Will Panera Soar Where Chipotle Struggled?

Source: Panera Bread.

Among up-and-coming restaurant chains, Panera Bread and Chipotle Mexican Grill have both taken advantage of the popular trend toward healthier eating, with both companies priding themselves on using fresh ingredients and delivering high-quality food to their customers. Yet Chipotle disappointed its investors with its most recent quarterly report, and with Panera reporting Wednesday afternoon, shareholders hope that the St. Louis-based chain can stake its claim to the fast-casual space and avoid some of the difficulties that plagued its Denver-based counterpart.

Panera has done a stellar job in growing its business over the years. Yet as the chain gets bigger, competitive pressures have heightened, making it increasingly difficult for the company to sustain its growth rate. In response, company management is looking for ways to reinvest in its business through initiatives like its Panera 2.0 conversion, and early efforts have been promising. But can Panera really overcome the same problems that have held back Chipotle? Let's take an early look at what's been happening with Panera Bread over the past quarter and what we're likely to see in its report.

Stats on Panera Bread

Source: Yahoo! Finance.

Will Panera earnings hold up this quarter? Investors are far from sure about the prospects for good news from Panera earnings, as they've cut their fourth-quarter estimates by a penny per share and reduced their full-year 2015 projections by a full percentage point. The stock has done better, though, climbing 7% since early November.

Source: Panera Bread.

Panera has struggled to keep growing at its past pace, and its third-quarter earnings report showed some of the specific difficulties it has faced. Last quarter, comparable-store sales at company-owned stores grew by only 2.1%, with only slight gains in traffic and average order size. Franchised locations did even worse, posting growth of only 0.7%, and that forced the company to reduce its earnings guidance for the full 2014 year. Comps appeared to bounce back somewhat at the beginning of the fourth quarter, but they are unlikely to come anywhere close to Chipotle's 16.1% comparable-restaurant sales.

Yet bullish investors still see a lot going for Panera. Between kitchen upgrades, simpler menus, and a streamlined ordering process, efficiency gains could dramatically improve the customer experience, driving more traffic into Panera locations. Once the company gets customers back in the doors, Panera could then follow the same game plan that Chipotle did, raising menu prices only once it had recaptured customer loyalty and helping to recoup some of the higher costs of its food ingredients.

Moreover, Panera has a lot more upside than Chipotle, if only because its stock trades at a more attractive earnings multiple. Granted, a P/E of 26 doesn't make Panera cheap, especially with its growth under pressure. Yet even after its recent earnings-related slump, Chipotle trades at a much costlier 46 times trailing earnings. For now, Chipotle's much-faster growth arguably justifies that higher multiple, but if Panera can accelerate its sales gains, it could easily earn some P/E expansion in 2015 and beyond.

CEO Ron Shaich. Source: Panera Bread.

Some believe that gains for Panera shares could come from impatient activist investors. Panera stock dropped about 1% in 2014, and with substantial turnover in the company's corporate suite, activists might decide that agitating for shareholder-friendly changes could be lucrative. Yet those moves could backfire if they distract CEO Ron Shaich from its long-term strategies in favor of short-term actions like stock buybacks or shifting the mix between company-owned and franchisee-owned stores.

In the Panera earnings report, be sure to see the extent to which Panera can drive growth in its existing store locations. As helpful as expansion is, comparable-restaurant sales are the key to Panera's long-term growth strategy. If comps bounce back and start getting closer to Chipotle's impressive figures, then the sky could be the limit for Panera shareholders and future returns.

The article Will Panera Soar Where Chipotle Struggled? originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.