TheStreet.com's Jim Cramer says that as consumers try to stretch their dining dollar, Darden, Yum! and McDonald's will benefit.
We all know we are overstored in this country and over-restauranted. There are tons of players -- so many that the competition got too hard. Now they collapse. That Uno might miss a payment, that Bennigan's and Steak & Ale are going away, that Bakers Square and Village Inn have filed for bankruptcy: All say the industry is in big trouble.
We read all of these horrible articles every day about restaurants, and yet we see that the stocks of Yum! and Darden hang in great, particularly the first, which gave hideous guidance and yet is now higher than it was before it told people commodity costs were hurting it. McDonald's? How many stocks just hit their 52-week high?
Next week is sure to be filled with fun and volatile market conditions. The highlight will be the Fed decision on key rates, due on Wednesday, April 30, following a two-day meeting. Anytime the Fed has the floor, the markets listen. Tuesday and Wednesday will be filled with speculation up until the time of the announcement of a cut or pause.
There are many possible outcomes for this meeting, as we have seen a substantial change in investor sentiment regarding the potential need for further rate cuts. The buzz on the street is for a cut of 25 basis points and then a wait-and-see attitude from there. I think that is the most likely direction.
There has been a great deal of concern that all the recent rate cuts have not provided the benefit to consumers the economy needs. Clearly, there is a fatty clog within our financial circulatory system. Traditionally, the Fed likes to see how its actions trickle into the economy before it continues too far down one path, which would argue for a pause now. Plus, the Fed does not want to run out of ammunition by cutting rates too far too fast. But there is no question that we are dealing with a more aggressive Fed than we have seen in decades, so I think we will see another small rate cut.
Panera Bread Company (NASDAQ: PNRA) released on Tuesday 3Q 2007 earnings that indicate the company didn't raise much dough. Revenue was up 35% to $276 million, which sounds encouraging. But that revenue increase translated into a much lower increase in net income, 10%. Net income YTD 2007, $40 million, is exactly the same as net income YTD 2006, even though Panera has opened 35 new bakery-cafe locations in 3Q 2007 alone.
Same-store sales increased 2.6% during the quarter, yet average weekly sales were essentially flat. Diluted 3Q EPS was $0.37, an improvement over diluted EPS of $0.34 in 3Q 2006 until one factors in the $0.05 per share benefit from the resolution of a tax disagreement with the IRS. Without that benefit, actual EPS would have been $0.32 per share.
In effect, Panera is earning more revenue but making less money. Even CEO Ron Shaich admits Panera needs to "return to a record of strong earnings growth."
Panera is faced with a triple whammy. It has shifted its menu offerings away from lower cost soup and sandwiches to higher cost salads. Across the board, ingredients' costs are rising, as are labor costs. Yet the company remains optimistic, or perhaps just confused. Senior management forecasts same bakery-cafe sales growth of 1-3.5% for 4Q 2007 and same bakery-cafe sales growth of 1-4% for FY 2008. Unless that sales growth results in net income growth, the dough simply will not rise.
Investors have reacted negatively to the 3Q figures. The stock closed recently at $41.66, down $1.95 on the news.
MOST NOTEWORTHY: Sanofi-Aventis, Lifecell, Mylan Labs, Panera Bread and Norsk Hydro were today's noteworthy upgrades:
Societe Generale upgraded shares of Sanofi-Aventis (NYSE: SNY) to Buy from Hold as they believe pipeline maturation over the next 12 months can drive the stock higher.
Piper upgraded shares of Lifecell (NASDAQ: LIFC) to Outperform from Market Perform after their recent survey indicated that AlloDerm remains the leading biologic hernia mesh on the market and competition is making little headway.
JP Morgan upgraded Mylan Labs (NYSE: MYL), Panera Bread (NASDAQ: PNRA) and Norsk Hydro (NYSE: NHY) to Overweight from Neutral. The firm upgraded Mylan based on its position in the global generics market and above-average growth; Panera was upgraded on valuation, as they believe the recent operating risk is now behind the company; Norsk Hydro was upgraded, as they believe the value of the company's aluminum assets are higher than the current share price suggests.
OTHER UPGRADES:
HSBC upgraded Ride Aid (NYSE: RAD) to Neutral from Underweight.
The past several months have not been kind to Panera Bread (NASDAQ: PNRA). The stock was trading near $70 last fall after several years of steady growth, then it started dropping early in October, made up some of that lost ground, and then took a real hit in June when the company lowered its expectations for the second quarter. Then, last week it lowered its expectations for the third quarter, which sent the stock down another 9%.
