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Tuesday, October 29, 2013 - 14:30

I Love This Company's Food, But I Hate Its Stock

Tuesday, October 29, 2013 - 2:30pm

I love taking road trips. My friends think I'm crazy to prefer driving over flying, but I truly do. I like exploring little-known attractions and towns off the beaten path.

One of my favorite things about taking road trips is the wide variety of fast-food choices across the nation. I'm weary of the traditional burger, chicken and pizza places that seem to be everywhere, and the need to reduce my caloric intake also has forced me to look for healthier options in my travels.

One of my favorite healthier food chains is Panera Bread Co. (Nasdaq: PNRA). I enjoy Panera's wide selection of salads, breads, sandwiches and soups (and desserts, when I lose track of my diet). However, I dislike many things about the restaurant chain, and despite the great food, I think the price driver bias is definitely on the short side with the stock.


My negative experiences with the chain begin with the difficult-to-read menu. Every time I visit a Panera, I feel lucky to know what I want ahead of time rather than be forced to interpret the confusing menu boards. I have even seen a few would-be patrons leave after growing frustrated with the menu.

Next, it seems like the restaurant messes up my order about a third of the time. I might request an apple with my soup and get a slice of bread instead. I can't remember the last time another major food chain erred with my order. Computerized order management should have eliminated these issues a long time ago. It has for every other chain that I have visited.

My final personal gripe has to do with the way the restaurant is designed. Ordering then having to travel around a corner to pick up your meal is inconvenient, and in general, the drink bar is also oddly placed.

The quality and taste of Panera's food makes it easy to overlook these troubling flaws in the customer experience. In addition, the nearly 9% increase in third-quarter adjusted earnings, 8% year-over-year revenue growth, and increased same-store comparable sales paint a rosy picture for the chain.

Flickr/kennejima
The quality and taste of Panera's food makes it easy to overlook the troubling flaws in the customer experience. But the company's mission to solve these issues could result in an increased cost structure, which would hurt profits.

However, the positives are crushed by diminished fourth-quarter and full-year guidance. Panera is aware of its daily operational shortfalls and has embarked on a mission to solve the issues, but these changes are likely to result in an increased cost structure, which would eat into profits. Panera forecasts earnings of between $1.91 and $1.97, down from the high-end projection of $2.11 for the fourth quarter; same-store growth is predicted to be flat to slightly higher. In addition, full-year guidance for same-store comparables has been lowered from a range of 3% to 5% to a range of 2% to 2.75%.

Panera has undertaken the first steps to much needed improvement. While this effort will likely pay off over the long term, it may be a year or longer before the chain regains its footing. Lasting change is a slow process; therefore my call -- for now -- is to short PNRA.

Technically speaking, PNRA has been on a long downtrend after posting a double top formation in the $192 range this summer. The price has gapped down to the $150 area after drifting lower.

Risks to Consider: Shorting any stock has its own dangers. Panera may surprise everyone with greatly improved results for the fourth quarter and full year. Stop-loss orders are critical when shorting shares due to the theoretical unlimited upside. Always diversify and position size properly when investing.

Action to Take --> I like Panera as a short right now. My nine-month initial downside target is $130, with the next support level being $100.

P.S. I just finished reading a special report by my colleague, Amber Hestla, about how investors can consistently and reliably pull income from the options market. And you don't have to be a sophisticated trader to do it. Click here to learn more.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.