Panera Bread Company’s customers like its fresh soups and sandwiches; its investors may find its high earnings quality equally tasty.
Given the choice, there are plenty of time-pressed commuters and frazzled parents who would prefer a healthier, fresher or more flavorful alternative to the burgers and chicken nuggets offered by the likes of Yum Brands (YUM.N) and McDonalds (MCD.N), both of which have seen their net income dip in recent quarters. That’s especially true if both the price and convenience levels are closer to those classic fast food joints than they are to fancy “sit-down’ restaurants with cloth tablecloths. For many of these individuals, chains like Panera Bread Company (PNRA.O) offer the perfect compromise, with fans swearing by the bakery-cafe chain’s fresh-made sandwiches and soups. Since the average Panera customer has a household income of at least $75,000 year, they are more willing and able to absorb the impact of higher food costs if the company chooses to pass those along in the form of higher prices for their Cuban chicken paninis and bistro French onion soup orders. It’s not surprising that Panera’s earnings have grown steadily, at a rate of more than 20% in 11 of the last 12 quarters. Better still, the company’s score of 83 out of a possible 100 on the StarMine Earnings Quality Model suggests that those profits remain as fresh as Panera’s ingredients, and of high quality, meaning they are more likely to be sustained in the coming quarters.
Panera’s gross margin, operating margin and net margin — the three most commonly used measures of a company’s margins — all stand at five-year highs on a trailing four-quarter basis, reflecting the company’s ability to pass on food inflation expenses to its customers rather than swallowing them itself. The company’s gross margin for the trailing four quarters (represented by the red line in the chart below) remained robust at 61.8% in the quarter ending December 2012, while its operating and net margins jumped to 13.3% and 8.1% respectively, both above the industry median. The operating margin results are particularly significant as an indicator of operating efficiency. Panera’s return on its net operating assets (RNOA) tells a similar tale: it also stands at a five-year high of 56.8%, having risen steadily over the last five years to a point where it now dwarfs the industry median of 15.6%. One of the inputs used to compute RNOA is asset turnover, which at Panera now stands at 4.3 on a trailing four-quarter basis, a shade below the company’s highest level in the last five years of 4.6. Looking at asset turnover as a gauge of future returns is a more reliable way to determine sustainable earnings than studying profit margins alone.
Source: Datastream Professional / StarMine
Source: Datastream Professional / StarMine
Panera’s operating cash flows have been among the strongest the company has recorded: In each of the last five consecutive quarters, for instance, the company reported cash flows from operations of more than $70 million. That is reflected in the growth in the company’s net income, which climbed significantly over the 12 months ended December 30 to hit a high quarterly level of $51.6 million. Whenever earnings are backed by strong cash flows, they tend to be more sustainable going forward. In fact, the company’s best score on the StarMine EQ model is on its cash flow component, where it registers a score of 93 out of a possible 100.
Source: Datastream Professional / StarMine
Panera is rolling out a new series of pasta dishes to tempt customers to drop by more often and attract new ones, with offerings including tortellini Alfredo. There’s no data yet to suggest how successful this initiative will be, but the company has been upbeat about the outlook for its catering business, which tends to have higher margins than its stores and cafes. The company is “still in the early innings of catering”, Ron Shaich, the company’s founder, chairman and co-CEO, told an earnings conference call in early February. If these newer or less developed sources of revenues prove to generate earnings of as high quality as the models suggest is already the case at Panera, this could consolidate the company’s position as a business offering very sustainable profits.
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