Chipotle and Panera: The Competition Has Arrived, and They Have Lower Prices

By Ronald Thomas, CFA  SEP 30, 2013 1:20 PM

Relative newcomers Noodles & Co. and Potbelly look poised to take a big bite out of gross margins at two popular fast food brands.

 


If you've read my previous articles on these two companies, you're familiar with one of the main reasons I believe that Chipotle (NYSE:CMG) and Panera (NASDAQ:PNRA) are overvalued: The huge five-year EPS growth rates that have been assigned to them -- CMG: 33%, PNRA: 18% -- by their present stock prices of $419 and $164, respectively, are based on the lack of present competition.

I have said that one of the biggest reasons for that is that the capital markets were closed to new restaurant offerings after the 2008 market crash while consumers were trading down from casual dining to the fast casual concepts and these two companies.

With frothy stock prices in place in the consumer discretionary sector, we are now getting an expected growth in IPOs in the fast casual restaurant subsector.

Noodles & Co.'s (NASDAQ:NDLS) price has shot up fast since its IPO, and now we have Potbelly, which, with Howard Schultz of Starbucks (NASDAQ:SBUX) as an investor, should likely be seen as a very serious competitor.

Going by popular images of Potbelly, it also looks pretty much like the other few potential fast casual competitors I saw in Dallas a few months ago. So the competition is coming in earnest now, though the actual stores have not yet appeared.

Looking at Potbelly's menu, the large sandwiches go for $6.10, which is relatively in line with the Dallas concepts I have seen. Compare that to the prices at Chipotle and Panera and you can see that their pricing is $1.00 at a minimum too high. Take that extra gross margin out of their earnings estimates maybe three years hence.

It won't be pretty.


Customers line up at a Potbelly location in midtown Manhattan.
No positions in stocks mentioned.

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