Panera Bread’s primary competition is comprised of many other fast casual and/or cafe-style restaurant chains, including Chipotle, Starbucks Coffee, Five Guys Burgers and Fries and P. F. Chang’s China Bistro. One of the significant changes on Panera Bread’s vertical analysis occurs with the Treasury Stock – Common account, which went from accounting for -17% of their Total Liabilities and Shareholder’s Equity to accounting for -51% of them. This change constituted for a decrease of approximately 34% over the course of four years.
As a perpetually negative account that represents share reacquisitions, this decrease coincides with the fact that Panera reacquired a significant number of its shares from 2011-2014. In late 2010, the company released information about a three-year repurchase program that would lead them to ultimately reacquire up to $600 million worth of shares, and this is shown by the stock price, which has increased steadily overtime from $101. 21 on January 1, 2011 to $173. 10 on December 31, 2014. These reacquisitions were also partially responsible for the 8% decrease in Cash & Equivalents that occurred.
Another major change was the 15% increase in Property/Plant/Equipment, which helps further justify the decrease in cash, as Panera was effectively transferring their short-term assets into long-term assets to help fund their ever-expanding franchise. With steady expansion leading to increased profit, the 22% increase in Retained Earnings is not surprising, as it is the account to which all unexhausted income is recorded and carried over from year to year. 2014 was the first year when Panera had any Long Term Debt, which went from accounting for 0% of the Total Assets to 7% that year.
This increase is likely due to Panera’s franchise expansion, which led them to take out bank loans. One major income statement change that will be discussed in the following section is the large increase in Interest Expense, and this acquisition of Long Term Debt is the main reason for it. Panera’s income statement provides further, and potentially more worrying, insight into its financial position. At first glance, the income statement appears to have remained very stable in terms of % of assets. However, when ooking at the years individually, it is clear that many accounts experienced steady growth from 2011 to 2013, yet dropped back down significantly in 2014.
Operating income, which had the highest overall change with a 1. 67% increase, dropped from 12. 99% in 2013 to 10. 91% 2014. This is concerning, as operating income measures the amount of profit realized from Panera’s operations after taking out operating expenses such as COGS, wages and depreciation. As total revenue has in fact been steadily increasing over the years, it is clear that the drop in operating income is due to an increased amount of expenses acquired by Panera.
In order to accurately see the changes, it is important to take a look at the company’s horizontal analysis, which paints a less stable picture of its revenues and expenses. All of Panera’s expenses increased substantially from their 2011 figure, particularly in 2014. From 2013 to 2014, Cost of Revenue increased by 9%, Selling/General/Administration Expense increased by 13% and Depreciation/Amortization increased by 22%. In contrast, Revenue only increased by 8%. Panera introduced masses of new menu items in 2014, which naturally led to a significant amount of new expenses.
Unfortunately, they did not lead to the profit increase that was expected, but rather to longer customer wait times and lower food quality due to the newly overcrowded menu. This made many loyal customers shy away from the company, so the new expenses were not matched by the expected increase in revenue. The largest change on Panera’s horizontal analysis was Interest Expense (Income) – Net Operating, which increased by 122% since 2011 and by 94% just in 2014. This coincides with it relying more heavily on debt financing, which naturally led to more interest that needed to be paid off.
From 2011 to 2014, Panera experienced a decrease in its current ratio, which went from 1. 48 to 1. 15. This 0. 33 decrease means that there are now fewer current assets available to pay off the company’s short-term debts, and, the ratio is also lower than both the industry and sector averages of 1. 26 and 1. 84. This decrease in Panera’s liquidity could potentially be a positive or negative sign. On one hand, the decrease could mean that more of its cash and short-term marketable securities are being invested into other operations, rather than sitting dormant in current asset accounts.
However, it also means that Panera may be acquiring too many current liabilities, and will not have the means to pay them off when the time comes. Panera also experienced a decrease in its A/R collection period, which went from an average of 16. 64 days in 2011 to an average of 11. 99 days in 2014. While being significantly higher than the industry average of just 3. 01 days, it is still well below the sector average of 26. 22 days. These differences can be attributed to Panera having more credit sales than most companies in the specialty eateries sector, likely because it offers catering.