The main reason for these woes is decreased profitability. Analysts like Jeffrey Bernstein at Lehman Brothers have blamed rising commodity prices, while John Gloss of CIBC attributes it to commodities as well as labor costs. The company has looked to customer shifts from home-baked bread and muffins to outsourced products like scones and soufflés. Others have blamed rising fuel costs that have led to more customers staying home rather than driving to eat. Whatever the reason, PNRA's results have not been good, and investors have understandably been selling shares.
MOST NOTEWORTHY: DaimlerChrysler (DCX), Omniture (OMTR), Convergys (CVG), Expedia (EXPE) and Baidu.com (BIDU) were today's noteworthy upgrades:
WestLB upgraded shares of DaimlerChrysler (NYSE: DCX) to Buy from Add after the company raised the profit margin forecast for its Mercedes unit.
Omniture (NASDAQ: OMTR) was upgraded by Piper Jaffray to Market Perform from Underperform to reflect the company's strong revenue momentum and expanding margins.
Wedbush upgraded Convergys (NYSE: CVG) to Hold from Sell on valuation.
Citigroup raised shares of Expedia (NASDAQ: EXPE) and Baidu.com (NASDAQ: BIDU) to Buy from Hold on valuation...
OTHER UPGRADES:
Bear Stearns upgraded shares of Ryder System (NYSE: R) to Outperform from Underperform.
Lehman raised EnCana Corp (NYSE: ECA) to Equal Weight from Underweight.
USG Corp (NYSE: USG) was raised to Neutral from Underperform at Buckingham.
Morgan Keegan upgraded shares of Panera Bread (NASDAQ: PNRA) to Outperform from Market Perform.
I've held the anti-restaurant thesis for several weeks now, and I think the two reports after the bell yesterday validated the thoughts. Commodity costs are up, labor costs are increasing (and will to continue to increase) with the rise in the minimum wage, the increase in gas prices crunches the consumer's spending power, and so on.
CEC Entertainment (NYSE: CEC), the operator of Chuck E. Cheeses restaurants, reported earnings of 26 cents per share vs. expectations of 34 cents per share. In addition, same-store-sales fell 1.6% while operating costs rose 4%. Interestingly, the company attributed its poor performance not only to gas prices, but also popular new movie releases which drew its young-children demographic out of its restaurants and into movie theaters. If this wasn't enough, CEC cut its full year guidance to $1.96-$2.04 per share -- a rather significant difference from the analyst estimates of $2.26 per share before this report.
Similarly, Panera Bread (NASDAQ: PNRA) disappointed the street after the bell. As Beth Gaston Moon reported, the company's guidance for the coming quarter of 32-38 cents per share in EPS came in below prior analyst expectations of 43 cents. In addition, the company's guidance for the second half of the year of $.86-1.02 per share disappointed analysts who expected $1.12 per share.
Panera Bread (NASDAQ: PNRA) - operator of casual bakery/cafes with free WiFi and tasty cinnamon-crunch bagels - was the latest restaurateur to report earnings tonight.
After the close, PNRA announced second-quarter income totaled $12.6 million, or 39 cents per share, matching the average analyst estimate. This marks a 10% decline from last year's results. Revenue, however, managed to climb 28% to $253 million, edging out Wall Street expectations of $250.6 million. Same-restaurant sales rose 2.1% during the reporting period, led by strength in franchise-operated locations.
Looking ahead to the third quarter, PNRA expects per-share earnings results of 32 cents to 38 cents per share, well below analysts' current view of 43 cents. For July, Panera officials predict same-store sales growth of 3.6% to 3.9%.
Investors appear to be brushing off the positive revenue surprise and focusing on the grim third-quarter outlook, which falls short of analysts' expectations. In after-hours trading, PNRA has dropped 6.5%. If this negative momentum continues through tomorrow's open, the stock could hit a new 52-week low.
MOST NOTEWORTHY: JP Morgan Chase (JPM), Symantec (SYMC), Advanced Micro Devices (AMD), Nvidia (NVDA) and SVB Financial Group (SIVB) were today's more notable upgrades:
Keefe Bruyette upgraded JP Morgan Chase (NYSE: JPM) to Outperform from Market Perform based on valuation and superior execution.
Symantec Corp (NASDAQ: SYMC) was raised to Outperform from Neutral at Baird as they believe integration issues from Veritas (CGV) are behind the company and expectations that shares will benefit from investments made during the past two years.
