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Panera Bread's Earnings Were Up, but Sales Continue to Be an Issue


Are prices too high at Panera?

Panera Bread (NASDAQ:PNRA) reported second-quarter earnings per share of $1.74, up 16%. That was around $.04 below analysts' estimates. Sales were the only real issue in the company's earnings results.

Same-store sales were up 3.7% when 4.4% was the expectation. There was a 4.3% increase in price/mix combined with a .5% drop in traffic. Comparable store sales are running up 2.1% in the third quarter so far. Management said that breakfast sales were under some pressure, and that sales would be higher at lunch, if customers could get served faster. To that end, they would add staff at lunch. Also, increased complexity and a higher number of entrees per order have apparently slowed service.

So management said that it would add some lower priced options that will initially include half-sandwiches coming this year. Smaller and lower costing fare will be on tap next year. Management believes that third-quarter same-store sales growth will be in the 2-4% range. Full-year earnings guidance has been reduced 2%.

Breakfast is a very price-sensitive meal, I believe, and it is one of the first places that excessively high prices would show up. If there are too many different menu offerings now, which is evident during lunch at Panera, how can management add new lower priced menu offerings without a disproportionately negative effect on profitability? My prior observation that main menu items are about $.75 overpriced is being proven correct.

Basically, I see management as being in denial about its prices being too high and figuring that it is smart enough to work its way around it, rather than directly cut menu prices to where they should be. It is similar to the situation as Darden Restaurants (NYSE:DRI) has been in, and with Olive Garden, especially. Wrestling with that problem will create other problems that will slow down the long-term growth rate of sales and EPS.

For the remainder of 2013, the sales and earning guidance is probably too high, creating just the right environment for more disappointments to bring the stock down to the $145-155 area. I have not done any research to see what a complete rebasing of prices to competitive levels would do, but I am sure that it would not be pretty.
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