Panera Bread 2012 Annual Report Download

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Panera Bread Company
2012 Annual Report to Stockholders

Table of contents

  • Page 1
    Panera Bread Company 2012 Annual Report to Stockholders

  • Page 2

  • Page 3
    ... chain teams, working in partnership, have driven the success of our signature salad, sandwich, soup, and smoothie categories. Last year we once again experienced the positive impact of food development and supply chain working together to drive innovation in the Panera experience. Indeed, in 2012...

  • Page 4
    ... for Panera outside of our four walls and we plan on continued innovation to capture that demand in the future. To that end, we are making investments in catering in 2013 by increasing the number and quality of our regional catering sales managers, rolling out a new sales force management system and...

  • Page 5
    ... to provide member food banks in more than 75 markets with Panera's Black Bean soup. Additionally, in early 2013 and 2012, the Panera Bread Foundation opened two more Panera Cares® Community Cafes in Boston, MA and Chicago, IL. These locations are non-profit donation based community cafes of shared...

  • Page 6
    ... in this annual report to stockholders and in our public disclosures, whether written or oral, relating to future events or our future performance, including any discussion, express or implied, of our anticipated growth, operating results, plans, objectives, and future earnings per share, contain...

  • Page 7
    ... in Rule 12b-2 of the Act). Yes No Smaller reporting company The aggregate market value of the registrant's voting common equity held by non-affiliates of the registrant, based on the last sale price of the registrant's worldwide Class A Common Stock at the close of business on June 26, 2012, was...

  • Page 8
    ... FINANCIAL DISCLOSURE ...70 ITEM 9A. CONTROLS AND PROCEDURES ...70 ITEM 9B. OTHER INFORMATION ...71 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ...71 ITEM 11. EXECUTIVE COMPENSATION...71 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED...

  • Page 9
    ... Ontario, Canada. As of December 25, 2012, our fresh dough and other product operations segment, which supplies fresh dough and other products daily to most Company-owned and franchiseoperated bakery-cafes, consisted of 24 fresh dough facilities (22 Company-owned and two franchise-operated), located...

  • Page 10
    ... to return to our bakery-cafes. Our menu, operating systems, design, and real estate strategy allow us to compete successfully in several segments of the restaurant business: breakfast, lunch, gathering place, dinner, and take home, through both on-premise sales and off-premise Panera Catering®. We...

  • Page 11
    ... levels and competitive compensation for our associates is fundamental to our current and future success. We believe in providing bakery-cafe operators the opportunity to share in the success of the bakery-cafe. Through our Joint Venture Program, selected general managers and multi-unit managers...

  • Page 12
    ..., which generally equates to 20 years. Lease terms generally require us to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs. Many bakery-cafe leases provide for contingent rental (i.e. percentage rent) payments based on sales in excess...

  • Page 13
    .... Our fresh dough facility system supplies fresh dough and other products to substantially all franchise-operated bakery-cafes. We do not generally finance franchisee construction or ADA payments. From time to time and on a limited basis, we may provide certain development or real estate services to...

  • Page 14
    ... reduce managers' administrative time. We use retail data to generate daily and weekly consolidated reports regarding sales and other key metrics, as well as detailed profit and loss statements for our Company-owned bakery-cafes. Additionally, we monitor the transaction counts, product mix, average...

  • Page 15
    ..., labor or distribution problems, food safety issues by our suppliers or distributors, cost, and the financial health of our suppliers and distributors. Any disruptions in our bakery-cafe supply chain could adversely affect our profitability and operating results. Changes in food and supply costs...

  • Page 16
    ... decrease in customer traffic to our bakery-cafes. Our ability to increase our revenues and operating profits could be adversely affected if we are unable to execute our growth strategy or achieve sufficient returns on invested capital in bakery-cafe locations. Our growth strategy primarily consists...

  • Page 17
    ... competitive environments. Additional expenses attributable to costs of delivery from our fresh dough facilities may exceed our expectations in areas not currently served by those facilities. Our growth strategy also includes opening bakery-cafes in existing markets to increase the penetration rate...

  • Page 18
    ... items consistent with customer tastes and expectations; balancing unit growth while meeting target returns on invested capital for locations; increasing same store sales and gross profit per transaction through investments in areas such as category management, catering, and technology in an effort...

  • Page 19
    ... our Company-owned bakery-cafes to include caloric information, we may become subject to other regulations in the area of nutrition disclosure or advertising which would require us to make certain additional nutritional information available to our customers or restrict the sales of certain types of...

  • Page 20
    ... our operations, including for the order and delivery of fresh dough from our fresh dough facilities, point-of-sale processing in our bakery-cafes, gift and loyalty cards, online business, and various other processes and transactions, including the storage of employee and customer information. Our...

  • Page 21
    ... increased labor costs, including wages of management and associates, compensation, insurance, and health care; and changes in business strategy including concept evolution and new designs. • • • profitability of new bakery-cafes, especially in new markets; delays in new bakery-cafe openings...

  • Page 22
    ..., which generally equates to 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...

  • Page 23
    ... KS ...Minneapolis, MN ...Miramar, FL ...Ontario, CA ...Orlando, FL ...Seattle, WA ...St. Louis, MO ...Stockton, CA ...Warren, OH ...Ontario, Canada ...(1) Total square footage includes approximately 20,000 square feet utilized for tuna and cream cheese production. Square Footage 1,800 26,000 35,700...

  • Page 24
    ...New Hampshire...New Jersey ...New Mexico ...New York...North Carolina...Ohio ...Oklahoma ...Oregon ...Pennsylvania ...Rhode Island ...South Carolina...South Dakota ...Tennessee...Texas ...Utah ...Vermont...Virginia ...Washington ...West Virginia...Wisconsin ...District of Columbia ...Ontario, Canada...

  • Page 25
    ...reserve of $3.7 million in accrued expenses in our Consolidated Balance Sheets as of December 25, 2012. On July 22, 2011, a purported class action lawsuit was filed against us and one of our subsidiaries by David Carter, a former employee of a subsidiary of Panera Bread Company, and Nikole Benavides...

  • Page 26
    ..., 2012, our Board of Directors approved a new three year share repurchase authorization of up to $600.0 million of our Class A common stock, 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...

  • Page 27
    ...of Operations" and our consolidated financial statements and notes thereto. For the fiscal year ended (1) (in thousands, except per share and percentage information) December 25, 2012 Revenues: Bakery-cafe sales, net ...$ 1,879,280 Franchise royalties and fees...102,076 Fresh dough and other product...

  • Page 28
    ... 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 systemwide sales information internally in connection with store development decisions, planning, and...

  • Page 29
    ... pre-opening expenses relate to all areas of revenue generation. Our fiscal year ends on the last Tuesday in December. Each of our fiscal years ended December 25, 2012, December 27, 2011, and December 28, 2010, had 52 weeks. We include in this report information on Company-owned, franchise-operated...

  • Page 30
    ... franchise-operated bakery-cafes); and five bakery-cafes closed system-wide (one Company-owned bakery-cafes and four franchise-operated bakery-cafes). In fiscal 2011, we earned $4.55 per diluted share with the following performance on key metrics: system-wide comparable net bakery-cafe sales growth...

  • Page 31
    ..., 2012 2011 2010 Revenues: Bakery-cafe sales, net Franchise royalties and fees ...Fresh dough and other product sales to franchisees ...Total revenue ...Costs and expenses: Bakery-cafe expenses (1): Cost of food and paper products ...Labor ...Occupancy ...Other operating expenses...Total bakery-cafe...

  • Page 32
    ... Net Bakery-cafe Sales Comparable net bakery-cafe sales growth for the fiscal periods indicated were as follows: For the fiscal year ended December 25, December 27, December 28, 2012 2011 2010 Company-owned ...6.5% 4.9% 7.5% Franchise-operated ...5.0% 3.4% 8.2% System-wide ...5.7% 4.0% 7.9% 24

  • Page 33
    ...growth ...Results of Operations Revenues The following table summarizes revenues for the periods indicated (dollars in thousands): For the fiscal year ended December 25, December 27, December 28, 2012 2011 2010 Bakery-cafe sales, net ...$ Franchise royalties and fees ...Fresh dough and other product...

  • Page 34
    ...increase in average weekly net sales for Company-owned bakery-cafes in fiscal 2011 compared to the prior fiscal year was primarily due to the above noted average check growth that resulted from retail price increases and our category management initiatives. Franchise royalties and fees The following...

