Panera Bread (PNRA:NYSE) delivered convincing fourth-
quarter results after the close, highlighted by a big
bottom-line earnings (EPS) beat and impressive
comparable-store growth (a.k.a. "comps," or same-store
sales -- SSS). The company also issued somewhat mixed
initial guidance for 2016, with a better-than-expected
forecast around comp growth tempered by a lower-than-
expected forecast around earnings.
Net-net, we view the results and guidance as encouraging,
and believe the company's ability to drive strong comp
growth comes as a direct result of its investments over
the past 18 months, most notably those associated with
the rollout of its "Panera 2.0" technological initiative.
While continued investments in the platform may hamper
margins in the near term, we believe management is
prudent to build upon its existing success by
prioritizing long-term brand transformation.
For the fourth quarter, Panera posted a monster bottom-
line beat, with EPS of $1.88 coming in 10 cents ahead of
consensus. More importantly, the retailer's most
important metric -- comparable sales -- grew 3.6% year
over year, well above consensus at 3% and prior guidance
toward the "midpoint of 2.0% to 3.5%." Management also
indicated that comps increased 6.4% year over year in the
first 41 days of 2016, although they qualified the
outsized growth by noting comps benefited from the
company's decision to raise prices earlier than
anticipated to better align with structural wage
increases. Regardless, it is clear to us the company is
increasingly differentiating itself from competitors and
likely taking share amid industrywide weakness.
Management also issued initial 2016 guidance, forecasting
EPS growth of between 2% and 5% (slightly below
consensus) and comparable-store growth of between 3.5%
and 4.5% (which, at the midpoint, tops consensus of
+3.5%). The lower-than-expected earnings growth is driven
by a 50- to 100-basis-point decline in operating margins,
which reflects startup and transition costs associated
with the company's ongoing initiatives (i.e., the
aforementioned rollout of Panera 2.0). This shouldn't be
entirely unexpected as the company has consistently
pointed to 2017 as the year in which it expects earnings
to inflect. Today's results validate contributions from
Panera's 2.0 initiative and give investors even more
reason to view the stock as a core portfolio holding.
On tomorrow's 8:30 a.m. ET conference call webcast (click here for the company's
investor relations page), we will be focusing on 1)
further color around initial 2016 guidance and
expectations around long-term earnings growth; 2) updates
on efforts to sustain positive traffic, including
catering, loyalty programs and its first national TV ad
campaign; 3) more detailed performance data comparing
pre- vs. post-2.0 store launches; 4) management
commentary around other value-enhancing initiatives,
including incremental cost savings, balance-sheet
strength, share buybacks and refranchising. We will
provide subscribers with our updated thoughts following
Jim Cramer, Portfolio Manager & Jack Mohr, Director of
Research - Action Alerts PLUS
DISCLOSURE: At the time of publication, Action Alerts
was long PNRA.
It's an opportunity to put some cash into one of our favorite names.
We will exit HOT, sell some DOW and buy more BIIB.
This week, higher crude and strong earnings had a negligible effect. No new names in the portfolio, though we downgraded 2 positions.
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