Forward-Thinking Panera and Transitioning Buffalo Wild Wings


Earnings releases from Panera (NASDAQ: PNRA) and Buffalo Wild Wings (NASDAQ: BWLD) show the stark difference between forward-thinking innovators and status quo.

Both brands share a lot of similarities; both have a national footprint, both have impressive average unit volumes (around $2.6 million at Panera and around $3.1 million at BWW) and both plan to keep growing standard and small-format locations in a rocky market.

What separates the two is management philosophy. Given Q4 earnings, Panera’s spend-ahead philosophy has worked well, while Buffalo Wild Wings is just starting a big transition.

Restaurant analyst Howard Penny, the restaurant sector head at Hedgeye, said forethought is among the most impactful drivers of Panera’s Q4 results.

“Panera is positioning itself to take advantage of technology. They’ve spent ahead of the curve to reposition the company and are reaping the benefits,” said Penny. “And Buffalo Wild Wings has not done that.”

Panera slowed down, but with overall same-store sales of 0.7% (3% at company locations, -1.4% at franchised locations), it still beat the industry by a wide margin. Management said the company was 5% ahead of the industry average of the -4.3% reported in TDn2K’s Black Box average for the year. And in some points during the dismal December, it was ahead by 9 percent. Management attributes those results to many things from clean food and the growing loyalty program, but given the dominance of delivery and technology on the analyst call, new inroads to the brand made the difference.  

“This is as powerful of an initiative we’ve seen at Panera in a long time,” said Ronald Shaich, on the delivery rollout. “That’s what’s going to drive the future.”

Delivery is now at 15% of locations, and management has an aggressive goal of 30-40% implementation by year-end. The platform adds $5,000 in “80-90% incremental” weekly revenue around the six month mark. It’s driven by the previous aggressive rollout of Panera 2.0, which management said is “constructively complete” at all company locations, but functionally at work in 70% of those locations.

In a previous report, Jefferies restaurant analyst Andy Barish said that Panera’s Band-Aid approach to the technology rollout was extreme, but it positioned the brand to see real improvements.

“Panera is probably an extreme example because they went full tilt on everything,” said Barish. “With ‘2.0’ it’s cost them 300-400 basis points. Some companies could spend half of that, it’s still 150 basis points if you don’t get sales improvements right away.”

Now, 24% of orders are digital, a level unheard of outside the big-three pizza brands.

Panera stock was up 8% after the analyst call.

At -4% at corporate locations and -3.9% at franchised locations, Buffalo Wild Wings was in step with the overall industry.

They had plenty of strong initiatives at Buffalo Wild Wings too. The FastBreak lunch program promised lunch fare in 15 minutes or less (or it’s free), driving the day part significantly. An update to the company app helped drive 19% of takeout orders to digital, up from 12% in 2015. The Blazin’ Rewards program was implemented at 480 locations with the full rollout expected in Q2 2017. A new burger platform grew burger sales up 25%. And a 100-unit test of third-party delivery drove incremental sales that saw 30% higher ticket averages. All that was too little to weather the late 2016 dip. Net earnings sank 38% and margins slipped as well. BWLD dipped at the trading bell, but rose by 2.74%.

“We know performance needs to improve in 2017,” said CEO Sally Smith on an earnings call.

If nothing else, when a company seems to be at the whim of the market, investors get agitated. And Marcato is certainly agitated. The investment firm under activist investor Mick McGuire aggressively pursued board seats and is pushing for refranchising. During the Q4 earnings call, the company said it would be refranchising 10% of restaurants.

Smith spoke directly to the activists, saying they wouldn’t move "toward preset ownership target, but will be strategic about selling.” Marcato was aiming for 90% franchised. It’s encouraging that the brand won’t lose value in a race toward an asset-light model, but opening the door to refranchising may prove only to whet the appetite for investors hoping for a stronger Marcato push.

“They’ve admitted that what Marcato said was the right thing to do but they’re not doing it,” said Penny. “It seems like they’ve recognized that it’s what they need to do, why not do it?”

The results show that brands must be wary about just keeping up with the market. To keep a competitive advantage in this market, it pays to spend ahead of curve. 

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