News Column

PANERA BREAD CO - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

July 30, 2014

Matters discussed in this report and in our public disclosures, whether written or oral, relating to future events or our future performance, including any discussion, expressed or implied, of our anticipated growth, operating results, future earnings per share, plans, objectives, and the impact of our investments in sales-building initiatives and operational capabilities on future sales and earnings, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the words "believe", "positioned", "estimate", "project", "plan", "goal", "target", "assumption", "continue", "intend", "expect", "future", "anticipate", and other similar expressions, whether in the negative or the affirmative, that are not statements of historical fact. These forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict, and you should not place undue reliance on our forward-looking statements. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this report and in our other public filings with the United States Securities and Exchange Commission, or SEC, including our Form 10-K for the year ended December 31, 2013 and our quarterly reports on Form 10-Q. All forward-looking statements and the internal projections and beliefs upon which we base our expectations included in this report or other periodic reports represent our estimates as of the date made and should not be relied upon as representing our estimates as of any subsequent date. While 11 -------------------------------------------------------------------------------- we may elect to update forward-looking statements at some point in the future, we expressly disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.



General

Panera Bread Company and its subsidiaries are referred to as the "Company," "Panera Bread," or in the first person notation of "we," "us," and "our" in the following discussion.

Our revenues are derived from Company-owned net bakery-cafe sales, fresh dough and other product sales to franchisees, and franchise royalties and fees. Fresh dough and other product sales to franchisees are primarily comprised of sales of fresh dough, produce, tuna, and cream cheese to certain of our franchisees. Franchise royalties and fees include royalty income and franchise fees, which includes fees for development and real estate services and information technology services. The cost of food and paper products, labor, occupancy, and other operating expenses relate primarily to Company-owned net bakery-cafe sales. The cost of fresh dough and other product sales to franchisees relates primarily to the sale of fresh dough, produce, tuna, and cream cheese to certain of our franchisees. General and administrative, depreciation and amortization, and pre-opening expenses relate to all areas of revenue generation. We include in this report information on Company-owned, franchise-operated, and system-wide comparable net bakery-cafe sales percentages. Bakery-cafes in our comparable net bakery-cafe sales percentages include those bakery-cafes with an open date prior to the first day of our prior fiscal year, which we refer to as our base store bakery-cafes. Company-owned comparable net bakery-cafe sales percentages are based on net sales from Company-owned base store bakery-cafes. Franchise-operated comparable net bakery-cafe sales percentages are based on net sales from franchise-operated base store bakery-cafes, as reported by franchisees. System-wide comparable net bakery-cafe sales percentages are based on net sales at Company-owned and franchise-operated base store bakery-cafes. Acquired Company-owned and franchise-operated bakery-cafes and other restaurant or bakery-cafe concepts are included in our comparable net bakery-cafe sales percentages only if we or our franchisee previously held or acquired a 100 percent ownership interest prior to the first day of our prior fiscal year. Comparable net bakery-cafe sales exclude closed locations. We do not record franchise-operated net bakery-cafe sales as revenues. However, royalty revenues are calculated based on a percentage of franchise-operated net bakery-cafe sales, as reported by franchisees. We use franchise-operated and system-wide sales information internally in connection with store development decisions, planning, and budgeting analyses. We believe franchise-operated and system-wide sales information is useful in assessing consumer acceptance of our brand, facilitates an understanding of our financial performance and the overall direction and trends of sales and operating income, helps us appreciate the effectiveness of our advertising and marketing initiatives, to which our franchisees also contribute based on a percentage of their net sales, and provides information that is relevant for comparison within the industry. We also include in this report information on Company-owned, franchise-operated, and system-wide average weekly net sales. Average weekly net sales are calculated by dividing total net sales in the period by operating weeks in the period. Accordingly, year-over-year results reflect sales for all locations, whereas comparable net bakery-cafe sales exclude closed locations and are based on sales only from our base store bakery-cafes. New stores typically experience an opening "honeymoon" period during which they generate higher average weekly net sales in the first 12 to 16 weeks after opening, after which customers "settle-in" to normal usage patterns. On average, average weekly net sales during the "settle-in" period are 5 percent to 10 percent less than during the "honeymoon" period. As a result, year-over-year results of average weekly net sales are generally lower than the results in comparable net bakery-cafe sales. This results from the relationship of the number of bakery-cafes in the "honeymoon" period, the number of bakery-cafes in the "settle-in" period, and the number of bakery-cafes in the comparable bakery-cafe base.



