Stock analysts have talked about how 2017 is not going to be a good year for restaurants, and by and large, this is good advice. The restaurant industry is pressured by demands for higher wages and a growing disinterest in sitting down for a meal compared to ordering takeout.
But Panera Bread (NASDAQ:PNRA) has managed to buck this trend so far, as its fourth-quarter earnings report impressed investors and saw its stock shoot up Wednesday morning. Panera reported earnings of $2.05 per share on $727.1 million in revenue according to CNBC. Panera thus surpassed earnings expectations of $2 per share even though it slightly missed revenue expectations of $727.7 million.
The success of Panera Bread, especially in contrast to other disappointments like Buffalo Wild Wings, is a sign of how Panera has adapted to new changes in the restaurant industry and consumer interests. While Panera Bread’s stock hit record highs of over $230 Wednesday, it still has room to grow thanks to Panera’s embrace of delivery and a strong emphasis on technology. Thanks to these strong results, the company is a solid buy.
The Success of Panera 2.0
In 2014, Panera launched a “Panera 2.0” process which vowed to modernize the chain. By using tablets and digital kiosks, Panera aimed to reduce the wait time and end the long lines of people crowding around their wares picking out sandwiches. Furthermore, Panera started a delivery service, creating what they initially described as an “enhanced guest experience” for those sitting down and grabbing something to go.
A quick look at the numbers shows that Panera 2.0 has been a major success. Company-owned locations, which implemented Panera 2.0, saw comparable sales increase by 3 percent. Panera’s franchise-owned operation, which did not implement the changes, saw their sales decrease by 1.4 percent. Overall, Panera’s sales increased by 0.7 percent. While this growth percentage is not that high, Panera has a clear path to success as franchisees should look to implement Panera 2.0 at their own stores given these results.
Panera adding new technology to improve wait times undoubtedly helped, but the big thing is that it embraced delivering food. Panera’s emphasis on high-quality sustainable food makes it popular among millennials, but many millennials are unwilling to make the effort to even head to a restaurant to pick up food. And as mobile devices grow more popular, ordering out food has become even easier than ever.
Restaurants which emphasize delivery like Papa John’s or Dominoes have performed very well in 2017, with the former up 80 percent over the past 12 months. In Panera’s case, digital sales account for 24 percent of total sales even though it offers delivery in only 15 percent of its stores. The low percentage of stores offering delivery means that Panera has plenty of room to grow, and it anticipates offering delivery in 40 percent of its stores by the end of 2017.
Beating the Odds
Restaurants like Panera and Papa John’s are doing well with a net worth of $70 billion, but their success should not take away from the general struggles of the restaurant industry. Casual dining restaurants like Applebee’s, fast-food places like McDonald’s Corporation (NYSE:MCD), and even previously rising fast casual scene like Chipotle Mexican Grill Inc (NYSE:CMG) or Shake Shack (NYSE:SHAK) are struggling on the market.
Each individual company has their own troubled story, but the fundamental problems are that customers are more discerning and less willing to spend money all while restaurants are embattled by rising prices. Panera carries some unique advantages on this front. Its emphasis on sustainable food is a major draw which means that millennials will still eat there even while they turn their nose at McDonald’s.
But despite Panera’s success, it cannot be entirely unaffected by the problems which affect the restaurant industry as a whole. Furthermore, its decision to expand delivery services could be a burden in the short term as it will need to train new employees. While it should be an investment which will quickly pay off given its past success, it may not feel that success in the next quarter or two. These short-term concerns should not take away from Panera’s healthy long-term prognostication.
An Optimistic Outlook
The restaurant industry is struggling and investors may want to stay away from the sector altogether. But industry-wide problems should not take away from bright spots like Panera. Its emphasis on high-quality food, delivery services, and technology has made it popular among millennials even while other restaurants are falling behind.
Panera has shot up to new highs and it may fall a bit in the next few months. But the trends response for its excellent fourth-quarter should keep this company healthy for the foreseeable future as it works to expands delivery and implement Panera 2.0 in franchisees. This stock is an excellent buy over the medium to long term.