Why shares have been choppy?
In order to understand Panera Bread’s (PNRA) stock performance, we should first look at the company’s earnings. Earnings are what investors care about, and often earnings have a huge impact on share price.
Panera Bread stock fell by ~10% following its 4Q14 earnings announcement in February 2015. The company cautioned investors that EPS (earnings per share) might come in lower as a result of investments in Panera 2.0.
During its 1Q15 release, management reiterated its lower EPS guidance for fiscal 2015. Adjusted EPS was $6.53 in fiscal 2014. Management said that analysts should “continue to hold our current EPS trajectory as choppy.” This may mean that EPS growth, which is depressed because of investments in Panera 2.0, will continue to be volatile. EPS in 1Q15 grew at a -9% rate. Analysts have revised EPS estimates downward to $6.21.
To mitigate such risks, you might consider investing in the broader Consumer Discretionary Select Sector SPDR Fund (XLY), which invests 4% of its portfolio in McDonald’s (MCD), 1.5% in Yum! Brands (YUM), and ~1% in Chipotle Mexican Grill (CMG).
Share repurchase program
Just before the 1Q15 earnings announcement, on April 16, 2015, Panera stock rose by 11%. Several media companies suggested that this increase was a result of Panera’s newly announced share repurchase program worth $750 million. However, the authorized repurchases represented only a small increase from the $600 million authorized in 2014.
Along with the share repurchase program, Panera announced the refranchising of 73 company-owned units. Refranchising means selling company-owned units to franchisees. Net proceeds from this sale, along with $500 million in new debts, will be used to repurchase shares.
A repurchase program can mean that a company is just trying to appear more appealing to investors, or it can mean that the company believes in Panera 2.0 and that there are no better investment opportunities to be had.
But how long can investors wait for the company to turn the corner? For how long should investors rely on share buyback programs as opposed to company fundamentals? We’ll discuss this in the next part of this series.