Panera Bread May Be Overdone

 | Oct 22, 2013 | 4:00 PM EDT
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After the close today, Panera Bread (PNRA) reports third quarter fiscal year 2013 results. The Street is expecting the company to earn $1.35 on $583.95 million in revenue. While I would be amazed if the company were to hit that figure, I am wondering if the stock is washed out enough to jump back in.

The shares of Panera Bread are virtually unchanged on a year-to-date basis. Panera's trouble began back in July when it reported a horrible second quarter. It seemed like the whole fast casual dining business hit the skids in the second quarter as consumers pulled back on eating out. Panera missed the top line number and guided below expectations. Other names like Brinker (EAT) and Darden (DRI) have had a choppy year as well.

The second quarter was ugly. Management said it expects inflation in the back half of the year to pick up and crimp profits. The company is projecting a 1.5% increase on food and paper goods. With an uncertain consumer, management is not sure how much of that increase it can pass on to its customers.

The company felt it no longer had the wind at its back when it comes to labor costs. Management said the labor market had picked up enough to make it more expensive to find good workers. And the restaurants need to hire more workers in order to drive throughput during the busiest times of the day. Because of these challenges, the year-over-year operating margin is expected to be equal to last year.

In addition to higher expenses, Panera is seeing a slowdown in store traffic. In the second quarter, store comps rose 3.8%, which was below expectations. But on the conference call afterwards, management told investors that for the first 27 days of the third quarter, the company was on track to post a third quarter comp of just 2.1%.

Previously, the company had guided investors to expect 4% to 5% comp store growth. That was a big blow to Panera investors, as it seems consumers are no longer excited about the brand. With new menu items and a national TV campaign running, it's no wonder investors are disappointed with the company's results.

While it likely will take a few quarters to get back on track, I believe the stock is attractive solely on a valuation basis. It seems frugal consumers are here to stay. Competition has caught up and it will be more difficult to report blowout numbers in the future. But it's also clear Panera is a well-managed company and will figure a way out of this mess.

If the stock sells off on the third quarter report, I would look for a way to get in with the expectation the shares would be higher by this time next year.

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