Executive Summary of Results

For the thirteen weeks ended July 1, 2014, we earned $1.82 per diluted share with the following performance on key metrics: system-wide comparable net bakery-cafe sales were flat on a calendar basis (growth of 0.1 percent for Company-owned bakery-cafes and decline of 0.2 percent for franchise-operated bakery-cafes); system-wide average weekly net sales decreased 0.9 percent to $47,791 ($48,313 for Company-owned bakery-cafes and $47,290 for franchise-operated bakery-cafes); 19 new bakery-cafes opened system-wide (10 Company-owned bakery-cafes and nine franchise-operated bakery-cafes); and one franchise-operated bakery-cafe closed. Additionally, included in diluted earnings per share for the thirteen weeks ended July 1, 2014 was an $0.08 per diluted share benefit from a favorable resolution of an insurance coverage matter. For the thirteen weeks ended June 25, 2013, we earned $1.74 per diluted share with the following performance on key metrics: system-wide comparable net bakery-cafe sales grew 3.7 percent (growth of 3.8 percent for Company-owned bakery-cafes and growth of 3.5 percent for franchise-operated bakery-cafes); system-wide average weekly net sales increased 3.3 percent to $48,215 ($48,700 for Company-owned bakery-cafes and $47,750 for franchise-operated bakery-cafes); 37 new bakery-cafes opened system- 12 -------------------------------------------------------------------------------- wide (18 Company-owned bakery-cafes and 19 franchise-operated bakery-cafes); and two Company-owned bakery-cafes closed. Additionally, during the thirteen weeks ended June 25, 2013, we acquired one bakery-cafe in Hallandale, Florida from a franchisee, as described in Note 2 in the accompanying consolidated financial statements. For the twenty-six weeks ended July 1, 2014, we earned $3.36 per diluted share with the following performance on key metrics: system-wide comparable net bakery-cafe sales were flat on a calendar basis (growth of 0.1 percent for Company-owned bakery-cafes and flat for franchise-operated bakery-cafes); system-wide average weekly net sales decreased 0.5 percent to $47,360 ($47,731 for Company-owned bakery-cafes and $47,005 for franchise-operated bakery-cafes); 46 new bakery-cafes opened system-wide (26 Company-owned bakery-cafes and 20 franchise-operated bakery-cafes); and five bakery-cafes closed system-wide (two Company-owned bakery-cafes and three franchise-operated bakery-cafes). Additionally, included in diluted earnings per share for the twenty-six weeks ended July 1, 2014 was an $0.08 per diluted share benefit from a favorable resolution of an insurance coverage dispute. For the twenty-six weeks ended June 25, 2013, we earned $3.38 per diluted share with the following performance on key metrics: system-wide comparable net bakery-cafe sales grew 3.5 percent (growth of 3.6 percent for Company-owned bakery-cafes and growth of 3.4 percent for franchise-operated bakery-cafes); system-wide average weekly net sales increased 3.2 percent to $47,596 ($47,927 for Company-owned bakery-cafes and $47,279 for franchise-operated bakery-cafes); 59 new bakery-cafes opened system-wide (28 Company-owned bakery-cafes and 31 franchise-operated bakery-cafes); and three Company-owned bakery-cafes closed. Additionally, during the twenty-six weeks ended June 25, 2013, we acquired one bakery-cafe in Hallandale, Florida from a franchisee, as described in Note 2 in the accompanying consolidated financial statements. 13 -------------------------------------------------------------------------------- The following table sets forth the percentage relationship to total revenues, except where otherwise indicated, of certain items included in the Consolidated Statements of Comprehensive Income for the periods indicated. Percentages may not add due to rounding: For the 13 Weeks Ended For the 26 Weeks Ended July 1, June 25, July 1, June 25, 2014 2013 2014 2013 Revenues: Bakery-cafe sales, net 88.1 % 88.5 % 88.2 % 88.5 % Franchise royalties and fees 4.8 4.7 4.8 4.7 Fresh dough and other product sales to franchisees 7.2 6.9 7.0 6.8 Total revenues 100.0 % 100.0 % 100.0 % 100.0 % Costs and expenses: Bakery-cafe expenses (1): Cost of food and paper products 30.3 % 30.0 % 30.0 % 29.7 % Labor 30.3 28.8 30.3 29.3 Occupancy 7.1 6.9 7.2 7.1 Other operating expenses 14.2 13.8 14.2 13.8 Total bakery-cafe expenses 81.8 79.4 81.6 79.8 Fresh dough and other product cost of sales to franchisees (2) 86.2 85.4 86.7 85.9 Depreciation and amortization 4.8 4.3 4.8 4.3 General and administrative expenses 5.1 5.0 5.5 5.0 Pre-opening expenses 0.2 0.4 0.3 0.3 Total costs and expenses 88.3 85.8 88.6 86.1 Operating profit 11.7 14.2 11.4 13.9 Interest expense - - 0.1 - Other (income) expense, net (0.6 ) (0.1 ) (0.4 ) (0.3 ) Income before income taxes 12.3 14.3 11.7 14.1 Income taxes 4.5 5.6 4.3 5.5 Net income 7.8 % 8.7 % 7.4 8.6 Other comprehensive income (loss) 0.1 (0.1 ) - (0.1 ) Comprehensive income 7.9 % 8.6 % 7.4 % 8.5 %



(1) As a percentage of net bakery-cafe sales.

(2) As a percentage of fresh dough and other product sales to franchisees.

14 -------------------------------------------------------------------------------- The following table sets forth certain information relating to the number of Company-owned and franchise-operated bakery-cafes for the periods indicated: For the 13 Weeks Ended For the 26 Weeks Ended July 1, June 25, July 1, June 25, 2014 2013 2014 2013 Number of bakery-cafes: Company-owned: Beginning of period 881 818 867 809 Bakery-cafes opened 10 18 26 28 Bakery-cafes closed - (2 ) (2 ) (3 ) Bakery-cafes acquired from franchisees - 1 - 1 End of period 891 835 891 835 Franchise-operated: Beginning of period 919 855 910 843 Bakery-cafes opened 9 19 20 31 Bakery-cafes closed (1 ) - (3 ) - Bakery-cafes sold to Company - (1 ) - (1 ) End of period 927 873 927 873 System-wide: Beginning of period 1,800 1,673 1,777 1,652 Bakery-cafes opened 19 37 46 59 Bakery-cafes closed (1 ) (2 ) (5 ) (3 ) End of period 1,818 1,708 1,818 1,708



