Panera Bread 2006 Annual Report Download

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Panera Bread Company
2006 Annual Report to Stockholders

Table of contents

  • Page 1
    Panera Bread Company 2006 Annual Report to Stockholders

  • Page 2
    ... comparative store sales growth (comps), driving average weekly sales to $39,150-or just over $2 million per bakery-cafe annually. System-wide bakery-cafe sales reached $1.9 billion ($0.7 billion for Company-owned locations and $1.2 billion for franchise-operated locations). BUILDING OUR BUSINESS IN...

  • Page 3
    ... customers have. THANK YOU Before I close, I'd like to extend a special thank you to our Board of Directors, to our support center team members, and in particular, to our operators, joint venture partners, and franchisees. Your extraordinary service and commitment to Panera Bread drives our success...

  • Page 4
    ... to execute our growth strategy, including, among other things, variations in the number, timing, and successful nature of Company-owned and franchise-operated bakery-cafe openings and continued successful operation of bakery-cafes; failure to comply with government regulations; loss of a member of...

  • Page 5
    ... Panera Bread Company (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 04-2723701 (I.R.S. Employer Identification No.) 6710 Clayton Rd., Richmond Heights, MO (Address of principal executive offices) 63117 (Zip code...

  • Page 6
    ..., and free Internet access provided through a managed WiFi network. At the close of each day, our bakery-cafes donate bread and baked goods to community organizations in need. We operate as three business segments: the Company-owned bakery-cafe operations segment, the franchise operations segment...

  • Page 7
    ...offered by traditional fast food. Our goal is to maintain recognition of Panera Bread as a leading brand. Our menu, prototype, operating systems, design, and real estate strategy allow us to compete successfully in several segments of the restaurant business: breakfast, lunch, PM "chill out," dinner...

  • Page 8
    ...products which build on the strength of our bakery expertise. The key menu groups are fresh baked goods, made-to-order sandwiches on freshly baked breads, Crispani» hand-crafted pizza, soups, salads, and cafe beverages. Included within these menu groups are a variety of freshly baked bagels, breads...

  • Page 9
    ... per location sales through menu development, product merchandising, and promotions at every day prices and by sponsorship of local community charitable events. Franchise-operated bakery-cafes contribute to us 0.7% of their sales to a national advertising fund and 0.4% of their sales as a marketing...

  • Page 10
    ... time, we do not have any international franchise development agreements. BAKERY-CAFE SUPPLY CHAIN Bakery-cafes use fresh dough for their artisan and sourdough breads and bagels and for their Crispani» handcrafted pizza. Fresh dough is supplied daily to both Company-owned and franchise-operated...

  • Page 11
    ... average check. All product prices are programmed into the point-of-sale register from our headquarters office. We allow franchisees, that elect to do so, access to certain of our proprietary bakery-cafe systems and systems support. Franchisees set their own menu prices. We use in-store Enterprise...

  • Page 12
    .... In addition, we provide periodic investor relations updates and our corporate governance materials at our Internet address. GOVERNMENT REGULATION Each fresh dough facility and Company-owned and franchise-operated bakery-cafe is subject to regulation and licensing by federal agencies, as well as to...

  • Page 13
    ... rate of our bakery-cafes in those markets. However, this strategy could result in a sales decline in some of our existing bakery-cafes if customers choose to patronize a new location over an existing location. There can be no assurance that we will be successful in operating bakery-cafes profitably...

  • Page 14
    ... including business, health, fire and safety codes. Various federal and state labor laws govern our operations and our relationship with our employees, including minimum wage, overtime, accommodation and working conditions, benefits, citizenship requirements, insurance matters, workers' compensation...

  • Page 15
    ... to provide health insurance to employees, could negatively impact our operating results. Disruptions in our supply chain or increases in ingredient, product and other supply costs could adversely affect our profitability and operating results. Our Company-owned and franchise-operated bakery-cafes...

