Panera: Bread, Bluffing and Donation Bins

Some guys just need to stay away from the poker table. It seems Ron Shaich is one of those guys. Mr. Shaich, CEO guest du jour on Jim Cramer's Mad Money, said on March 7 that rising gas prices help his Panera Bread (PNRA) restaurant chain. If McDonalds (MCD) CEO James Skinner were to say "Dollar Menu" sales increase sufficiently to keep revenues steady amidst rising gasoline prices I'd probably buy it, but restaurants simply operate on excess in terms of consumer spending, period. By missing an opportunity to argue company strengths that might allow Panera to overcome diminished consumer spending capacity, he refused to acknowledge a simple truth. Sometimes folding helps your image in poker, just like admitting weakness can help promote a stock- you can't win every hand Ronnie!

While Panera has grown top and bottom lines consistently over recent years, the balance sheet is flashing warning signs too. Net cash from operating activities declined from FY 2010 to FY 2011 and overall cash, largely due to buybacks and acquisitions, has been negative for consecutive years. Numerous insider sales, several over $1,000,000, and no buys have taken place in recent months.

The restaurant chain's most questionable endeavor remains the Panera Cares "pay-what-you-can" cafes. The Company claims initial locations, offering free food to all customers with a bin at the counter for "suggested donations," have been a success and a nationwide rollout is in the works. Despite stealthily nabbing any tips that might have gone to employees, the concept is more flawed than the non-Latina faces on the current season of Celebrity Apprentice.

With a trailing P/E of 35, no dividend to speak of despite a publicly traded existence of more than two decades, and growth coming from highly questionable endeavors, Panera Bread is a much more appealing short candidate than other debt free, high growth restaurant stocks such as Chipotle Mexican Grill (CMG) and BJ's Restaurants (BJRI). Furthermore, menu items such as salads from Panera are easily made at home, with minimal preparation, for pennies on the dollar. Selling PNRA short is an appealing play, and for a higher risk/reward proposition April near-the money puts are extremely cheap for such a high-flying stock.

As a matter of fact, I could see myself as a (non-paying) regular if Panera Bread cares enough to open a "pay-what-you-can" location in Palo Alto, California.