  • Page 35
    ... opening of 59 franchise-operated cafes, and new product offerings, partially offset by our purchase of 30 franchise-operated bakery-cafes and the closure of 21 franchise-operated bakery-cafes. Costs and Expenses The cost of food and paper products includes the costs associated with the fresh dough...

  • Page 36
    ... bakery-cafe sales. The following table summarizes fresh dough and other product cost of sales to franchisees for the periods indicated (dollars in thousands): For the fiscal year ended December 25, December 27, December 28, 2012 2011 2010 Fresh dough and other product cost of sales to franchisees...

  • Page 37
    ... requirements for cash have primarily resulted from the cost of food and paper products, employee labor, 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...

  • Page 38
    ... accounts receivable, net, prepaid expenses, and inventories. Cash flows provided by operating activities in fiscal 2010 primarily resulted from net income, adjusted for noncash items such as depreciation and amortization, stock-based compensation expense, deferred income taxes, tax benefit from...

  • Page 39
    ..., 2012, our Board of Directors approved a new three year share repurchase authorization of up to $600.0 million of our Class A common stock, 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...

  • Page 40
    ... to perform no other service to earn this fee. The remainder of the fee is paid at the time an individual franchise agreement is signed and is recognized as revenue upon the opening of the corresponding bakery-cafe. Royalties are generally paid weekly based on a percentage of net franchisee sales...

  • Page 41
    ...-economic conditions, market and industry conditions, internal cost factors, competitive environment, share price fluctuations, results of past impairment tests, and the operational stability and the overall financial performance of the reporting units. During the fourth quarter of fiscal year 2012...

  • Page 42
    ... December 25, 2012, we recorded a valuation allowance related to net operating loss carryforwards of our Canadian operations of $1.8 million. No valuation allowance was recorded against deferred tax assets during the fiscal years ended December 27, 2011 and December 28, 2010, respectively. Although...

  • Page 43
    ..., which generally equates to 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...

  • Page 44
    ...sometimes purchased under agreements of one month to one year time frames usually at a fixed price. As a result, we are subject to market risk that current market prices may be above or below our contractual price. In fiscal 2012, 2011, and 2010, we did not utilize derivative instruments in managing...

  • Page 45
    ...result in an interest rate change that may have an impact on our consolidated results of operations. Foreign Currency Exchange Risk We currently have six Canadian Company-owned bakery-cafes and three Canadian franchise-operated bakery-cafes. Our operating expenses, cash flows, and royalty income are...

  • Page 46
    ... item: Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Statements of Comprehensive Income...Consolidated Statements of Cash Flows ...Consolidated Statements of Changes in Equity ...Notes to the Consolidated Financial Statements ...Schedule II...

  • Page 47
    ...the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform...

  • Page 48
    PANERA BREAD COMPANY CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share information) December 25, 2012 ASSETS Current assets: Cash and cash equivalents ...$ Trade accounts receivable, net...Other accounts receivable ...Inventories ...Prepaid expenses and other ...Deferred income ...

  • Page 49
    ... per share information) For the fiscal year ended December 25, December 27, December 28, 2012 2011 2010 Revenues: Bakery-cafe sales, net ...$ Franchise royalties and fees ...Fresh dough and other product sales to franchisees ...Total revenues ...Costs and expenses: Bakery-cafe expenses: Cost of food...

  • Page 50
    ...year ended December 25, December 27, December 28, 2012 2011 2010 Cash flows from operations: Net income ...$ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization...Stock-based compensation expense...Tax benefit from exercise of stock options...

  • Page 51
    PANERA BREAD COMPANY CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in thousands) Common Stock Class A Shares Balance, December 29, 2009 ...Comprehensive income: Net income (loss)...Other comprehensive income ...Comprehensive income ...Noncontrolling interest in PB Biscuit ...Purchase of ...

  • Page 52
    ... 2012, December 27, 2011, and December 28, 2010 had 52 weeks. The Company's fiscal year ending December 31, 2013 will have 53 weeks. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts...

  • Page 53
    ... carrying values. In considering the step zero approach to testing goodwill for impairment, the Company performs a qualitative analysis evaluating factors including, but not limited to, macro-economic conditions, market and industry conditions, internal cost factors, competitive environment, share...

  • Page 54
    ... future operating performance, such as revenue growth rates, operating margins, risk-adjusted discount rates, and future economic and market conditions. Estimates of cash flow may differ from actual cash flow due to, among other things, economic conditions, changes to the Company's business model...