In addition, the restaurant industry as a whole has more A/R as it includes suppliers. The 4. 65-day decrease from 2011 could be attributed to Panera getting stricter with their creditors by increasing interest, or to the improvement in the economy since 2011. Overall, as the company’s credit sales have not decreased, this change is a positive one. Panera’s inventory turnover saw a large increase throughout the years, going from an average of 34. 49 times to 48. 24 times. This is a good sign, as it means that Panera is selling its inventory more quickly than it had in the past, which coincides with its increase in revenue.
When comparing the ratio to the industry average of 35. 96 times and the sector average of 11. 92 times, it is once again made clear that Panera is doing a good job in terms of sales. The ratio may seem exceptionally high compared to the sector average, but Panera and others in the specialty eateries industry sell perishable goods, so it is natural that they would have a very high inventory turnover. The company’s return on equity has steadily increased over the four years, going from 18. 67% in 2011 to 24. 62% in 2014, a change of around 5. 95%. This figure is significantly higher than both the industry average of 11. 2% and the sector average of 16. 69%, meaning that Panera is employing shareholder investment more effectively than other companies in their sector and industry, and more effectively than it had in the past.
This change can be attributed to the significant increase in Panera’s overall net income, which would naturally lead to a higher return on investment. Considering the substantial increase in Panera’s return on equity, the fact that its net profit margin has gone down by around 0. 37% is surprising. Despite steadily increasing from 7. 46% in 2011 to 8. 23% in 2013, the 2014 figure was only 7. 9%, which coincides with the decrease in net income from 2013 to 2014. This is a worrying occurrence, as much of the growth the company had experienced from 2011-2013 was effectively reversed in 2014. This is likely due to the previously mentioned unsuccessful introduction of new menu items, which led to a decrease in net income and thus a lower net profit margin.
Despite the drop, Panera is still well above the industry average of 3. 39%, but below the industry average of 10. 27%. Going from 268. 52 in 2011 to 153. 03 in 2014, Panera’s interest coverage ratio decreased by around 115. . This number is still exceptionally high, as the industry average is 114 and the sector average is just 9. 08, so the company should have no problem meeting interest payments despite the drop. However, the negative trend may be a cause for concern, as it could mean that Panera is relying more heavily on debt financing than it had in the past, which would naturally increase its interest expense. It could also mean that their EBIT is proportionally smaller than it was in the past, which is also a worrying occurrence.
Panera’s P/E ratio fluctuated quite a bit, dropping from 29. 8 in 2011 to 25. 61 in 2013, and then spiking back up to 27. 72 in 2014. The initial drop is likely due to the company’s steadily increasing net income over the years, which led to a higher EPS, and therefore a lower P/E ratio. Conversely, the 2014 drop was likely caused by the 91% decrease in net income that occurred, which brought down the EPS and led to a higher P/E ratio. This is one instance where an increase in the P/E ratio is concerning, as it could mean that Panera’s shares are overvalued and the company is not generating sufficient cash flow to justify its share price.
Its P/E ratio is substantially below the industry average of 47. 38, but both are higher than the sector average of 18. 7. This means that, while investor confidence in Panera may not be as high as other companies in their industry, the specialty eateries industry as a whole is doing better than others in the restaurant sector. Finally, Panera’s cash/flow ratio decreased since 2011, going from 16. 96 to 14. 83, dropping primarily due to the aforesaid increase in cash flow. The previously mentioned 2014 drop in net income also had an effect on the price/cash flow ratio, as it increased lightly from the 2013 figure of 14. 42.
Panera’s price/cash flow ratio is much lower than both the industry and sector averages of 32. 79 and 35. 43, respectively. This further reinforces the fact that the cash flow the company is generating may not equate sufficient investor confidence compared to other similar companies. CONCLUSION Panera Bread is a growing company that is expanding its franchise every year. However, Panera recently experienced the negative effects of an unsuccessful business decision, which greatly impacted many of its ratios as well as its income.
In one year, the introduction of new menu items managed to effectively reverse much of the company’s positive growth in the three years prior, as well as burdening the company with additional expenses and new liabilities. In addition, there was an 11% spike in Panera’s stock price in April of 2015 due to the company announcing that they were planning to buy back $500 million worth of shares. Since then, the share price has remained rather stable but has been dropping slowly. The faltering profitability, increase in debt and lowering share mean that, at least in the short-term, Panera is not a wise investment.