Comparable Net Bakery-cafe Sales

The following table sets forth certain information relating to comparable net bakery-cafe sales growth for the periods indicated:

For the 13 Weeks Ended For the 26 Weeks Ended June 25, June 25, July 1, 2014 (1) 2013 July 1, 2014 (1) 2013 Company-owned 0.1 % 3.8 % 0.1 % 3.6 % Franchise-operated (0.2 )% 3.5 % 0.0 % 3.4 % System-wide 0.0 % 3.7 % 0.0 % 3.5 % (1) Comparable net-bakery cafe sales growth for the thirteen and twenty-six weeks ended July 1, 2014 is presented on a calendar basis. We believe that comparable net bakery-cafe sales percentages presented on a calendar basis, which match the specific operating weeks in a fiscal period to the same specific operating weeks in another, are useful in understanding our sales results because such comparisons are generally not impacted by the shifting of seasonal holidays between fiscal periods or by additional weeks of sales in a particular fiscal period. 15 --------------------------------------------------------------------------------



The following table sets forth the composition of Company-owned comparable net bakery-cafe sales growth for the periods indicated:

For the 13 Weeks Ended For the 26 Weeks Ended July 1, June 25, July 1, June 25, 2014 2013 2014 2013 Price 0.6 % 1.7 % 1.2 % 2.0 % Mix (0.9 )% 2.6 % 0.1 % 3.1 % Average check (0.3 )% 4.3 % 1.3 % 5.1 % Transactions 0.4 % (0.5 )% (1.2 )% (1.5 )% Company-owned comparable net bakery-cafe sales growth 0.1 % 3.8 % 0.1 % 3.6 % The year-over-year increase in transactions during the thirteen weeks ended July 1, 2014 was primarily due to an increase in transactions during the breakfast daypart, partially offset by operational issues impacting the customer experience and a continued challenging consumer environment. The decline in mix during the thirteen weeks ended July 1, 2014 was primarily due to slower catering sales growth and a lower total average check as a result of the increase in breakfast transactions, which carry a lower average check than lunch or dinner transactions. Price growth year-over-year during the thirteen weeks ended July 1, 2014 was modest, generally due to our decision to take minimal price increases in the first quarter in anticipation of expected modest inflation. The year-over-year decline in transactions during the twenty-six weeks ended July 1, 2014 was due to a variety of factors, including, but not limited to, severe weather, operational issues impacting the customer experience, a continued challenging consumer environment, and intensified competition, partially offset by an increase in transactions during the breakfast daypart during the thirteen weeks ended July 1, 2014. Price growth year-over-year during the twenty-six weeks ended July 1, 2014 was modest, generally due to our decision to take minimal price increases in anticipation of modest inflation. Mix growth year-over-year during the twenty-six weeks ended July 1, 2014 was modest due, in part, to slower catering sales growth and a lower total average check as a result of the increase in breakfast transactions during the thirteen weeks ended July 1, 2014. As noted, we believe that comparable net bakery-cafe sales percentages presented on a calendar basis are useful in understanding our sales results because such comparisons are generally not impacted by the shifting of seasonal holidays between fiscal periods or by additional weeks of sales in a particular fiscal period. The following table sets forth information relating to comparable net bakery-cafe sales growth presented on both a calendar and fiscal basis for the thirteen and twenty-six weeks ended July 1, 2014: For the 13 Weeks Ended July 1, 2014 For the 26 Weeks Ended July 1, 2014 Calendar Fiscal Calendar Fiscal Company-owned 0.1 % 0.1 % 0.1 % 0.4 % Franchise-operated (0.2 )% (0.2 )% 0.0 % 0.2 % System-wide 0.0 % (0.1 )% 0.0 % 0.3 % 16

--------------------------------------------------------------------------------



Results of Operations

Revenues

The following table sets forth revenues for the periods indicated (dollars in thousands, except for average weekly net sales information):

For the 13 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change Bakery-cafe sales, net $ 555,645$ 521,038 6.6 % Franchise royalties and fees 30,057 27,453 9.5 % Fresh dough and other product sales to franchisees 45,353 40,520 11.9 % Total revenues $ 631,055 $



589,011 7.1 %

System-wide average weekly net sales $ 47,791$ 48,215 (0.9 )% For the 26 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change Bakery-cafe sales, net $ 1,091,194$ 1,018,557 7.1 % Franchise royalties and fees 59,365 54,030 9.9 % Fresh dough and other product sales to franchisees 86,249 78,203 10.3 % Total revenues $ 1,236,808 $



1,150,790 7.5 %

System-wide average weekly net sales $ 47,360 $



47,596 (0.5 )%

The growth in total revenues for the thirteen and twenty-six weeks ended July 1, 2014 compared to the same periods in fiscal 2013 was primarily due to the opening of 120 new bakery-cafes system-wide since June 25, 2013, partially offset by the closure of 10 bakery-cafes system-wide since June 25, 2013.

