NEW YORK (The Deal) -- Followers of Panera Bread (PNRA) believe the next several months will be imperative for the sandwich, salad and bakery retailer's turnaround after the company last week announced plans to sell and refranchise several cafes and boost its share buyback program in the wake of an encounter with activist shareholder Luxor Capital.
A key piece of the turnaround plan is dubbed Panera 2.0 and was unveiled by the chain about a year ago. It includes the use of various new technology capabilities for digital ordering, payment, operations, among other things.
"We'll basically know whether Panera 2.0 is going to work or not by late 2015," Wedbush analyst Nick Setyan said. "If it's not going to work, then that possibility [of a sale] becomes a very big one."
Another analyst, Stephen Anderson of Miller Tabak, said that Panera's discussions with New York-based hedge fund Luxor Capital, revealed in an April 15 announcement, could help drive a deal but also feels other factors may discourage one.
"At this point I don't really see it [a sale] as likely given the company just added another $500 million in debt," he said.
Luxor, headed by Christian Leone, has had a strong impact in the restaurant space, successfully electing directors to the board of BJ's Restaurants (BJRI) - Get Report in April 2014, and ultimately helping unlock shareholder value from the Huntington Beach, Calif.-based casual dining chain.
"Luxor is no stranger to turnarounds," Anderson said, adding that the hedge fund's involvement is "raising the odds that [via] the Panera 2.0 initiative, we'll see cost savings utilized."
While Anderson contends that it's still too early to see a sale of Panera, he said that what is possible is for pressure to be exerted on the company to implement changes at the board level.
"Management is still on the hot seat to maximize shareholder return," he said.
St. Louis-based Panera boasts of having about 1,880 franchises and company-owned bakery-cafes across 45 states, Washington and Ontario. The company owns and operates 22 fresh-dough facilities, while its franchisees own and operate four fresh-dough facilities.
Panera announced on April 15 that it has entered into letters of intent to sell and refranchise 73 restaurants, in line with its previously announced plan to refranchise 50 to 150 cafes in 2015. Panera said it anticipates the sales to be accretive to ongoing earnings, while it also expects to incur a related one-time charge.
Panera also revealed in last week's announcement that it plans to boost its share buyback program to $750 million. The company said it would purchase $500 million of shares over the next 12 months via a combination of cash on hand, cash flow from operations and $500 million in new debt.
The company acquired $154 million in Panera common stock last year and, combined with what it has acquired this year, has repurchased about $511 million worth altogether.
"The company has been actively repurchasing shares," a source familiar with the company said. "I think that speaks volumes about what management thinks about the company and its relatively depressed stock."
While officials with Panera declined to comment and followers of the company acknowledge that it may be too early to determine the likelihood of a sale, Wedbush's Setyan speculates that a buyout price would likely start at about $250 a share and could surpass $300 a share with activist involvement.
On the low end, a $250 a share takeout price would value Panera at about $6.75 billion based upon its 27 million outstanding diluted shares as of Dec. 30.
"I wouldn't be surprised if there was a management buyout," Setyan said, while also noting the possibility of a leveraged buyout. "The franchisees will follow [CEO and founder Ronald Shaich] off a cliff if necessary. If he feels the public market isn't valuing the company the way it should, he could take it private himself. I'm sure there'd be plenty of backers."
Taking Panera private, combining it with additional brands, and then taking it back to the public markets a few years down the road could also make sense, another source who requested anonymity noted.
Rather than a management buyout or a leveraged one, Anderson suggested the company could down the road look to bring its franchise overseas to achieve growth.
Kevin Hein, a partner at Faegre Baker Daniels who focuses on franchising, said that quite a bit of private equity money is chasing both franchisees and restaurant operators.
"Panera has done a good job upgrading its menu. It's still a very solid company," Hein said. "It's got good market penetration but a need for growth. They've got some challenges."
At the same time, Hein anticipates a recession sometime in the third or fourth quarter, which would consequently depress earnings at casual dining restaurants.
Other challenges that could be on the horizon for Panera and other fast-casual concepts is their ability to find new, quality retail locations, the push for a $15-an-hour minimum wage across the restaurant industry, commodity costs and pressures from the National Labor Relations Board, among other things.
While Leone, Luxor Capital's CEO and founder, couldn't be reached on Wednesday, the hedge fund appears to be happy with the initiatives unveiled last week.
"We support the actions that Panera's Board of Directors and management announced today," said Leone in the announcement. "We have long admired the Panera brand and appreciate the constructive dialogue we have had with the Company. We are confident in the Panera team's ability to grow the business and continue to build shareholder value."
Luxor isn't the first activist to take notice of Panera.
In 2007, Chris Kiper and Brad Vizi, who were running activist campaigns for Roy Disney's Shamrock Activist Value fund at the time, took aim at Panera.
When they saw that the bakery-café casual dining chain's margins were compressed during a time when wheat prices were spiking, they compared it to its peers, only to discover that competitors weren't being hit as badly.
With further research, they discovered that Panera was underestimating customer loyalty and pricing their products incorrectly. They took their case to management and a number of their requests were implemented, including making sure that the CEO and CFO re-engaged with the store site selection process.
Entering 2008, Panera was trading around $50 per share. On Wednesday, shares of Panera, trading on the Nasdaq, closed at $181.59, down 2.3%. But for the past 12 months, the share price is up about 8%.
Officials with Panera declined to comment on Wednesday.
Read more from: