Panera Gets Pounded

Shares of the bakery chain sank Wednesday after it cut sales growth targets and warned of margin pressures

Investors lost their appetite for Panera Bread (PNRA) after the chain of casual bakery-cafes cut its same-store sales growth target for the second quarter from 3.5%-4.5% to 1.5%-2.5%. The eatery also said its margins are under pressure because of a "mix shift" away from products made in its fresh dough facilities, along with higher gasoline and other input costs.

In turn, the St. Louis-based company lowered its second-quarter earnings per share guidance to $0.38-$0.40 from $0.47-$0.51. Analysts were expecting EPS of 49 cents (excluding special items), according to Reuters Estimates.

The news left investors with a sour taste. Panera Bread shares tumbled 13.8% to $50.28 in heavy volume of 10 million shares on the Nasdaq on June 6. The stock has traded as high as $69.03 and as low as $46.25 in the last year.

At least one Wall Street analyst turned negative on the stock. Morgan Keegan analyst Robert Derrington downgraded Panera to market perform from outperform based on the company's lower-than-expected sales trends management trimmed same-store sales and EPS guidance. He cut his EPS forecasts for the second quarter, as well as for 2007 and 2008.

"Based on our lowered EPS expectations and concern for further weakness, we are lowering our rating to Market Perform from Outperform," he said in a June 6 note.

Standard & Poor's analyst Mark Basham kept a sell opinion on Panera shares. He also trimmed his earnings estimates, as well as his discounted cash flow-based 12-month target price by $8, to $48. (S&P, like, is owned by McGraw-Hill [MHP].)

Panera owns and franchises approximately 1,100 bakery-cafes under the Panera Bread and Saint Louis Bread Co. names. It specializes in organic and all-natural food for breakfast and lunch, including fresh baked goods, sandwiches, soups, salads, coffees and other beverages. The bakery-cafes are mainly located in suburban strip malls and regional malls -- and target suburbanites and workers who want a higher-quality and more esthetically pleasing breakfast and lunch experience than is typical at fast food restaurants, says S&P in a report. Fresh dough is supplied to system restaurants through company-owned commissaries.

S&P's Basham says in a research report he anticipates that Panera's new store openings and revenues will slow over the next several years. He figures company-owned and franchised unit expansion will slow from a recent rate of about 20% to about 12% in the next five years. And he projects revenue growth will decelerate from a compound annual growth rate (CAGR) of about 30% since 2003 to the mid-teens during the coming five years.

He noted that casual dining chains have been overbuilding in recent years, leading to growing price discounting this year. Meanwhile, customer traffic for many restaurants has remained weak in the second quarter of 2007 as higher gasoline prices and the softening housing market has dampened consumer spending, says S&P.

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