Why Panera Bread's Turnaround Could Just Be Getting Started

By Markets Fool.com

Panera Bread Co.was up as much as 14% today after the company announced the latest step in its turnaround plan.

Continue Reading Below

The fast-casual bakery cafe chain said it would increase it share buyback authorization to $750 million, with plans to repurchase $500 million in stock over the next 12 months. It also intends to sell and refranchise 73 cafes, fulfilling a promise to refranchise 50 to 150 stores this year. CEO Ron Shaich also touted the Panera 2.0 initiative, which he said would build the company's "competitive advantage, by reducing customer friction at its cafes, through digital access and improved operational processes."

Shares reached a 52-week high and approached an all-time high on the news; today's jump notwithstanding, though, Panera stock has been underwhelming of late. From the beginning of 2008 to the summer 2013, the stock jumped 451% to a record high, but since then shares have fallen 5% while the S&P 500is up 28%. Before examining Panera's turnaround plan, let's look at why the stock went into a tailspin over the last two years.

Essentially, earnings per share flatlined as comparable sales growth fell from 6.5% at company-owned stores in 2012 to just 1.4% in 2014.Last year, the average transaction value fell, and the company lowered its guidance several times, disappointing investors. In many ways, however, the company is a victim of its own success. On a per-restaurant basis, Panera is one of the top-grossing quick-service restaurant chains in the country, with average per-location sales of $2.465 million in 2013 coming in at No. 4, just behindMcDonald'sand ahead ofChipotle Mexican Grill.

A major barrier to further same-store sales growth has been service bottlenecks during peak hours. This is a good problem to have, but it's a problem nonetheless. Panera has blamed the slowing growth on long lines and slow service due to higher demand. CEO Shaich said, "Our success at growing sales rapidly over the past few years has outstripped some of our capabilities in some of our cafes. Walk into any of our cafes at 12:30 p.m. during the lunch rush, and you will see the lines. It is clear that the demand for our product is not the issue."

Continue Reading Below

To combat this problem, the company is rolling out Panera 2.0.

Technology to the rescue
Panera announced the initiative last April, calling it "a series of integrated technologies to enhance the guest experience for all consumers no matter how they choose to use Panera."The program features mobile and online ordering with instant pickup for to-go orders or table service for eat-in customers. To facilitate the ordering process, Panera will also add in-store iPad kiosks and install new technology and equipment to the back of the house to speed up operations and ensure accuracy. Finally, the company intends to increase peak-time staffing levels, including assigning a "quarterback" on the customer side to expedite the ordering process.

The rollout of Panera 2.0 has been slow thus far -- only about 100 of Panera's approximately 1,850 locations have made the upgrade. The company expects to add 300 more stores to that list by the end of the year and has promised to complete the upgrade at all locations by April 2017.

Stores that have received the 2.0 revamp have seen a respectable 8%-12% bump in sales. Those investments will weigh on earnings this year, but they are necessary to unlock the potential from the unmet demand at Panera locations. If the company can successfully relieve the long lines and slow service that have stymied sales growth, profits will begin moving north again.

Foolish takeaway
Like Starbucks CEO Howard Schultz, who returned to the company he founded after it began floundering, founder Shaich stepped away from Panera Bread in 2010, but returned to the CEO chair in 2013.Shaich knew technology was the key to further growth, and he announced the 2.0 plan soon after his return.

While investors have been restless in the meantime, Shaich insists it's just a matter of time before it takes off, noting the company's growth has always come in stages.

As today's stock jump shows, investors are clearly hungry for good news from Panera. In addition to the opportunity in the 2.0 initative, catering also remains a promising growth area; it's a popular service and a way for Panera to add sales without clogging up in-store operations.

We'll know more about the company's progress when it reports quarterly earnings on April 28. Analysts expect a modest $1.44 in earnings per share, down from a year ago, but management's assessment of the 2.0 rollout should offer a better indicator of the company's future.

The article Why Panera Bread's Turnaround Could Just Be Getting Started originally appeared on Fool.com.

Jeremy Bowman owns shares of Chipotle Mexican Grill. The Motley Fool recommends Chipotle Mexican Grill, McDonald's, Panera Bread, and Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill, Panera Bread, and Starbucks. 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.