Panera Bread (PNRA) posted EBIT (earnings before interest and tax) of $60.9 million, which formed an EBIT margin of 8.3% in 1Q16 compared to 9.3% in 1Q15. Analysts were expecting the margin to be 8.8%.
Despite its sales leverage from positive same-store sales growth, Panera’s margin fell due to a rise in expenses caused by the implementation of Panera 2.0 store conversions.
Increases in expenses
In 1Q16, Panera’s labor as a percentage of total sales rose from 31.6% to 32%. Increased labor wages, increased manager bonuses, and increased startup costs for Panera’s initiatives offset the effect of sales leverage, increasing expenses.
Increased incentives caused general and administrative expenses to rise from 5.8% in 1Q15 to 6.6% in 1Q16. Other operating expenses rose from 14.1% to 14.8%.
The effects of these expense increases were offset to some extent by reductions in food and paper and occupancy costs. Food and paper costs fell from 30.3% to 29.5% of PNRA’s total sales, while occupancy costs fell from 7.5% to 7% of PNRA’s total sales.
Although the implementation of Panera 2.0 is expected to increase PNRA’s revenue and same-store sales growth, analysts expect its 2016 EBIT margin to fall to 9.2% from 9.8% in 2015. The fall will mainly be due to increased expected expenses relating to the conversion of restaurants into Panera 2.0 locations and increased labor wages.
Panera Bread forms 0.04% of the holding of the iShares Russell 1000 Growth ETF (IWF).