another: Q3 will be worse than management originally said, but Q4 will likely be better. Most importantly, there is now some more uncertainty, and I think that's the big reason for the sell off. It pains me that I didn't see this coming. But even if I had, I would probably have maintained that it wasn't a big deal to Panera's business and that the markets wouldn't react like they have. Markets and uncertainty go togther like alcohol and firearms, however.

So now it's up to investors to place their bets on whether or not Crispani will turn out to be good for Panera, or cause its demise. My guess is that it won't cause the bakery-cafe's demise, given the history of successful product rollouts and America's infatuation with pizza. And oh, by the way, there are more menu innovations coming but the company won't say what. But Panera might not earn the $2/share like managment originally said would happen. Would you be disappointed if they only earned $1.90, instead? That would only be 26% EPS growth.

The bottom line is that this story is still a great long-term stock. CEO Shaich has been around the block once before with Au Bon Pain and knows some of the pitfalls to avoid when it comes to managing publicly traded restaurants. But, while the share price knife is falling, there's no reason to try to catch it, even though I have been a buyer ever since $65 was breached.

Time for a Cinnamon Crunch Bagel! Mmmmmmm...


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