“A Not-so-Hidden Gem of a Restaurant Stock”

A Not-so-Hidden Gem of a Restaurant Stock

Posted: 24 Sep 2010 05:07 PM PDT

Not many businesses have been immune to the economic downturn that has affected the economy for the past couple of years. Even low-priced fast-food giants like McDonald's (NYSE: MCD), Burger King (NYSE: BKC), and Yum! Brands (NYSE: YUM) have had difficulty raising prices.

Instead, these fast-food restaurants have focused on a "barbell" pricing strategy -- balancing value meals and one dollar breakfast deals to draw customers against higher-priced premium items to get them to cough up more dough when they're in the door. However, one fast-food restaurant has not only been able to keep premium prices stable, but also added a $17.99 lobster-salad sandwich to its menu.

I'll have a lobster with that recession
That company is Panera Bread (Nasdaq: PNRA). Some might object to calling Panera a fast-food restaurant, and they're probably right: The food is better and the prices higher. Analysts put Panera in the fast-casual segment with other chains such as Fool favorite Chipotle Mexican Grill (NYSE: CMG), Cosi, and Potbelly's. Each chain goes a little more upscale in exchange for a higher price.

On the heels of the pricey lobster sandwich as well as its other premium sandwiches, muffins, and smoothies, Panera was actually able to increase the average check in the recently reported second quarter by 7.7%. And same-store sales grew a whopping 9.9%.

The second quarter also saw a 14% year-over-year sales growth, as well as an increase in restaurant-level operating margins of 2.9%, boosting them to 18.2%

Panera is also beginning to test and phase in a loyalty card program. While some companies like Starbucks (Nasdaq: SBUX) have used these loyalty cards to offer discounts to draw in customers, Panera will not be giving any discounts. Instead, its card will be used to give customers early access to new sandwiches, or tastings.

Management is confident
Although management downgraded its earnings guidance for the current quarter, Panera Chairman Ron Shaich could not have sounded more confident about the future during an interview on CNBC. Shaich said, "I would say our growth is expanding, we're up 50 percent in terms of [our] rate of growth vs. last year. These are very good times for Panera Bread." He added, "This is [our] third quarter of near double-digit comp store sales. People are voting with their feet, voting with their wallets."

Shaich plans to put his money where his mouth is in the coming year. As most fast-casual and fast-food chains continue to cut back, Panera plans on hiring 25,000 workers. That is some serious growth for a company with about 25,000 employees currently.

Management also spoke about the growth and success of its new line of frozen drinks. The company has been able to hitch onto the shoulder of McDonald's as the fast-food giant has made a heavy marketing push into the segment. This marketing push has boosted customer awareness of these frozen drinks for many different companies including Panera, and frozen drink chain Jamba (Nasdaq: JMBA).

Nice balance
Panera Bread's ability to maintain premium prices has helped bolster a strong financial footing for the company. Panera has more than $282 million of cash and no debt. The company also has a current ratio of two, meaning it is well-positioned, should the economy prove more challenging.

While the financials paint a pretty picture, at current prices the stock is valued pretty richly. Trading in the high $80 range, Panera is valued at more than 27 times earnings, and at around 14 times free cash flow. In order to justify such a valuation, the company must continue to outperform and executives must be able to execute their plan.

The Foolish bottom line
Panera Bread is a company that seems to be firing on all cylinders. It makes a product that people want and are willing to pay up for. Investors have taken notice and have awarded the stock a significant premium, which means the company must continue its pattern of successful earnings growth or the stock could get hit.

Do you think the company can continue to grow and maintain margins in the future? Let us know in the comment box below.

Interested in reading more about Panera Bread? Add it to My Watchlist, which will find all of our Foolish analysis on this stock.