  • Page 16
    ... our bakery operations or, if necessary, we could make menu adjustments to address material supply issues. However, there are many factors which could cause shortages or interruptions in the supply of our ingredients and products - including produce, antibiotic free chicken, sweet goods and soup...

  • Page 17
    ... in our operating costs; • labor availability and wages of management and associates; • increases and decreases in average weekly sales and comparable bakery-cafe sales, including as a result of the introduction of new menu items; • profitability of new bakery-cafes, especially in new markets...

  • Page 18
    ... with respect to Company-owned leased fresh dough facilities as of December 26, 2006 is set forth below: Facility Square Footage Franklin, MA(1) ...Fairfield, NJ ...Chicago, IL ...St. Louis, MO ...Beltsville, MD ...Cincinnati, OH ...Detroit, MI...Atlanta, GA ...Kansas City, KS ...Seattle, WA...

  • Page 19
    ...below: Panera Bread/St. Louis Bread Co. Bakery-Cafes State CompanyOwned Bakery-Cafes FranchiseOperated Bakery-Cafes Total Bakery-Cafes Alabama ...Arkansas ...California ...Colorado ...Connecticut ...Delaware ...Florida ...Georgia ...Iowa ...Illinois ...Indiana ...Kansas ...Kentucky ...Massachusetts...

  • Page 20
    ... MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Our Class A Common Stock is listed on The Nasdaq Global Select Market under the symbol "PNRA." There is no established public trading market for our Class B Common Stock. The following table sets forth the high and low sale prices for our Class...

  • Page 21
    ...per share data) Revenues: Bakery-cafe sales ...Franchise royalties and fees ...Fresh dough sales to franchisees ...Total Revenue ...Costs and expenses: Bakery-cafe expenses: Cost of food and paper products ...Labor ...Occupancy ...Other operating expenses ...Fresh dough cost of sales to franchisees...

  • Page 22
    ...-operated bakery-cafes, as reported by franchisees. System-wide sales is a non-GAAP financial measure that includes sales from all Company-owned and franchise-operated bakery-cafes. Management uses system-wide sales and franchisee revenue information internally in connection with store development...

  • Page 23
    ...cafe sales percentages and average weekly sales. System-wide sales is a non-GAAP financial measure that includes sales from all Company-owned and franchise-operated bakery-cafes, as reported by franchisees. Management uses system-wide sales information internally in connection with store development...

  • Page 24
    ...the Fiscal Year Ended December 26, December 27, December 25, 2006 2005 2004 Revenues: Bakery-cafe sales ...Franchise royalties and fees ...Fresh dough sales to franchisees ...Total revenue ...Costs and expenses: Bakery-cafe expenses(1): Cost of food and paper products ...Labor ...Occupancy ...Other...

  • Page 25
    ... that have been in operation for at least 18 months. Franchise-operated bakerycafes which we acquire are included in comparable bakery-cafe sales 18 months after the original franchise opening date. Both Company-owned and franchise-operated comparable bakery-cafe sales exclude closed locations. 20

  • Page 26
    ... for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, stockbased compensation was included as pro forma disclosure in the financial statement...

  • Page 27
    ...2006 (70 Company-owned and 85 franchise-operated) as well as increases in system-wide comparable bakery-cafe sales of 4.1% for the fiscal year ended December 26, 2006. The system-wide average weekly sales per bakery-cafe and the related number of operating weeks for the fiscal year ended December 26...

  • Page 28
    ...open 85 to 90 new franchise-operated bakery-cafes. The ADA requires a franchisee to develop a specified number of bakery-cafes on or before specific dates. If a franchisee fails to develop bakery-cafes on schedule, we have the right to terminate the ADA and develop Company-owned locations or develop...

  • Page 29
    ...due to the leveraging of other operating costs over higher sales volumes, partially offset by increased local marketing expenses incurred in support of our evening daypart initiative. For the fiscal year ended December 26, 2006, fresh dough facility cost of sales to franchisees was $85.6 million, or...

