Note: This article is solely intended to illustrate how data analysis can be used to aid investment research. Volmanac does not have an investment view of or position in PNRA.

Panera bread (PNRA) is currently a darling of Wall Street Analysts - trading at 35x earnings (a 10-year high) and an EV/EBITDA of ~14x (granted with very low leverage). Panera has roughly 2000 locations (~900 company owned, ~1100 franchised) and is in the midst of revamping a number of its stores to facilitate increased throughput and therefore raise Same Store Sales (SSS) - it creatively calls these new stores Panera 2.0. These stores are theoretically more efficient because they allow kiosk ordering, ordering from store Wi-Fi to a table, online pickup, and potentially delivery. Check out the video to learn more about Panera 2.0:

Panera is a very well managed company and a solid business - however some investors believe the street is incorrectly extrapolating gross reported SSS on a small sample size to the rest of the business. Additionally, there are a few natural headwinds against these healthy, fast casual businesses:

  • increased competition leading to declining ROIC
  • increased labor costs: minimum wage laws, Obamacare, Overtime rule (which applies to anyone earning less than $47,476/year
  • KNAPP-TRACK casual dining guest counts are at 2-3 year lows - almost down 6% on a two year basis

Management may be misrepresenting the impact “Panera 2.0” has on sales as well as the size of the online presence. Panera sometimes claims to be a tech company masquerading as a restaurant, which is laughable to programmers but a statement which the street has eaten up.

Panera initially piloted the 2.0 program with 3 stores and has since expanded it to over 400. Panera has disclosed the gross SSS for these 2.0 stores (see below from 3Q15)[1]:

panera-sss

Panera has not stated which stores it has converted (more on these later), but gross sales are very suspicious (and it has since stopped disclosing 2.0 SSS because there was “no longer a clean control”, which doesn’t make sense). We had heard these initial 2.0 stores were poor performers (allowing comps to perform better) and incentivized additional purchases with coupons. We first set out to see if we could discover which stores were Panera 2.0 stores, and where they were located.

On the public Panera website you can search for stores, https://delivery.panerabread.com/foundation-api/search/cafes. The JSON response which is returned contains a tremendous amount of information about the stores:

properties: {
Zip: "11201",
HasKiosk: "NO",
Hours: "{"Sun":{"close":"21:00","open":"07:00"},"Mon":{"close":"22:00","open":"05:30"},"Tue":{"close":"22:00","open":"05:30"},"Wed":{"close":"22:00","open":"05:30"},"Thu":{"close":"22:00","open":"05:30"},"Fri":{"close":"23:00","open":"05:30"},"Sat":{"close":"23:00","open":"07:00"}}",
TimeZone: "America/New_York",
OpenDate: "03/12/2012",
Phone: "718-643-0345",
EcommerceEnabled: "YES",
maxModifications: "5",
dineInPilotTip: "false",
rpuPilotTip: "false",
HasCommunityRoom: "NO",
HasDelivery: "NO",
City: "Brooklyn",
Email: "cafe4078@panerabread.com",
StreetName: "345 Adams Street",
Fax: "718-643-0709",
Name: "Brooklyn - Adams Street",
HasCatering: "YES",
HasDineIn: "NO",
HasDriveThru: "NO",
HasOrderFromMyTable: "NO",
State: "NY",
CafeId: "204078",
HasPickup: "YES",
Distance: 2142.192230067834,
activeDeliveryAreaException: "false",
activeDeliveryCateringException: "false",
HasCateringPickUp: "NO",
HasCateringDelivery: "NO",
HasGroupOrderDelivery: "NO",
HasGroupOrderPickup: "NO"
}

From the JSON you can tell which stores have kiosk ordering, pickup, table ordering, and delivery - see the list of 1800 stores. This is valuable because now we can track 2.0 conversions in realtime, and see which regions of the country Panera is converting stores and overlay these SSS with blackbox intelligence industry trends. We have been reaching out to these specific stores and speaking to former employees to better understand real 2.0 store differences. Additionally, store hours are disclosed and it was interesting to note that stores with table ordering were open an average of 109.49 hours/week, stores with kiosks were open 108.81 hours/week, and stores without were open an average of 105.12 hours/week. We asked the company if 2.0 store hours were being extended to raise SSS, we have yet to hear back.

Additionally, management has been somewhat misleading about “online” operations. From the Q1 2016 Earnings Call transcript:

Think about this, today Panera processes each day more than half the number of orders that GrubHub processes each day. And GrubHub’s level of activity is occurring in 40,000 restaurants while we do it in 2,000 cafes, of which only a handful have delivery today. As well, we know we are already greatly exceeding digital utilization rates at leading competitors like Starbucks, which recently reported its digital ordered and processed sales were 4%. Compare that to Panera where in Company cafes the rate of digital utilization, which is to say orders that are both digitally placed and paid, not simply ordered and paid via mobile device was 17% of sales at the end of Q1 2016 and then consider that Panera 2.0 cafes, and remember, Panera 2.0 is not yet fully rolled out, are generating digital utilization rates of 23%. Simply put, it is clear; Panera’s the digital leader exclusive of the big three pizza delivery operators among all food purveyors.[2]

Digitally placed orders count for a kiosk - which is very similar to a cash register, this is not at all comparable to GrubHub’s business. Additionally, with Panera 2.0 stores you can order online from your table via your phone, so digital utilization rates should be higher - we can’t imagine a scenario where they would be lower - these comments don’t make sense. The key question is can Panera 2.0 really increase transactions, which have been flat over the last three years. While these investments are great in theory, we have yet to see evidence that sales throughput will actually increase due to these changes, and yet the street already seems to be giving the company credit. Given the macro headwinds facing the fast casual business, we believe Panera has more risk to the downside.

Update: July 20th

Management told us they are not extending store hours after a Panera 2.0 store is converted.

However, in just 1.5 months after out initial analysis, we discovered 55 stores with different hours, open an average of 1.8hours longer / week.

Additionally, Black Box Intelligence released June numbers which paints a very gloomy picture for the restaurant industry going forward.

[1] https://www.sec.gov/Archives/edgar/data/724606/000072460615000024/a20150630ex991pressrelease.htm

[2] http://seekingalpha.com/article/3968045-panera-breads-pnra-ceo-ron-shaich-q1-2016-results-earnings-call-transcript?part=single