  • Page 55
    ... in the Company's consolidated financial statements. The Company capitalizes direct and indirect costs clearly associated with the acquisition, development, design, and construction of bakery-cafe locations and fresh dough facilities as these costs have a future benefit to the Company. The types of...

  • Page 56
    ...December 25, 2012, December 27, 2011, and December 28, 2010, respectively. Pre-Opening Expenses All pre-opening expenses directly associated with the opening of new bakery-cafe locations, which consists primarily of preopening rent expense, labor, and food costs incurred during in-store training and...

  • Page 57
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) leases is the initial non-cancelable lease term plus one to two renewal option periods, which generally equates to 20 years. In addition, certain of the Company's lease agreements provide for scheduled rent increases ...

  • Page 58
    ... performance and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. The Company does not possess any ownership interests in franchise entities or other affiliates. The franchise agreements are designed to provide the franchisee with key decision-making...

  • Page 59
    ... in the Company Bakery-Cafe Operations segment. Milwaukee Franchisee Acquisition On April 19, 2011 the Company acquired substantially all the assets and certain liabilities of 25 bakery-cafes and the related area development rights from a Milwaukee franchisee for a purchase price of approximately...

  • Page 60
    ... in the Company Bakery-Cafe Operations segment. New Jersey Franchisee Acquisition On September 29, 2010 the Company acquired substantially all the assets and certain liabilities of 37 bakery-cafes and the area development rights from its New Jersey franchisee for a purchase price of approximately...

  • Page 61
    ...were carried at fair value in the Consolidated Balance Sheets based on quoted market prices for identical securities (Level 1 inputs). The Company's remaining cash balance in the Consolidated Balance Sheets was held in FDIC insured accounts. As of December 25, 2012 and December 27, 2011, the Company...

  • Page 62
    ... of the beginning and ending balances of the Company's goodwill by reportable segment at December 25, 2012 and December 27, 2011 (in thousands): Fresh Dough and Other Product Operations $ 1,695 - - - $ 1,695 - - - $ 1,695 Balance as of December 28, 2010 ...Acquisition of Milwaukee Franchisee...

  • Page 63
    ..., 2012 Unredeemed gift cards, net ...$ Compensation and related employment taxes ...Insurance ...Capital expenditures ...Taxes, other than income tax...Advertising ...Fresh dough and other product operations ...Rent ...Loyalty program ...Utilities ...Deferred acquisition purchase price ...Litigation...

  • Page 64
    ... purchase price of approximately $247.6 million. On August 23, 2012, the Company's Board of Directors approved a new three year share repurchase authorization of up to $600.0 million of Class A common stock, pursuant to which the Company may repurchase shares from time to time on the open market...

  • Page 65
    ..., which generally equates to 20 years. Lease terms generally require the Company to pay a proportionate share of real estate taxes, insurance, common area, and other operating costs. Certain bakery-cafe leases provide for contingent rental (i.e., percentage rent) payments based on sales in excess...

  • Page 66
    ... would operate three Panera Bread bakery-cafes in Ontario, Canada. On April 7, 2009, Millennium requested a Cdn. $3.5 million advance under the credit agreement for payment of the costs to develop the bakery-cafes, which was included in other accounts receivable in the Consolidated Balance Sheets as...

  • Page 67
    ... its consolidated financial statements. Other The Company is subject to on-going federal and state income tax audits and sales and use tax audits and any unfavorable rulings could materially and adversely affect its consolidated financial condition or results of operations. The Company believes...

  • Page 68
    ... operations which are not realizable on a more likely than not basis. The following is a rollforward of the Company's total gross unrecognized tax benefit liabilities for the periods indicated (in thousands): December 25, 2012 Beginning balance...$ 3,544 Tax positions related to the current year...

  • Page 69
    ... outstanding in fiscal years 2012 and 2011. Treasury Stock Pursuant to the terms of the Panera Bread 1992 Stock Incentive Plan and the Panera Bread 2006 Stock Incentive Plan and the applicable award agreements, the Company repurchased 42,100 shares of Class A common stock at a weighted-average cost...

  • Page 70
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) Co-Chief Executive Officers, to the Company's Compensation and Management Development Committee ("the Compensation Committee"). Long-Term Incentive Program In fiscal 2005, the Company adopted the 2005 Long Term Incentive...