  • Page 30
    ...-cafes in 2005 as well as increases in system-wide comparable bakery-cafe sales of 7.8% for the fiscal year ended December 27, 2005. The system-wide average weekly sales per bakery-cafe and the related number of operating weeks for the fiscal year ended December 27, 2005 and December 25, 2004 were...

  • Page 31
    ...open 80 to 85 new franchise-operated bakery-cafes. The ADA requires a franchisee to develop a specified number of bakery-cafes on or before specific dates. If a franchisee fails to develop bakery-cafes on schedule, we have the right to terminate the ADA and develop Company-owned locations or develop...

  • Page 32
    ... existing Company-owned bakery-cafes, purchasing existing franchise-operated bakery-cafes, developing, remodeling and maintaining fresh dough facilities, and for enhancements of information systems and other infrastructure capital investments. See Note 3 of our Consolidated Financial Statements for...

  • Page 33
    ...2006 included $7.7 million from the exercise of stock options, $4.3 million from the tax benefit from exercise of stock options, and $1.6 million from the issuance of common stock under employee benefit plans. The financing activities in the fiscal year ended December 27, 2005 included $12.6 million...

  • Page 34
    .... We perform our impairment assessment by comparing discounted cash flows from reporting units with the carrying value of the underlying net assets inclusive of goodwill. In performing this analysis, management considers such factors as current results, trends, future prospects and other economic...

  • Page 35
    ...See Note 2 to the Consolidated Financial Statements for further information on our accounting for leases. Stock-Based Compensation We maintain several stock-based incentive plans. We grant options to purchase common stock at an option price equal to the market value of the stock at the date of grant...

  • Page 36
    ...ten years with renewal options at most locations and generally require us to pay a proportionate share of real estate taxes, insurance, common area, and other operating costs. Many bakery-cafe leases provide for contingent rental (i.e., percentage rent) payments based on sales in excess of specified...

  • Page 37
    ... reduction in bakery-cafe profit margins as a result of changes in such laws, and management does not anticipate any related future significant reductions in gross profit margins. Recent Accounting Pronouncements In June 2006, the Financial Accounting Standards Board issued FASB Interpretation...

  • Page 38
    ... to this item: Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Statements of Operations ...Consolidated Statements of Cash Flows ...Consolidated Statements of Stockholders' Equity ...Notes to the Consolidated Financial Statements ...Schedule II...

  • Page 39
    ... schedule In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Panera Bread Company and its subsidiaries at December 26, 2006 and December 27, 2005 and the results of their operations and their cash...

  • Page 40
    ... of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject...

  • Page 41
    PANERA BREAD COMPANY CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share information) December 26, 2006 December 27, 2005 ASSETS Current assets: Cash and cash equivalents ...Investments in government securities ...Trade accounts receivable, net ...Other accounts receivable ......

  • Page 42
    ...Ended December 26, December 27, December 25, 2006 2005 2004 Revenues: Bakery-cafe sales ...Franchise royalties and fees ...Fresh dough sales to franchisees ...Total revenue ...Costs and expenses: Bakery-cafe expenses: Cost of food and paper products ...Labor ...Occupancy ...Other operating expenses...

  • Page 43
    ... from sale of assets ...Acquisitions, net of cash acquired Purchase of investments ...Investment maturities proceeds ...(Increase) decrease in deposits and other ...Net cash used in investing activities ...Cash flows from financing activities: Exercise of employee stock options...Tax benefit from...

  • Page 44
    ... of year ...Treasury Stock, at cost: Balance, beginning of year ...Balance, end of year ...Additional Paid In Capital: Balance, beginning of year ...Exercise of employee stock options ...Issuance of common stock ...Stock compensation ...Income tax benefit related to stock option plan 1,401 (1) 1,400...

