Panera Bread's Q2 Results Are Half Baked In BMO's View

At a time when the market is cheering the quarterly performance of Panera Bread Co (NASDAQ: PNRA), BMO says the results are decidedly half baked.

The fast-casual restaurant chain reported second-quarter adjusted EPS/revenue of $1.78/$698.9 million versus consensus estimate of $1.74/$696 million. Comps grew 180 basis points from last year to 4.2 percent.

Further, Panera said third-quarter (first 27 days) company-owned comparable net bakery-cafe sales were up 3.1 percent, up 7.8 percent on a two-year basis. Panera guided to below-consensus third-quarter EPS of $1.32–$1.35 and fourth quarter EPS of $1.94–$2.01, largely in line with the Street.

The company raised the low end of its FY2016 EPS guidance to $6.60–$6.70 from $6.50–$6.70 versus the Street view of $6.68. Panera reiterated its targeted range for fiscal 2016 company-owned comparable net bakery-cafe sales growth of 4–5 percent.

The brokerage remains Market Perform rated on Panera, saying that the stock appears to incorporate the benefits of its strategic initiatives and the outlook is not without risks.

Justification

BMO pointed out that Panera's "underlying traffic decline for the first time since early 2014," and the combination of traffic and mix slowed to its lowest level in four quarters on a two-year basis.

"We believe there is some risk to the traffic trajectory moving forward as PNRA is beginning to lap last year's step-up in advertising, and it should not be overlooked that weaker traffic occurred in the first quarter PNRA lapped last year's step-up in pricing with another quarter of 2+ percent price increases," analyst Andrew Strelzik wrote in a note.

Related Link: Bernstein Says Panera Bread Is Defying Industry Trends

The analyst noted that the 2017 consensus EPS estimates could prove "overly optimistic," as labor headwinds appear particularly understated in consensus estimates. The Street expects EPS of $7.81 for 2017, with estimates ranging from $7.25–$8.75.

In addition, Strelzik warned that Panera's current valuation may not be sustainable over time depending on long-term growth assumptions.

"We eagerly await additional color on the company's long-term growth targets and algorithm as we believe investors are struggling to justify meaningful additional upside to the stock absent greater clarity on PNRA's growth potential," Strelzik continued.

That said, reflecting stronger comps, the analyst modestly increased his 2016 and 2017 EPS estimates by $0.03 and $0.08 to $6.66 and $7.61, respectively. Strelzik also raised his price target on the stock by $5 to $210.

At time of writing, shares of Panera Bread were up a healthy 3.19 percent on the day, seen trading at $221.38.

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