In 2Q16, Panera Bread (PNRA) posted EBIT (earnings before interest and tax) of $66.6 million, which led to an EBIT margin of 9.7%, compared to 10.2% in 2Q15. Analysts were expecting the margin to be 9.7%.
Despite sales leverage from positive same-store sales growth and favorable commodity prices, the Panera’s EBIT margin declined due to labor inflation and an increase in G&A (general and administrative) expenses.
Increases in expenses
In 2Q16, Panera Bread’s labor as a percentage of total sales rose from 31.7% to 32.1%. The rise in labor wages, expenses associated with new initiatives, and managers’ incentives increased labor expenses. The increase in incentive-based compensation expenses; investment in growth initiatives such as technology, delivery, and catering; and the establishment of legal reserves increased G&A expenses as a percentage of total sales from 4.2% to 5.6%.
However, favorable commodity prices and sales leverage brought food and paper costs down from 30.6% in 2Q15 to 29.5%. Also, the cost of occupancy declined from 7.3% to 6.9% due to sales leverage.
With continued investment in growth initiatives such as technology, delivery, and catering, analysts are expecting Panera Bread to post an EBIT margin of 9.1% in 2016 compared to 9.8% in 2015. In 1Q17 and 2Q17, analysts are expecting the company to post EBIT margins of 9.2% and 9.9%, respectively.
Next, we’ll look at Panera Bread’s 2Q16 earnings.