Bakery-cafe sales, net

The following table sets forth net bakery-cafe sales for the periods indicated (dollars in thousands, except for average weekly net sales information):

For the 13 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change Bakery-cafe sales, net $ 555,645$ 521,038 6.6 % As a percentage of total revenues 88.1 % 88.5 %



Company-owned average weekly net sales $ 48,313$ 48,700

(0.8 )% Company-owned number of operating weeks 11,501 10,699 7.5 % 17

--------------------------------------------------------------------------------

For the 26 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change Bakery-cafe sales, net $ 1,091,194$ 1,018,557 7.1 % As a percentage of total revenues 88.2 % 88.5 %



Company-owned average weekly net sales $ 47,731$ 47,927

(0.4 )% Company-owned number of operating weeks 22,861 21,252



7.6 %

The increase in net bakery-cafe sales for both the thirteen and twenty-six weeks ended July 1, 2014 compared to the same periods in fiscal 2013 was primarily due to the opening of 61 new Company-owned bakery-cafes since June 25, 2013, partially offset by the closure of five Company-owned bakery-cafes since June 25, 2013.



Franchise royalties and fees

The following table sets forth franchise royalties and fees for the periods indicated (dollars in thousands, except for average weekly net sales information): For the 13 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change Franchise royalties $ 29,576$ 26,873 10.1 % Franchise fees 481 580 (17.1 )% Total $ 30,057$ 27,453 9.5 % As a percentage of total revenues 4.8 %



4.7 %

Franchise-operated average weekly net sales $ 47,290$ 47,750 (1.0 )% Franchise-operated number of operating weeks 12,005 11,194 7.2 % For the 26 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change Franchise royalties $ 58,471$ 53,075 10.2 % Franchise fees 894 955 (6.4 )% Total $ 59,365$ 54,030 9.9 % As a percentage of total revenues 4.8 %



4.7 %

Franchise-operated average weekly net sales $ 47,005$ 47,279 (0.6 )% Franchise-operated number of operating weeks 23,867

22,217 7.4 %

The increase in franchise royalty and fee revenues for both the thirteen and twenty-six weeks ended July 1, 2014 compared to the same periods in fiscal 2013 was primarily due to the opening of 59 franchise-operated bakery-cafes since June 25, 2013, partially offset by the closure of five franchise-operated bakery-cafes since June 25, 2013. As of July 1, 2014, there were 927 franchise-operated bakery-cafes open and we had received commitments to open 115 additional franchise-operated bakery-cafes. The timetables for opening these bakery-cafes are established in the respective Area Development Agreements, or ADAs, with franchisees, which provide for the majority of such bakery-cafes to open in the next four to five years. An ADA requires a franchisee to develop a specified number of bakery-cafes by specified dates. If a franchisee fails to develop bakery-cafes on the schedule set forth in the ADA, we have the right to terminate the ADA and develop Company-owned bakery-cafes or develop locations through new franchisees in that market. We may exercise one or more alternative remedies to address defaults by franchisees, including not only development defaults, but also defaults in complying with our operating and brand standards and other covenants included in the ADAs and franchise agreements. We may waive compliance with certain requirements included in our ADAs and franchise agreements if we determine such action is warranted under the particular circumstances. 18 --------------------------------------------------------------------------------



Fresh dough and other product sales to franchisees

The following table sets forth fresh dough and other product sales to franchisees for the periods indicated (dollars in thousands):

For the 13 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change Fresh dough and other product sales to franchisees $ 45,353$ 40,520 11.9 % As a percentage of total revenues 7.2 % 6.9 % For the 26 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change Fresh dough and other product sales to franchisees $ 86,249$ 78,203 10.3 % As a percentage of total revenues 7.0 %



6.8 %

The increase in fresh dough and other product sales to franchisees for both the thirteen and twenty-six weeks ended July 1, 2014 compared to the same periods in fiscal 2013 was primarily due to the opening of 59 franchise-operated bakery-cafes since June 25, 2013, partially offset by the closure of five franchise-operated bakery-cafes since June 25, 2013.



Costs and Expenses

The cost of food and paper products includes the costs associated with our fresh dough and other product operations that sell fresh dough and other products to Company-owned bakery-cafes, as well as the cost of food and paper products supplied by third-party vendors and distributors. The costs associated with our fresh dough and other product operations that sell fresh dough and other products to the franchise-operated bakery-cafes are excluded from the cost of food and paper products and are shown separately as fresh dough and other product cost of sales to franchisees in the Consolidated Statements of Comprehensive Income.



The following table sets forth cost of food and paper products for the periods indicated (dollars in thousands):

For the 13 Weeks Ended



Percentage

July 1, 2014June 25, 2013



Change

Cost of food and paper products $ 168,187$ 156,171 7.7 % As a percentage of bakery-cafe sales, net 30.3 % 30.0 % For the 26 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change Cost of food and paper products $ 327,081$ 302,588 8.1 % As a percentage of bakery-cafe sales, net 30.0 %



29.7 %

The increase in the cost of food and paper products as a percentage of net bakery-cafe sales for both the thirteen and twenty-six weeks ended July 1, 2014 compared to the same periods in fiscal 2013 was primarily due to higher food input costs, including, but not limited to, unexpected increases in the costs of butter, avocados, and bacon, and increased food variance, primarily due to severe weather during early fiscal 2014. These increases were partially offset by improved leverage of our fresh dough manufacturing costs due to additional bakery-cafe openings. For the thirteen and twenty-six weeks ended July 1, 2014, there was an average of 79 and 78 bakery-cafes per fresh dough facility, respectively, compared to an average of 73 for both the thirteen and twenty-six weeks ended June 25, 2013. 19

