Panera Has Investors Excited Going Into Earnings

Source: Panera Bread.

The rise of healthier eating-out options has been a big driver for the restaurant industry in recent years, and Panera Bread has done its best to capitalize on that trend with its fast-casual eateries. Yet after last quarter's earnings report, the restaurant chain's stock fell sharply as investors questioned whether Panera could grow at the same pace as some of its peers. Coming into Tuesday afternoon's first-quarter earnings report, though, shares have bumped up in a big way recently as the company has taken some interesting steps toward trying to boost its perception among investors in response to that criticism. Let's look at some of the things that have been going on with Panera Bread over the past quarter and what it is likely to tell investors in its report.

Stats on Panera Bread

Source: Yahoo! Finance.

Why Panera earnings aren't really the story this quarter Investors have been bracing for some difficult Panera earnings results for the past few months. In that time, investors have cut their views on first-quarter earnings by 10%, and they've made similarly large reductions to their projections for the 2015 and 2016 fiscal years. The stock, though, has held its own, rising more than 8% since late January.

Panera's fourth-quarter earnings report in February set the stage for concerns about the restaurant chain's ability to keep growing fast enough to justify its current share price. Revenue growth of just 2% led to a double-digit percentage drop in net income, and even a 3% increase in comparable-restaurant sales didn't provide much excitement for shareholders. Even worse, Panera projected that earnings would be flat for full-year 2015 on growth in comps of about 2% to 3.5%. Without any substantial acceleration in earnings or revenue growth, investors punished the stock with a drop of about 10% on the day of the announcement.

Source: Panera Bread.

Panera has felt pressure from activist investors, who have looked for the company to take steps to try to move its share price in the right direction. A couple of weeks ago, Panera confirmed that it had been in discussions with Luxor Capital Group on ways to build shareholder value, and it announced a number of initiatives designed to get investors excited about Panera stock. The company said it would increase its stock buyback program authorization to $750 million, with $500 million in purchases expected within the next 12 months. In addition, Panera confirmed its commitment to cutting costs, with an expected 5% drop in general expenses in 2015 and with a management consulting firm coming on board to see if it can dig up further savings.

Perhaps the most interesting step Panera is taking, though, involves a large group of its stores. Panera said it has entered into letters of intent to sell 73 of its company-owned cafes as part of a larger goal to convert between 50 and 150 locations into franchised restaurants during 2015. The company believes this strategy will help boost earnings, and it also expects to use any proceeds from the sale-and-refranchising transactions to add to its share-repurchase programs.

Different restaurant chains have had varying success with the company-owned vs. franchise-owned question. Some chains thrive by maintaining full control of their brands, while others are more profitable with the high-margin opportunities available from efficient franchise operations. Shareholders celebrated the announcement, though, sending the stock to new highs and building enthusiasm about the chain's future direction.

In the Panera earnings report, it will be important for management to explain exactly how its actions will translate into better financial results. If the future finally looks brighter, then shareholders will likely overlook any short-term hit to revenue or earnings in favor of longer-term potential. Without that confidence, though, Panera could give back some of its recent gains.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Panera Bread. The Motley Fool owns shares of 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.

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