  • Page 45
    ... retail operations consist of 391 Company-owned bakery-cafes. The Company specializes in meeting consumer dining needs by providing high quality food, including fresh baked goods, made-to-order sandwiches on freshly baked breads, Crispani» hand-crafted pizza, soups, salads, and cafe beverages, and...

  • Page 46
    ... capitalized. Goodwill Goodwill consists of the excess of the purchase price over the fair value of net assets acquired from the acquisitions of the Saint Louis Bread Company, franchise-operated bakery-cafes, a franchise-operated fresh dough facility, and the membership interest of a former minority...

  • Page 47
    ..., future prospects, and other economic factors. No impairment of long-lived assets was determined for the years ended December 26, 2006, December 27, 2005, and December 25, 2004. Self-Insurance Reserves The Company is self-insured for a significant portion of its workers' compensation, group health...

  • Page 48
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Revenue Recognition The Company records revenue from bakery-cafe sales upon delivery of the related food and other products to the customer. Revenue from fresh dough sales to franchisees is also recorded upon delivery....

  • Page 49
    .... Derivative Financial Instruments The Company periodically enters into swap agreements to manage fluctuating butter prices. Swap agreements designated at inception as a hedge are accounted for under the deferral method, with gains and losses from hedging activity included in the cost of sales as...

  • Page 50
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Stock-Based Compensation The Company maintains several stock-based incentive plans. The Company grants options to purchase common stock at an option price equal to the market value of the stock at the date of grant. ...

  • Page 51
    ... on its consolidated financial statements. 3. Acquisitions On October 24, 2006, the Company purchased substantially all of the assets of thirteen bakery-cafes (one of which was under construction) and the area development rights for certain markets in Iowa, Nebraska and South Dakota from its...

  • Page 52
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) for a purchase price of approximately $28.0 million in cash plus the assumption of certain liabilities including those associated with bakery-cafe construction. The acquisition price was paid with cash on hand. The ...

  • Page 53
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 5. Property and Equipment Major classes of property and equipment consist of the following (in thousands): December 26, 2006 December 27, 2005 Leasehold improvements ...Land and land improvements ...Machinery and ...

  • Page 54
    .... 8. Accrued Expenses Accrued expenses consist of the following (in thousands): December 26, 2006 December 27, 2005 Capital expenditures ...Unredeemed gift cards ...Compensation and related employment taxes...Accrued acquisition purchase price (Note 3) ...Insurance ...Accrued advertising ...Rent...

  • Page 55
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) common area, and other operating costs. Many bakery-cafe leases provide for contingent rental (i.e., percentage rent) payments based on sales in excess of specified amounts. Certain of the Company's lease agreements ...

  • Page 56
    ...FINANCIAL STATEMENTS - (Continued) Beginning in fiscal 2003, the Company executed Confidential and Proprietary Information and Non-Competition Agreements (Agreements) with certain employees. These Agreements contain a provision whereby employees would be due a certain number of weeks of their salary...

  • Page 57
    ...022) 12. Deposits and Other The Company established a company-owned life insurance ("COLI") program covering a substantial portion of its employees to help manage long-term employee benefit cost and to obtain tax deductions on interest payments on insurance policy loans. However, due to tax law...

  • Page 58
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) the Company through payment of death benefits and mortality dividends received. Interest expense is recorded on the accrual basis. 13. Stockholders' Equity Common Stock The holders of Class A Common Stock are entitled...

  • Page 59
    ... 26, 2006 and December 27, 2005, compensation (income) expense related to the performance awards was ($0.2) million and $1.0 million, respectively. Stock options under the LTIP are granted with an exercise price equal to the quoted market value of the Company's common stock on the date of grant. In...

  • Page 60
    ... may not exceed 10% of an employee's current year compensation) at 85% of the fair market value of the Class A Common Stock at the end of each calendar quarter. There were approximately 29,000 and 27,000 shares purchased with a weighted average fair value of purchase rights of $9.88 and $7.72 during...