-------------------------------------------------------------------------------- The following table sets forth labor expense for the periods indicated (dollars in thousands): For the 13 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change Labor expense $ 168,210$ 149,869 12.2 % As a percentage of bakery-cafe sales, net 30.3 % 28.8 % For the 26 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change Labor expense $ 330,673$ 298,467 10.8 % As a percentage of bakery-cafe sales, net 30.3 % 29.3 % The increase in labor expense as a percentage of net bakery-cafe sales for both the thirteen and twenty-six weeks ended July 1, 2014 compared to the same periods in fiscal 2013 was primarily a result of adding additional labor hours, as well as employees in the bakery-cafes and related training costs, both to support ongoing operational initiatives, partially offset by lower manager bonus expense.



The following table sets forth other operating expenses for the periods presented (dollars in thousands):

For the 13 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change Other operating expenses $ 78,714$ 72,145 9.1 % As a percentage of bakery-cafe sales, net 14.2 % 13.8 % For the 26 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change Other operating expenses $ 154,531$ 140,090 10.3 % As a percentage of bakery-cafe sales, net 14.2 % 13.8 % The increase in other operating expenses as a percentage of net bakery-cafe sales for both the thirteen and twenty-six weeks ended July 1, 2014 compared to the same periods in fiscal 2013 was primarily a result of increased marketing expenses, partially offset by lower multi-unit manager bonus expense.



The following table sets forth fresh dough and other product cost of sales to franchisees for the periods indicated (dollars in thousands):

For the 13 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change Fresh dough and other product cost of sales to franchisees $ 39,108$ 34,599 13.0 % As a percentage of fresh dough and other product sales to franchisees 86.2 % 85.4 % For the 26 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change Fresh dough and other product cost of sales to franchisees $ 74,742$ 67,197 11.2 % As a percentage of fresh dough and other product sales to franchisees 86.7 % 85.9 % The increase in fresh dough and other product costs of sales to franchisees as a percentage of fresh dough and other product sales to franchisees for both the thirteen and twenty-six weeks ended July 1, 2014 compared to the same periods in fiscal 2013 was primarily the result of higher year-over-year sales of zero margin fresh produce to franchisees. 20 --------------------------------------------------------------------------------



The following table sets forth depreciation and amortization for the periods indicated (dollars in thousands):

For the 13 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change Depreciation and amortization $ 30,052$ 25,267 18.9 % As a percentage of total revenues 4.8 % 4.3 % For the 26 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change



Depreciation and amortization $ 59,494$ 49,632 19.9 % As a percentage of total revenues 4.8 %

4.3 % The increase in depreciation and amortization as a percentage of total revenues for both the thirteen and twenty-six weeks ended July 1, 2014 compared to the same periods in fiscal 2013 was primarily the result of increased depreciation on investments in bakery-cafes and support centers to support ongoing operational initiatives.



The following table sets forth general and administrative expenses for the periods indicated (dollars in thousands):

For the 13 Weeks Ended



Percentage

July 1, 2014June 25, 2013



Change

General and administrative expenses $ 32,229$ 29,743 8.4 % As a percentage of total revenues 5.1 % 5.0 % For the 26 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change



General and administrative expenses $ 67,652$ 58,050 16.5 % As a percentage of total revenues

5.5 % 5.0 % The increase in general and administrative expenses as a percentage of total revenues for both the thirteen and twenty-six weeks ended July 1, 2014 compared to the same periods in fiscal 2013 was primarily due to an increase in headcount to support ongoing operational initiatives, partially offset by lower incentive compensation. Other (income) expense, net Other (income) expense, net was $4.0 million of income, or 0.6 percent of total revenues, for the thirteen weeks ended July 1, 2014 compared to $0.8 million of income, or 0.1 percent of total revenues, for the thirteen weeks ended June 25, 2013. Other (income) expense, net for the thirteen weeks ended July 1, 2014 was primarily comprised of a $3.2 million benefit from a favorable resolution of an insurance coverage matter. Other (income) expense, net for the thirteen weeks ended June 25, 2013 was comprised of immaterial items. Other (income) expense, net was $5.2 million of income, or 0.4 percent of total revenues, for the twenty-six weeks ended July 1, 2014 compared to $3.2 million of income, or 0.3 percent of total revenues, for the twenty-six weeks ended June 25, 2013. Other (income) expense, net for the twenty-six weeks ended July 1, 2014 was primarily comprised of a $3.2 million benefit from a favorable resolution of an insurance coverage matter. Other (income) expense, net for the twenty-six weeks ended June 25, 2013 was primarily comprised of a $2.2 million benefit from a favorable resolution of legal and tax matters. 21 --------------------------------------------------------------------------------



Income Taxes

The following table sets forth income taxes for the periods indicated (dollars in thousands): For the 13 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change Income taxes $ 28,452$ 33,011 (13.8 )% Effective tax rate 36.6 % 39.3 % For the 26 Weeks Ended Percentage July 1, 2014 June 25, 2013 Change

Income taxes $ 53,651$ 63,317 (15.3 )% Effective tax rate 36.9 % 39.0 % The decrease in the effective tax rate for both the thirteen and twenty-six weeks ended July 1, 2014 compared to the same periods in fiscal 2013 was primarily driven by favorable changes in permanent differences between financial and tax reporting and discrete tax benefits primarily related to state income taxes recognized in both the thirteen and twenty-six weeks ended July 1, 2014. We record income taxes using an estimated annual effective tax rate for interim reporting. The estimated annual effective tax rate may fluctuate due to changes in forecast annual operating income; changes to the valuation allowance for deferred tax assets; changes to actual or forecast permanent book to tax differences (non-deductible expenses); impacts from future tax settlements with state, federal or foreign tax authorities (such changes would be recorded discretely in the quarter in which they occur) or impacts from tax law changes. To the extent such changes impact our deferred tax assets/liabilities, these changes would generally be recorded discretely in the quarter in which they occur.



