Panera Bread Company (PNRA - Analyst Report) posted dismal third-quarter 2014 results, wherein both earnings and revenues lagged the Zacks Consensus Estimate.

Shares of Panera slid more than 2.6% in after hours trading in response to the results and the company’s lowered guidance for 2014.

Earnings Discussion

Adjusted third-quarter 2014 earnings of $1.38 per share missed the Zacks Consensus Estimate of $1.42 by 2.8%. Earnings excluded 8 cents of gain from favorable tax adjustments. Adjusted earnings increased 2.2% year over year as improved comps were offset by higher costs.

Panera Bread Company - Earnings Surprise | FindTheBest

However, including the favorable tax adjustments, earnings of $1.46 per share, was at the higher end of the company’s guided range of $1.40–$1.46 per share.

Quarter in Detail

In the reported quarter, the restaurant chain's total revenue increased 8% year over year to $619.9 million. Quarterly revenues benefited from an 8% rise in company-owned bakery-café revenues, 12% increase in franchise royalties and fees and 10% improvement in fresh dough and other product sales to franchisees.

However, revenues missed the Zacks Consensus Estimate of $621.0 million by a meager 0.2%.
 
System-wide comparable net bakery-café sales in the quarter increased 1.4%, better than flat comps in the prior quarter.

Comps at company-owned units grew 2.1%, better than 0.1% growth in the second quarter of 2014. Comps at company-owned units reflect average check growth of 0.7% and a year-over-year transaction growth of 1.4%.

Panera Bread witnessed 0.7% comps growth at franchised-operated units during the quarter versus 0.2% decline in the previous quarter.

The company's operating margin declined 200 basis points (bps) to 9.3% due to investment in key initiatives to improve customer experience, operational capabilities and technology infrastructure, as well as investments in menu innovation and marketing and food cost inflation.

Fourth-Quarter 2014 Guidance Lowered

Panera lowered the earnings guidance for the fourth quarter of 2014 due to higher-than-expected ingredient costs, primarily butter and dairy and the costs of initiating the rollout of structural enhancements, including Panera 2.0, operational integrity, delivery hubs and technological capabilities. Panera now expects earnings per share to range within $1.77 to $1.87 down from $1.89 to $1.98.

The company expects company-owned comparable net bakery-cafe sales growth in the range of 3% to 3.5% on a year-over-year basis. Additionally, the company expects its fourth-quarter operating margin to contract 125 to 175 bps on a year-over-year basis.

Full-Year 2014 Guidance Lowered

Panera lowered its earnings per share guidance from $6.65–$6.80 to $6.60–$6.70.

The company also tightened its guidance for comps at company-owned units to a range of 1% to 1.5% from 0% to 1.5%.

The company lowered its margin guidance and expects it to decline 200 to 225 bps, comparing unfavorably with the prior range of 135 to 185 bps year-over-year decline. The decline reflects higher expenses associated with significant investments planned for the company's bakery-cafés and higher input costs.

Our Take

After inclement weather significantly affected Panera’s comps in the first half of 2014, we believe Panera is posting a turnaround in the beginning of the second half. However, we believe the company’s margin will remain under pressure due to incremental investments in digital initiatives and menu innovations associated with the Panera 2.0 program. Further, higher commodity costs will add fuel to fire.

Nevertheless, the company's initiatives like introduction of new menu items, increased media exposure and focus on an off-premise catering program are expected to aid results. However, a weak 2014 outlook and a continuous decline in transactions cannot be ignored.

Panera Bread presently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the restaurant industry include BJ's Restaurants, Inc. (BJRI - Analyst Report), Jack in the Box Inc. (JACK - Snapshot Report) and Jamba, Inc. (JMBA - Snapshot Report). All these stocks sport a Zacks Rank #1 (Strong Buy).