  • Page 61
    ...of market options, peer company volatility, and other factors. The average expected life represents the period of time that option grants are expected to be outstanding and is derived from historical terms and other factors. The risk-free rate is based on the rate of U.S. Treasury zero-coupon issues...

  • Page 62
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) A summary of stock option activity under the Company's stock-based compensation plans is set forth below: Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value...

  • Page 63
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) net of a $2.3 million forfeiture estimate, and is expected to be recognized over a weighted average period of approximately 2.7 years. The fair value of restricted stock is determined based on the market value of the ...

  • Page 64
    ...The Company-owned bakery-cafes conduct business under the Panera Bread» or Saint Louis Bread Co.» names. These bakery-cafes sell fresh baked goods, made-to-order sandwiches on freshly baked breads, soups, salads, custom roasted coffees, and other complementary products through on-premise sales, as...

  • Page 65
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (1) In October 2006, the Company acquired 13 bakery-cafes (one of which was under construction) and the area development rights from a franchisee in certain markets in Iowa, Nebraska and South Dakota. In September ...

  • Page 66
    ... and interest receivable, "unallocated property and equipment" relates primarily to corporate fixed assets, "unallocated deposits and other" relates primarily to company-owned life insurance program, and "other unallocated assets" relates primarily to cash and cash equivalents and investments. 61

  • Page 67
    ... Year Ended December 26, December 27, December 25, 2006 2005 2004 Amounts used for basic and diluted per share calculations: Net income ...Weighted average number of shares outstanding - basic . . Effect of dilutive securities: Employee stock options ...LTIP ...Weighted average number of shares...

  • Page 68
    ...the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, stock-based compensation was included as pro forma disclosure in the financial statement footnotes. Footnote option expense would...

  • Page 69
    .... Internal control over financial reporting is defined in Rule 13a-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Company's board of directors, management and other associates...

  • Page 70
    ... principal executive, financial and accounting officers, and its directors and employees. The Company has posted the Standards of Business Conduct on its Internet website at www.panerabread.com under the "Financial Reports" section of the "About Us - Investor Relations" webpage. The Company intends...

  • Page 71
    PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements The following described consolidated financial statements of the Company are included in this report: Report of Independent Registered Public Accounting Firm. Consolidated Balance Sheets as of December 26, 2006 and...

  • Page 72
    ...report to be signed on its behalf by the undersigned, thereunto duly authorized. PANERA BREAD COMPANY By: /s/ RONALD M. SHAICH Ronald M. Shaich Chairman and Chief Executive Officer... Vice President, Chief Financial Officer Vice President, Controller, Chief Accounting Officer February 23, 2007 ...

  • Page 73
    ....†Panera Bread Company 2001 Employee, Director and Consultant Stock Option Plan. Incorporated by reference to Appendix A to the Company's Proxy Statement dated April 21, 2005 filed on Schedule 14A with the Commission on April 21, 2005.†Panera Bread Company 2005 Long-Term Incentive Program, as...

  • Page 74
    ... to Exhibit 10.12 of the Company's Annual Report on Form 10-K for the year ended December 30, 2000. Registrant's Subsidiaries. Consent of Independent Registered Public Accounting Firm. Certification by Chief Executive Officer. Certification by Chief Financial Officer. Certification Pursuant to 18...

  • Page 75
    ... on December 31, 2001 in index-including reinvestment of dividends. Indexes calculated on month-end basis. 12/29/01 12/28/02 12/27/03 12/25/04 12/27/05 12/26/06 PANERA BREAD COMPANY NASDAQ STOCK MARKET (U.S.) S&P MIDCAP RESTAURANTS $ 100.00 $ 131.14 $ 100.00 $ 69.66 $ 100.00 $ 101.29 $ 146...

  • Page 76
    ... University School of Management Ronald M. Shaich Chairman of the Board and Chief Executive Officer, Panera Bread Company Corporate Information Transfer Agent and Registrar Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940-3078 Shareholder Inquires 1- (877) 282-1169 2007 Annual...