Stifel upgraded Advanced Micro Devices (NYSE: AMD) to Short-Term Trading Buy from Neutral and recommends buying shares of AMD ahead of the Q2 report given market stabilization, the seasonally stronger 2H, and any positive commentary during the call that may be enough to encourage renewed investor interest.
Lehman upgraded Nvidia (NASDAQ: NVDA) to Overweight from Equal Weight citing checks that indicate a strong product cycles & shares gains in notebooks, improving seasonal demand, and new product traction.
Citigroup upgraded shares of SVB Financial (NASDAQ: SIVB) to Hold from Sell to reflect less earnings volatility due to more later-stage customers and growing funds management...
OTHER UPGRADES:
Matrix USA raised Panera Bread (NASDAQ: PNRA) to Buy from Hold on valuation.
Citigroup upgraded MBIA Inc (NYSE: MBI) to Buy from Hold.
Banc of America upgraded Sybase (NYSE: SY) to Buy from Neutral.
Wachovia initiated shares of CB Richard Ellis with an Outperform rating, as it views CBG as a compelling investment opportunity giving its leading position in the top real estate markets and breadth of services.
Wachovia also initiated shares of Jones Lang LaSalle with an Outperform rating, as it expects JLL to benefit from international services given the increasing flow of real estate dollars across boarders and to less well developed regions of the globe.
OTHER INITIATIONS:
Citigroup initiated shares of GameStop Corp (NYSE: GME) with a Buy rating and $46 target.
MOST NOTEWORTHY: The Walt Disney Co (DIS), Apple Inc (AAPL) and MasterCard Inc (MA) were two of today's notable upgrades:
CIBC upgraded The Walt Disney Co (NYSE: DIS) to Sector Perform from Underperform with a $40 target, following fourth quarter earnings and long-term fundamentals.
Citigroup upgraded Apple Inc (NASDAQ: AAPL) to Buy from Hold with a $105 target citing the company's compelling risk/reward.
MasterCard Inc (NYSE: MA) was upgraded to Market Perform from Underperform at Keefe Bruyette with a $115 target, based on fourth quarter results and valuation.
OTHER UPGRADES:
Kraft Foods Inc (NYSE: KFT) was upgraded by UBS to Neutral from Reduce with a $34 target, as the firm believes expectations for "shareholder friendly" actions will bring modest upside to the stock.
Bear Stearns upgraded Southwest Airlines Co (NYSE: LUV) to Outperform from Peer Perform citing a recovery in non-fuel margin performance and LBO potential.
Raymond James upgraded Panera Bread Co (NASDAQ: PNRA) to Strong Buy from Outperform.
CIBC upgraded Qwest Communications Int'l Inc (NYSE: Q) to Sector Performer from Sector Underperformer on valuation.
Oppenheimer upgraded shares of Adobe Systems Inc (NASDAQ: ADBE) to Buy from Neutral with a $43 target on valuation and strong business momentum.
Credit Suisse upgraded Ciena Corp (NASDAQ: CIEN) to Outperform from Neutral with a $36 target, citing above-average industry growth and strong competitive positioning.
Cramer discussed a tale of two different Panera Breads. On MAD MONEY, he said that Panera Bread Company (NASDAQ:PNRA) is not a $46 or $64 stock. He said on July 26 the company committed a cardinal sin by revising its range. The bakery chain revised by broadening, extending the top and bottom of its range by $0.02 in either direction. And although the same store sales were surprisingly low one month, it was just like Starbucks Corporation (NASDAQ:SBUX): the following month, sales were back to normal, and everyone bought the stock.
He says that Crispani is to Panera what Frappuccino is to Starbucks. He says PNRA should never have been there and he thinks PNRA is going to $74 soon. He said CIBC's John Glass was dead right on his call when he said that PNRA's drop back then was the wrong move. Cramer thinks the company goes higher.
PNRA has 939 bakery-cafes in 37 states. It reports in two weeks; Cramer argues that investors should should buy half of a position now and half after the earnings report. He thinks the company can have 2,500 to 3,000 stores before reaching any saturation. There was a change in strategy that extends the company's market, from lunch only to both lunch and dinner.
TheStreet.com's Jim Cramer says that as consumers try to stretch their dining dollar, Darden, Yum! and McDonald's will benefit.
Next week is sure to be filled with fun and volatile market conditions. The highlight will be the Fed decision on key rates, due on Wednesday, April 30, following a two-day meeting. Anytime the Fed has the floor, the markets listen. Tuesday and Wednesday will be filled with speculation up until the time of the announcement of a cut or pause.
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The past several months have not been kind to 
Panera Bread
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