Liquidity and Capital Resources

Cash and cash equivalents were $185.1 million as of July 1, 2014 compared to $125.2 million as of December 31, 2013. This $59.9 million increase was primarily a result of cash generated from operations during the twenty-six weeks ended July 1, 2014 of $146.5 million and proceeds from the issuance of long-term debt of $100 million, partially offset by the use of $100.3 million to repurchase shares of our Class A common stock and capital expenditures of $90.7 million. We finance our activities through cash flow generated through operations and term loan borrowings. We also have the ability to further borrow up to $250 million under a credit facility, as described below. Historically, our principal requirements for cash have primarily resulted from the cost of food and paper products, employee labor, the repurchase of shares of our common stock, and our capital expenditures for the development of new Company-owned bakery-cafes, for maintaining or remodeling existing Company-owned bakery-cafes, for purchasing existing franchise-operated bakery-cafes or ownership interests in other restaurant or bakery-cafe concepts, for developing, maintaining, or remodeling fresh dough facilities, and for other capital needs such as enhancements to information systems and other infrastructure. We had positive working capital of $50.8 million as of July 1, 2014 compared to negative working capital of $0.6 million as of December 31, 2013. The increase in working capital resulted primarily from the previously described increase in cash and cash equivalents of $59.9 million and a decrease in accrued expenses of $26.9 million, partially offset by a decrease in trade and other accounts receivable of $29.0 million and a decrease in prepaid expenses and other current assets of $8.4 million. We believe that cash provided by our operations, our term loan borrowings, and available borrowings under our existing credit facility will be sufficient to fund our cash requirements for the foreseeable future. We have not required significant working capital because customers generally pay using cash or credit and debit cards and because our operations do not require significant receivables, nor do they require significant inventories due, in part, to our use of various fresh ingredients. 22 -------------------------------------------------------------------------------- A summary of our cash flows, for the periods indicated, are as follows (in thousands): For the 26 Weeks Ended July 1, 2014 June 25, 2013 Cash provided (used) by: Operating activities $ 146,508$ 146,034 Investing activities (88,034 ) (181,867 ) Financing activities 1,357 (18,170 ) Net increase (decrease) in cash and cash equivalents $ 59,831$ (54,003 ) Operating Activities Cash provided by operating activities was $146.5 million and $146.0 million for the twenty-six weeks ended July 1, 2014 and June 25, 2013, respectively. Cash provided by operating activities consists primarily of net income, adjusted for non-cash expenses such as depreciation and amortization, and the net change in operating assets and liabilities. Cash provided by operating activities for the twenty-six weeks ended July 1, 2014 consisted primarily of net income adjusted for non-cash expenses and a decrease in trade and other accounts receivable, partially offset by a decrease in accrued expenses. The decrease in trade and other accounts receivable was primarily due to a decrease in other receivables due to the timing of the holidays near our fiscal 2013 year end and a decrease in refundable income taxes due to the timing of payments. The decrease in accrued expenses was primarily due to a decrease in the balance of outstanding gift cards and lower incentive compensation accruals. Cash provided by operating activities for the twenty-six weeks ended June 25, 2013 consisted primarily of net income adjusted for non-cash expenses and a decrease in trade and other accounts receivable, partially offset by a decrease in accrued expenses. The decrease in trade and other accounts receivable was primarily due to a decrease in credit card and other receivables due to the timing of the holidays near our fiscal 2012 year end. The decrease in accrued expenses was primarily due to a decrease in the balance of outstanding gift cards and lower incentive compensation accruals.



Investing Activities

Cash used by investing activities was $88.0 million and $181.9 million for the twenty-six weeks ended July 1, 2014 and June 25, 2013, respectively. Cash used in investing activities consists primarily of capital expenditures and for the twenty-six weeks ended June 25, 2013, also included the purchase of investments of $97.9 million. Capital Expenditures Capital expenditures are the largest ongoing component of our investing activities and include expenditures for new bakery-cafes and fresh dough facilities, improvements to existing bakery-cafes and fresh dough facilities, and other capital needs, which include investments in technology infrastructure to support ongoing strategic initiatives. A summary of capital expenditures for the periods indicated consisted of the following (in thousands): For the 26 Weeks



Ended

July 1, 2014 June 25, 2013 New bakery-cafe and fresh dough facilities $ 36,249 $



37,933

Bakery-cafe and fresh dough facility improvements 31,382 25,514 Other capital needs 23,112 18,055 Total $ 90,743$ 81,502 Our capital requirements, including development costs related to the opening or acquisition of additional bakery-cafes and fresh dough facilities, maintenance and remodel expenditures, and investments in technology infrastructure, have been and will continue to be significant. Our future capital requirements and the adequacy of available funds will depend on many factors, including the pace of expansion, real estate markets, site locations, and the nature of arrangements negotiated with landlords. We believe that cash provided by our operations, our term loan borrowings, and available borrowings under our credit facility will be sufficient to fund our capital requirements in both our short-term and long-term future. We continue to anticipate $225 million to $250 million of capital expenditures in fiscal 2014. 23 --------------------------------------------------------------------------------



