In recent times, I've lost a lot of enthusiasm for Panera Bread (PNRA). The stale menu, deteriorating ingredient quality, and presentation skills killed my loyalty as a customer. The lack of focus on operating efficiency turned me off as an investor.

Perhaps management has finally stepped foot inside a few locations and actually flipped through a couple pages of the financials (or maybe they just caught wind of some of my critical Panera articles). Either way, they’ve recognized that things haven’t been going all that smoothly. For the past few months, management has been quickly -- and so far, successfully -- whipping the restaurant back into shape.

Reporting third-quarter results this week, Panera generated 6% sales growth and 3.3% comps. Even with the help of continuous price increases, top-line growth has been decelerating over the past few quarters. That said, sales growth is still positive; something not many restaurant establishments can boast about these days.

More importantly, though, rampant innovation taking place inside the walls of corporate Panera may just be the key to reversing waning growth.

The theme of the third quarter could easily be dubbed “change." The list of modifications and improvements seemed endless, confirming management’s verbal commitment to heavily invest with a long-term mindset.

New salads, an improved breakfast program, a fresh line of brownies and cinnamon crunch bagels, reformulated French baguette dough, environmentally friendly packaging, and a more efficient panini grill are several of the concepts expected to transform Panera back into the promising restaurant investment it was several years ago. .

The efforts are clearly paying off already. Last year in September, just 56% of customers said they'd likely recommend Panera to a friend. This year, that percentage has already reached 69%.

From a financial standpoint, Panera has always maintained a clean balance sheet with no debt and plentiful cash. The root of its problems stemmed from inefficient operations.
From 2006 through 2008, margins collapsed quarter after quarter, eroding double-digit revenue growth into single-digit earnings growth. However, a renewed concentration on costs and cutting waste led to a 230-basis-point operating margin increase this quarter -- the sixth straight quarter of greater-than-100-basis-point margin expansion.

At 22 times this year’s expected earnings, the stock sells at a slightly more attractive multiple than competitors Starbucks (SBUX) and Buffalo Wild Wings (BWLD) and roughly the same as Chipotle (CMG). Aside from Buffalo Wild Wings, which is still growing sales at a double-digit pace, I think a P/E ratio above 20 is a tad high given the economic environment and the general outlook for restaurants.

As Panera continues implementing the right changes, I’m warming up to the idea of buying shares. However, until I see sales reaching pre-recession levels, a more attractive price will have to be presented.

Unfortunately, the Panera concept has yet to hit my side of the world and I haven’t personally been able to experience the new changes (I’ve been known to frequent the restaurant for in-store analysis). You can bet Panera will be one of the first food stops I make upon my arrival to the states, but it seems as if the establishment will be nearly unrecognizable. For shareholders, that’s a good thing.