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Breakfast takes a bite out of Panera comps in Q2

The quarter represented the first time in six quarters the company registered a year-over-year increase in transactions.

July 31, 2014

Panera Bread reported flat comps in Q2 2014, pointing to the shift in the Easter holiday as among the factors. Calculating same-store sales for the quarter without the holiday shift, Panera saw comps for company-owned bakeries gain 0.5 percent.

Positive transaction growth of 0.4 percent was offset by a decline in average check of 0.3 percent, according to remarks by CFO Roger C. Matthews during the company's earnings conference call Wednesday.

CEO Ronald M. Shaich highlighted the transaction gains in his comments.

"For the quarter, Panera posted transaction growth of 0.4 percent, 40 basis points. This is significant," he said. "It represents the first time in the past six quarters in which we've registered a year-over-year increase in transactions. Furthermore, when we adjusted the shift to the Eaaster holiday in Q2, we can estimate our transactions actually grew by 90 basis points on an apples-to-apples basis."

Panera's transaction growth also outperformed the industry average by 180 basis points in Q2, Shaich noted.

Shaich credited a renewed focus on throughput with the transactions increase, highlighting the addition of 35 hours each week to stores, equipment upgrades, and new kitchen display systems.

As a result of the changes, company stores saw a 30-second improvement in average production time over the same period last year.

Impact of breakfast daypart

Even as transactions grew, the average check fell by 0.3 percent. Shaich attributed the fall to increased breakfast traffic and pricing issues.

"Much of our transaction growth in Q2 came in the pre-11 a.m. daypart. In our second quarter, pre-11 a.m. transactions grew by 3.3 percent, adjusted for the Easter shift. Over the same period, our post 11 a.m. transactions essentially remain flat," said Shaich.

"Breakfast represents approximately 20 percent of our sales or roughly 30 percent of our transactions, so as traffic disproportionately grows in the a.m. hours, it actually has a dampening effect on our average check the entire day, as breakfast has a lower average check," he added.

Food costs may lead to price increases

Panera's margins took a hit this quarter due to food cost increases, particularly for key ingredients the company cannot lock in, like butter, avocados and bacon. Butter increased 16 percent, bacon was up 23 percent and avocados jumped 25 percent.

"The increases in these three components along resulted in an additional roughly $2 million of food cost," said Matthews. "As a result of these cost pressures, we now expect food inflation to be approximately 1.25 percent this year, and we expect this to continue to affect our bakery-café margin in the back half of the year."

Panera's modest price increase earlier in the year was not enough to offset the increased food costs. Shaich said the company plans to take a "surgical approach" to pricing going forward.

Catering

Catering also underperformed in Q2, with average catering check comps below first quarter projections. Shaich pointed to cutbacks in corporate spending, fallout from the Sunshine Act and increased competition.

Panera is focusing on catering, which represents 8 percent of its sales, and has hired a senior vice president to direct Large Order Delivery. In addition, Panera is moving to "hubs" to manage catering sales. The hubs separate retail and catering operations at the store level, freeing up managers to focus on one or the other.

"The added capacity alone drives sales as catering coordinators are no longer forced to turn away business when they can't complete an order," Shaich said. "The retail stores, meanwhile, benefit because they no longer have to deal with the last-minute catering orders that serve to blow up their line."

Shaich expects to have 15 percent of company catering sales coming out of the hub network by the end of 2014.

Panera 2.0

The rollout of Panera 2.0 continues, said Shaich, with 27 Panera 2.0 cafes currently operating and 100 more slated to begin operation by the end of 2014.

While Shaich would not offer any specific information on performance or sales trends for the 2.0 stores, he did say 2.0 bakery-cafes were scoring higher than traditional cafes in terms of overall experience and speed of service.

Shaich also anticipates promoting Panera's Rapid Pick-Up locations in late 2014 or early 2015. The Rapid Pick-Up locations – which Shaich describes as "a taste of our full 2.0 system" – allows customers to place orders and pay online or via mobile app, then pick up orders from shelves in the store without standing in line.

Long-term view

Shaich put Panera's Q2 report in perspective by urging investors to look to the long-term.

"We're making major investments in our business and they come with a real cost. And we fully understand that as a result, short term profit will be impacted," he said."While we understand that we operate in a dynamically changing marketplace and that if we don't take these kinds of options now, our company will not be in a position to generate expanded earnings growth in the future. Indeed, it's our belief and our greatest hope that the actions we're taking now will set up Panera for the kind of results we've historically produced."