Financing Activities

Cash provided by financing activities was $1.4 million for the twenty-six weeks ended July 1, 2014. Cash used by financing activities was $18.2 million for the twenty-six weeks ended June 25, 2013. Financing activities for the twenty-six weeks ended July 1, 2014 consisted primarily of $100.3 million used to repurchase shares of our Class A common stock and $100 million of proceeds from term loan borrowings. Financing activities for the twenty-six weeks ended June 25, 2013 consisted primarily of $20.4 million used to repurchase shares of our Class A common stock. Share Repurchases On August 23, 2012, our Board of Directors, or Board, approved a three year share repurchase authorization of up to $600 million of our Class A common stock, which we refer to as the 2012 repurchase authorization, pursuant to which we may repurchase shares from time to time on the open market or in privately negotiated transactions and which may be made under a Rule 10b5-1 plan. Repurchased shares may be retired immediately and resume the status of authorized but unissued shares or may be held by us as treasury stock. During the twenty-six weeks ended July 1, 2014, we repurchased 514,357 shares under the 2012 repurchase authorization, at an average price of $170.15 per share, for an aggregate purchase price of approximately $87.5 million. During the twenty-six weeks ended June 25, 2013, we repurchased 122,700 shares under the 2012 repurchase authorization, at an average price of $162.84 per share, for an aggregate purchase price of approximately $20.0 million. As of July 1, 2014, under the 2012 repurchase authorization, we had repurchased a total of 2,630,707 shares of our Class A common stock, at a weighted-average price of $167.13 per share, for an aggregate purchase price of approximately $439.7 million. On June 5, 2014, our Board terminated the 2012 repurchase authorization. On June 5, 2014, our Board approved a new three year share repurchase authorization of up to $600 million of our Class A common stock, which we refer to as the 2014 repurchase authorization, pursuant to which we may repurchase shares from time to time on the open market or in privately negotiated transactions and which may be made under a Rule 10b5-1 plan. Repurchased shares may be retired immediately and resume the status of authorized but unissued shares or may be held by us as treasury stock. The 2014 repurchase authorization may be modified, suspended, or discontinued by our Board at any time. As of July 1, 2014, under the 2014 share repurchase authorization, we had repurchased a total of 82,085 shares of our Class A common stock, at a weighted-average price of $151.95 per share, for an aggregate purchase price of approximately $12.5 million. We have approximately $587.5 million available under the 2014 repurchase authorization. In total, during the twenty-six weeks ended July 1, 2014, we repurchased 596,442 shares under the 2012 and 2014 repurchase authorizations, at an average price of $167.65 per share, for an aggregate purchase price of approximately $100.0 million. We have historically repurchased shares of our Class A common stock from participants of the Panera Bread 1992 Stock Incentive Plan and the Panera Bread 2006 Stock Incentive Plan, as amended, or collectively, the Plans, through a share repurchase authorization approved by our Board. Repurchased shares are netted and surrendered as payment for applicable tax withholding on the vesting of participants' restricted stock. During the twenty-six weeks ended July 1, 2014, we repurchased 1,840 shares of Class A common stock surrendered by participants of the Plans at a weighted-average price of $179.43 per share for an aggregate purchase price of approximately $0.3 million. During the twenty-six weeks ended June 25, 2013, we repurchased 2,271 shares of Class A common stock surrendered by participants of the Plans at a weighted-average price of $166.72 per share for an aggregate purchase price of approximately $0.4 million. These share repurchases were made pursuant to the terms of the Plans and the applicable award agreements and were not made pursuant to publicly announced share repurchase authorizations. 24 --------------------------------------------------------------------------------



