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2001 BW 50

SPRING 2002

STREET WISE

Panera Bread: An Appetizing Stock
The restaurant chain's tasty and comfortable alternative to fast food has plenty of room to grow


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Gourmet sandwiches on fresh-baked bread, crisp salads, nourishing soups. Lunch shops selling such fare are on every street in busy cities like New York. Dining in the suburbs, however, can still be a different story. People who live and work in such areas are often left wanting -- faced with lunch options that mainly consist of fast-food restaurants and greasy spoons.


Moving into that suburban void is Panera Bread (PNRA ), this year's best performer on the Standard & Poor's Small Cap 600 index, with its menu of tasty food in comfortable sit-down stores. "There's nowhere like this I can go," said Sandy Ward, a homemaker who was recently found eating lunch at a Panera shop in Wayne, N.J.


And now Wall Street is salivating over Panera as shifting trends work in the company's favor: Aging baby boomers and young mothers continue to cook at home less, and more people are shunning the high-fat fare of fast-food chains. "They want real food," says Ron Shaich, CEO of Panera.


WORTH THE PRICE?  Shares of the Richmond Heights (Mo.) company have soared in recent years as investors hunger for the next big thing in the restaurant business. At $59 per share, Panera is trading at a steep 45 times estimated 2002 earnings per share of $1.32. The stock is up 13% year-to-date, while the Standard & Poor's restaurant index is up 10%. That makes Panera by no means cheap.


It might be worth the price, though, considering all the opportunity still waiting in suburbs around the country. "It has a rich valuation, and you can't get around that," says Selman Akyol, an analyst at Stifel Nicolaus & Co. But "the concept has a lot of momentum," and Panera should be able to keep opening restaurants "at an aggressive pace."


In 2001, Panera's net income rose 92%, to $13.1 million, while revenues increased 33%, to $201.1 million. Picking the right suburban locations has been critical to its success. As of the end of 2001, 369 Panera stores -- mostly franchises -- were in 30 states. The company aims to add 110 more outlets during 2002 and move into an additional half-dozen states in doing so. "There's a wide breadth of demographics we're playing in very successfully," Shaich says.


FUFILLING FORMAT.  Panera's niche is fast casual, which refers to restaurants that offer quick service along with higher-quality food. Eateries like Einstein's Bagels, roast chicken specialist Boston Market, and Schlotzky's Deli fall into the segment. Most fast-casual restaurants have been around for several years and have had mixed success. With its combination of freshly made food, good service, and the right store locations, Panera in the past few years has apparently found a format customers like.


It has been compared to some of the hottest names in food and beverage services, like Starbucks (SBX ) and Krispy Kreme (KK ). While neither comparison is exactly right, one thing about Panera is indeed very Starbucks-like, and it's one of the biggest reasons why it's succeeding in this growing niche: In addition to the $6 gourmet sandwich, Panera offers an inviting interior to customers who for now don't have many appealing options. "The environment is part of what we sell. You can't segregate [the food and the atmosphere]. I've never heard anyone say that they come for the food only," Shaich says.


Providing a respite is part of Panera's appeal, and it has built stores that can accommodate lots of sit-down customers. With their trendy-looking fixtures, leather couches, and warm, earth-toned wallpaper, Panera shops often serve as hangouts or meeting places. "It feels like some of Starbucks' cafes, but it's more of a restaurant style, with tables and chairs," says Steve Jones, partner at King-Casey, a retail design and branding consulting firm in Norwalk, Conn., that has done work for Panera through its beverage partner PepsiCo.


AMBIENCE IS KEY.  While Panera's concept seems to be working, it isn't cheap. Each store costs an average of $800,000 to build, or about $178 per square foot. That's a good deal more than the $125 per square foot a sandwich shop like Subway would typically spend, figures Jones. "The look is critical. If you don't have an improved, relaxing environment, you won't be able to charge a premium for the service," he says.


Panera, which formerly ran Au Bon Pain (it divested the chain in 1999 to focus on Panera stores), learned the importance of ambience the hard way. Au Bon Pain stumbled in part because it chose a sterile look for the stores, according to analysts. The food at Au Bon Pain never lost its appeal, they add, but the fast-food-chain style of seating and lighting turned off diners.


One risk Panera faces is that its explosive growth may not be replicable for years on end. With annual revenues under $250 million, it's still puny compared with the omnipresent Starbucks, which had revenues of more than $2.5 billion last year. As Panera continues to expand, it'll get harder to turn in year upon year of high double- and triple-digit growth.


COSI COMPETITION.  Perhaps the biggest threat to Panera's recipe is copycats. One is Cosi, a competing sandwich shop that plans a public offering sometime in 2002. The 66-store New York-based chain is popular in city locations. Now, it's putting more focus on growing in residential areas.


"Over the last two years we've been branching out to suburban markets and less in downtown areas," says Rammy Harwood, director of marketing. Cosi will open around 30 to 35 locations this year and twice that in 2003, he says. One feature that differentiates Cosi stores is that most have full alcohol licenses, as will the new outlets.


Shaich isn't too worried about the competition. "The risk for us is not of others catching us. The risk is of us getting fat, happy, and stupid." One thing is for sure: Consumers' appetite for fast-casual makes market leader Panera a company to watch closely. And in the near term, its stock should reflect a winner on the rise.


MARCH 25, 2002



By Amy Tsao

Edited by Beth Belton

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