  • Page 71
    ...based compensation expense related to stock options was as follows for the periods indicated (in thousands): For the fiscal year ended December 25, December 27, December 28, 2012 2011 2010 Charged to general and administrative expenses (1)...$ 421 $ 1,122 $ 1,510 (163) (428) (575) Income tax benefit...

  • Page 72
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) The following table summarizes the Company's stock option activity under its stock-based compensation plans during fiscal 2012, fiscal 2011, and fiscal 2010: Weighted Average Contractual Term Remaining (Years) ...

  • Page 73
    ... pre-vesting forfeiture rates. For fiscal 2012, 2011, and 2010, stock-based compensation expense related to SSARs was $0.1 million, $0.1 million, and less than $0.1 million, respectively, and was charged to general and administrative expenses in the Consolidated Statements of Comprehensive Income...

  • Page 74
    ...27, 2011, and 818,000 shares issued under this plan as of December 28, 2010. 17. Defined Contribution Benefit Plan The Panera Bread Company 401(k) Savings Plan (the "Plan") was formed under Section 401(k) of the Internal Revenue Code ("the Code"). The Plan covers substantially all employees who meet...

  • Page 75
    ... Accounting Policies." Segment information related to the Company's three business segments is as follows (in thousands): For the fiscal year ended December 25, December 27, December 28, 2012 2011 2010 Revenues: Company bakery-cafe operations ...Franchise operations ...Fresh dough and other product...

  • Page 76
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) December 25, 2012 Segment assets: Company bakery-cafe operations...$ Franchise operations...Fresh dough and other product operations ...Total segment assets ...$ Unallocated cash ...Unallocated trade and other accounts ...

  • Page 77
    ...28, 2012 2011 2010 Cash paid during the year for (in thousands): Interest ...$ Income taxes ...Non-cash investing and financing activities (in thousands): Change in accrued property and equipment purchases ...$ Accrued purchase price of noncontrolling interest ...Accrued purchase price of New Jersey...

  • Page 78
    ... financial officers and effected by the company's board of directors, management and other associates, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting...

  • Page 79
    ... SEC within 120 days of the end of the fiscal year to which this report relates. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Incorporated by reference from the information in the Company's proxy statement for the 2013 Annual Meeting of Stockholders, which the Company intends to file with the SEC...

  • Page 80
    ...8: "Financial Statements and Supplementary Data". (a)(2) Financial Statement Schedule: The following financial statement schedule for the Company is filed herewith: Schedule II - Valuation and Qualifying Accounts PANERA BREAD COMPANY VALUATION AND QUALIFYING ACCOUNTS (in thousands) Balance Beginning...

  • Page 81
    ...Co-Chief Executive Officer, Director (Principal Executive Officer) February 15, 2013 /s/ THOMAS P. KELLY Thomas P. Kelly Interim Chief Financial Officer (Principal Financial Officer) VP of Accounting, Associate Controller, Chief Accounting Officer (Principal Accounting Officer) February 15, 2013...

  • Page 82
    ...Current Report on Form 8-K (File No. 0-19253), as filed with the Commission on March 15, 2012 and incorporated herein by reference). 1992 Employee Stock Purchase Plan, as amended (filed as Exhibit B to the Registrant's Proxy Statement on Schedule 14A dated April 12, 2010 (File No. 0-19253), as filed...

  • Page 83
    ... Panera Bread Company and Ronald M. Shaich (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 0-19253), as filed with the Commission on May 18, 2010 and incorporated herein by reference). Credit Agreement dated as of November 30, 2012 by and among Panera Bread Company...

  • Page 84
    ... S&P MidCap Restaurants *$100 invested on 12/25/07 in stock or 12/31/07 in index, including reinvestment of dividends. Index calculated on month-end basis. December 25, 2007 December 30, 2008 December 29, 2009 December 28, 2010 December 27, 2011 December 25, 2012 Panera Bread Company NASDAQ...

  • Page 85
    ... 2013 Annual Meeting of Stockholders Wednesday, May 22, 2013, 10:30 a.m., Central Time Panera Bread Headquarters 3630 South Geyer Road St. Louis, Missouri 63127 Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP Stock Trading Information The Nasdaq Global Select Market Symbol...

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