Weakening breakfast comps a concern at Panera
July 25, 2013
by Eric Schroeder
ST. LOUIS — Net income at Panera Bread Co. increased 16% in the second quarter of fiscal 2013, while sales rose 11%, but executives with the quick-casual restaurant chain expressed modest disappointment with the results, which failed to meet expectations, especially in the morning day-part. Net income in the period ended June 25 was $51,042,000, equal to $1.75 per share on the common stock, up from $44,137,000, or $1.51 per share, in the same period a year ago.
Total revenue in the quarter increased to $589,011,000 from $530,591,000.
Company-owned comparable net bakery-cafe sales increased 3.8% in the second quarter when compared with the previous year’s second quarter. Despite the year-over-year increase, comparable net bakery-cafe sales were below Panera’s expectations during the quarter, and were a topic of discussion in the company’s July 24 earnings conference call with financial analysts.
“While our comp performance continues to be stronger than most companies in our industry, our differential is moderating,” said Ron Shaich, chairman and co-chief executive officer. “Think of it this way: We’d suggest that in past years our comps have been performing relative to the industry at a score of 8 on a 10-point scale and are now performing at the level of a 6 or 7 on the same 10-point scale.”
Elaborating further, he described comps and transaction trends at Panera as “a tale of several different stories.”
“Indeed, late day comps have been up strongly at Panera for the last two quarters,” he said. “In fact, if all we looked at was Panera’s post 2 p.m. business, we would be exceptionally pleased with the very strong comp growth at Panera. From 2 p.m. to close, we saw comps higher than 5% for the last two quarters. And this growth has been the direct result of our success with pasta and other entrees.
“However, breakfast comps are a different story. Breakfast comps have weakened dramatically for us over the last two quarters. In 2011 and 2012, breakfast comps were up strongly at Panera, while in 2013 breakfast comps have essentially been flat and transactions have been down to the low single digits. We think this can be directly tied to the fact that we shifted advertising to lunch and evening products and our internal focus gravitated to afternoon and late day.
“We believe this occurred at the expense of the a.m. business, all while several competitors focused their advertising dollars intensely on the a.m. business. In addition, competitors have stepped up their game at breakfast. As a result, breakfast has become a drag on our 2013 comp trend.”
Yet another story exists in Panera’s lunch comps sales, Mr. Shaich said. He said lunch comps have grown modestly for a number of years, and so far in 2013 have been in the low single digits.
“We think our modest growth at lunch is the result of several things,” he said. “First, we all understand that Panera has not been helped by the number of casual diners now promoting some form of our You Pick Two lunch combination for $6.99.
“However, we believe the impact of their promotion is relatively modest and the real governor on our transaction growth has been throughput limits in many of our stores on many days. In fact, we have come to believe that both our production capacity limitations and our own labor expectations serve to dampen our ability to grow lunch transactions. Put another way, we think quarter two indicated to us that our potential to generate sales is greater than our ability to deliver the throughput and customer experience needed to deliver against those consumers’ expectations of Panera.”
Beyond comparable sales, franchise-operated sales increased 3.5%, and system-wide comparable net bakery cafe sales rose 3.7%. Panera Bread Co. opened 18 new bakery-cafes in the quarter while franchisees opened 19. The company as a result had 1,708 bakery-cafes open system-wide on June 25.
New products also were a topic of discussion during the conference call. Pasta, which launched nationally in the last two weeks of the first quarter, has exhibited trial and repeat statistics beyond Panera’s expectations, Mr. Shaich said.
“Ultimately, our customers are willing to pay for a product that delivers the elevated customer experience they have come to expect at Panera,” he said.
The company also has experienced solid demand for shrimp, which was added to the menu in the second quarter. But Mr. Shaich said shrimp’s appeal to a narrower niche of customers is part of the reason for the sluggish year-over-year comps. By comparison, the second quarter of fiscal 2012 was a period of some of Panera’s most successful new product launches, including strawberry poppyseed, the roasted turkey avocado B.L.T. and the chopped chicken cobb salad with avocado.
Several new items will roll-out in the second half of fiscal 2013, including a new signature salad: the roasted turkey harvest wheatberry salad; a new pasta, rigatoni San Marzano (rigatoni pasta with a spicy sausage, peas and San Marzano tomatoes); a vegetable autumn squash soup; and three flavors of cupcakes.