Term Loan

On June 11, 2014, we entered into a term loan agreement, or the Term Loan Agreement, with Bank of America, N.A., as administrative agent, and other lenders party thereto. The Term Loan Agreement provides for an unsecured term loan, or the Term Loan, in the amount of $100 million that bears interest at a rate equal to, at our option, (1) LIBOR plus a margin ranging from 1.00% to 1.50% depending on our consolidated leverage ratio or (2) the highest of (a) the Bank of America prime rate, (b) the Federal funds rate plus 0.50% or (c) LIBOR plus 1.00%, plus a margin ranging from 0.00% to 0.50% depending on our consolidated leverage ratio. Our obligations under the Term Loan Agreement are guaranteed by certain of our direct and indirect subsidiaries. The Term Loan Agreement also allows us from time to time to request that the Term Loan be further increased by an amount not to exceed, in the aggregate, $150 million, subject to the arrangement of additional commitments with financial institutions acceptable to us and Bank of America and other customary terms and conditions. The Term Loan Agreement contains various financial covenants that, among other things, require us to maintain certain leverage and fixed charge coverage ratios. The Term Loan is scheduled to mature on June 11, 2019, subject to acceleration upon certain specified events of defaults, including breaches of representations or covenants, failure to pay other material indebtedness or a change of control of the Company, as defined in the Term Loan Agreement. We expect to use the proceeds from the Term Loan for general corporate purposes. We are currently in compliance with all covenant requirements under the Term Loan Agreement. Credit Facility On November 30, 2012, we entered into a credit agreement, or the Credit Agreement, with Bank of America, N.A. and other lenders party thereto. The Credit Agreement provides for an unsecured revolving credit facility of $250 million and provides that we may select interest rates under the credit facility equal to (1) LIBOR plus the Applicable Rate for LIBOR loans (which is an amount ranging from 1.00 percent to 2.00 percent depending on our consolidated leverage ratio) or (2) the Base Rate (which is defined as the higher of Bank of America prime rate, the Federal funds rate plus 0.50 percent, or LIBOR plus 1.00 percent) plus the Applicable Rate for Base Rate loans (which is an amount ranging from 0.00 percent to 1.00 percent depending on our consolidated leverage ratio). Our obligations under the credit facility are guaranteed by certain of our direct and indirect subsidiaries. The Credit Agreement allows us from time to time to request that the credit facility be further increased by an amount not to exceed, in the aggregate, $150 million, subject to the arrangement of additional commitments with financial institutions acceptable to us and Bank of America. The Credit Agreement contains various financial covenants that, among other things, require us to maintain certain leverage and fixed charge coverage ratios. The credit facility will become due on November 30, 2017, subject to acceleration upon certain specified events of defaults, including breaches of representations or covenants, failure to pay other material indebtedness or a change of control of the Company, as defined in the Credit Agreement. We expect to use the proceeds from the credit facility for general corporate purposes. As of July 1, 2014 and December 31, 2013, we had no loans outstanding under the Credit Agreement. We are currently in compliance with all covenant requirements under the Credit Agreement.



Critical Accounting Policies and Estimates

Our discussion and analysis of our consolidated financial condition and results of operations is based upon the consolidated financial statements and notes to the consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of the consolidated financial statements requires us to make estimates, judgments and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Variances in the estimates or assumptions used to actual experience could yield materially different accounting results. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances. We have chosen accounting policies we believe are appropriate to report accurately and fairly our consolidated operating results and financial position, and we apply those accounting policies in a consistent manner. As described in Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, we consider our policies on accounting for revenue recognition, valuation of goodwill, self-insurance, income taxes, lease obligations, and the impairment of long-lived assets to be the most critical in the preparation of the consolidated financial statements because they involve the most difficult, subjective, or complex judgments about the effect of matters that are inherently uncertain. There have been no material changes to our application of critical accounting policies and significant judgments and estimates since December 31, 2013. 25

--------------------------------------------------------------------------------



Contractual Obligations and Other Commitments

In addition to our planned capital expenditure requirements, we have certain other contractual and committed cash obligations. Our contractual cash obligations consist of non-cancelable operating leases for our bakery-cafes, fresh dough facilities and trucks, and support centers; capital leases; purchase obligations primarily for certain commodities; and uncertain tax positions. Lease terms for our trucks are generally for five to seven years. The reasonably assured lease term for most bakery-cafe and support center leases is the initial non-cancelable lease term plus one renewal option period, which generally equates to an aggregate of 15 years. The reasonably assured lease term for most fresh dough facilities is the initial non-cancelable lease term plus one to two renewal option periods, which generally equates to an aggregate of 20 years. Lease terms generally require us to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs. Certain bakery-cafe leases provide for contingent rental (i.e. percentage rent) payments based on sales in excess of specified amounts, scheduled rent increases during the lease terms, and / or rental payments commencing on a date other than the date of initial occupancy.



Off-Balance Sheet Arrangements

As of July 1, 2014, we guaranteed operating leases of 24 franchisee or affiliate locations, which we account for in accordance with the accounting requirements for guarantees. These guarantees are primarily a result of the sales of Company-owned bakery-cafes to franchisees and affiliates, pursuant to which we exercised our right to assign the lease or sublease for the bakery-cafe but remain liable to the landlord for the remaining lease term in the event of a default by the assignee. These leases have terms expiring on various dates from July 31, 2014 to September 30, 2027 and potential future rental payments of approximately $18.4 million as of July 1, 2014. Our obligation from these leases will decrease over time as these operating leases expire. We have not recorded a liability for certain of these guarantees as they arose prior to the implementation of the accounting requirements for guarantees and, unless modified, are exempt from its requirements. We have not recorded a liability for those guarantees issued after the effective date of the accounting requirements because the fair value of these lease guarantees was determined by us to be insignificant individually, and in the aggregate, based on analysis of the facts and circumstances of each such lease and each such assignee's performance, and we did not believe it was probable that we would be required to perform under any guarantees at the time the guarantees were issued. We have not had to make any payments related to any of these guaranteed leases. Applicable assignees continue to have primary liability for these operating leases.



Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update (ASU) 2014-09, "Revenue from Contracts with Customers (Topic 606)". This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This update is effective for annual and interim periods beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of fiscal 2017. Early application is not permitted. This update permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect this guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting. In July 2013, the FASB issued Accounting Standards Update No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists". This guidance requires an unrecognized tax benefit related to a net operating loss carryforward, a similar tax loss or a tax credit carryforward to be presented as a reduction to a deferred tax asset, unless the tax benefit is not available at the reporting date to settle any additional income taxes under the tax law of the applicable tax jurisdiction. The guidance became effective for us at the beginning of our first quarter of fiscal 2014 and did not have a material impact on our consolidated financial statements.


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters