Restaurants: Sweet & Sour Profit News

Shares of Panera Bread climbed on a better than expected earnings forecast, while Asian-dining chain P.F. Chang's fell on a lowered outlook

Profit forecasts from two casual dining chains were on the menu Oct. 3. Investors got some sweet news from Panera Bread (PNRA), but a more sour outlook from P.F. Chang's China Bistro (PFCB).

Panera Bread said it expects its third quarter earnings per share to be 35 to 37 cents -- the higher end of its previous 32 to 38 cents forecast -- on a reported 35% rise in revenue. The operator of fast casual cafes that offers sandwiches, bagels, soups, salads, and other fare says system-wide sales rose 0.8% in September at its bakery-cafes open at least 18 months.

Friedman analyst Ashley Woodruff said in a note that Panera's same-store sales rise of 0.8%, vs. 5.9% last year, was modestly better than expected given the challenging comparison. She raised her earnings forecasts, and kept a market perform opinion on the stock as she believes the market's expectations for the remainder of 2007 are reasonable, but 2008 expectations may still be too high given commodity and labor cost pressures, she said.

Morningstar equity analyst John Owens is more optimistic, and thinks Panera's same-store sales rise is a "pretty resilient result" given the challenging consumer environment. Consumers have been pulling back on restaurant spending given high gasoline prices and the slowdown in the housing market. Plus, the company's expenses have risen because of higher food costs and wages.

Owens noted that Panera said it is making progress on the margin improvement initiatives it announced on its July conference call, after the company reported disappointing second quarter results. The initiatives include fine tuning their scheduling, streamlining their menu, and offering products that will boost both margins and sales. It also said it will raise prices.

Owens has a buy recommendation on Panera shares and thinks they're worth $75. "It's our view that current headwinds won't last forever and its long term prospects are very good," he said.

Panera's stock perked up 8% to $46.57 on heavy volume on Oct. 3. The stock has traded as high as $68.90, and as low as $39.50, in the last year.

Meanwhile, P.F. Chang's shares lost 2.8% to $29.41, and came within a penny of its 52-week low of $28.88. The stock has traded as high as $47.10 in the last 12 months.

P.F. Chang's, which operates the P.F. Chang's China Bistro chain of casual restaurants and quick-service Pei Wei Asian Diner chain, warned on Oct. 3 that third quarter EPS would be 5 to 7 cents below its previously released forecast of 25 cents. Revenue for the quarter was $270.8 million, below the company's expectation of $273.0 million. Its same-store sales for the third quarter fell 1.6% at Bistro and 1.0% at Pei Wei.

Along with lower revenue than expected, the company also cited unanticipated costs related to labor, repairs, a fire at a restaurant in Nashville, as well as an acceleration of its Bistro grill rollout. Back in July, the company had cut its full-year profit forecast due to weak customer traffic at its restaurants.

Owens at Morningstar noted that consumers have been "trading down" from casual dining to fast food restaurants, and also aren't ordering as many appetizers and higher-priced entrees when they eat out. But he thinks the tide will eventually turn, so he kept his buy opinion on P.F. Chang's stock and thinks it's worth $53.

"This downturn is not going to last forever, and companies like P.F. Chang's and Panera will be in a good position once things turn around," Owens says. "We think the stocks will take off then."

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