Why Did Panera Bread’s Earnings Margin Fall in 2Q16?

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.

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.

In 2Q16, Chipotle Mexican Grill (CMG) posted an EBIT margin of 4.4% compared to 19% in 2Q15. Shake Shack (SHAK) and Brinker International (EAT) are expected to post EBIT margins of 12.9% and 12.2%, respectively, compared to 12.8% and 12.1%, respectively, in the previous year.

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.