Panera Bread 2012 Annual Report Download - page 56

PANERA BREAD COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
48
Revenue Recognition
The Company records revenues from bakery-cafe sales upon delivery of the related food and other products to the customer.
Revenues from fresh dough and other product sales to franchisees are recorded upon delivery to the franchisees. Sales of soup
and other branded products outside of the Company's bakery-cafes are recognized upon delivery to customers.
Franchise fees are the result of the sale of area development rights and the sale of individual franchise locations to third parties.
The initial franchise fee is generally $35,000 per bakery-cafe to be developed under an Area Development Agreement (“ADA”).
Of this fee, $5,000 is generally paid at the time of the signing of the ADA and is recognized as revenue when it is received as it
is non-refundable and the Company has 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 bakery-cafe. Franchise fees were
$1.9 million, $2.3 million, and $1.4 million for the fiscal years ended December 25, 2012, December 27, 2011, and December 28,
2010, respectively. Royalties are generally paid weekly based on the percentage of franchisee sales specified in each ADA (generally
4 percent to 5 percent of net sales). Royalties are recognized as revenue when they are earned. Royalties were $100.2 million,
$90.5 million, and $84.8 million for the fiscal years ended December 25, 2012, December 27, 2011, and December 28, 2010,
respectively.
The Company maintains a customer loyalty program referred to as MyPanera in which Panera Bread Company customers earn
rewards based on registration in the program and purchases within Panera Bread bakery-cafes. The Company records the full retail
value of loyalty program rewards as a reduction of net bakery-cafe sales and a liability is established within accrued expenses in
the Consolidated Balance Sheets as rewards are earned while considering historical redemption rates. Fully earned rewards generally
expire if unredeemed after 60 days. Partially earned awards generally expire if inactive for a period of one year. The accrued
liability related to the Company’s loyalty program, which is included as a reduction of bakery-cafe sales in the Consolidated
Statement of Comprehensive Income, was $4.7 million and $5.9 million as of December 25, 2012 and December 27, 2011,
respectively.
The Company sells gift cards that do not have an expiration date and from which does not deduct non-usage fees from outstanding
gift card balances. The Company recognizes revenue from gift cards when: (i) the gift card is redeemed by the customer; or (ii) the
Company determines the likelihood of the gift card being redeemed by the customer is remote ("gift card breakage") and there is
no legal obligation to remit the unredeemed gift cards to the relevant jurisdiction. The determination of gift card breakage is based
upon Company-specific historical redemption patterns. When the likelihood of further redemptions becomes remote, breakage is
recorded as a reduction of general and administrative expenses in the Consolidated Statements of Comprehensive Income; however,
such gift cards will continue to be honored. In the fiscal year ended December 25, 2012 and December 27, 2011, the Company
recognized gift card breakage as a reduction of general and administrative expenses of $1.8 million and $1.9 million, respectively.
Advertising Costs
National advertising fund and marketing administration contributions received from franchise-operated bakery-cafes are
consolidated with those from the Company in the Company’s consolidated financial statements. Liabilities for unexpended funds
received from franchisees are included in accrued expenses in the Consolidated Balance Sheets. The Company’s contributions to
the national advertising and marketing administration funds are recorded as part of general and administrative expenses in the
Consolidated Statements of Comprehensive Income, while the Company’s own local bakery-cafe media costs are recorded as part
of other operating expenses in the Consolidated Statements of Comprehensive Income. The Company’s policy is to record
advertising costs as expense in the period in which the costs are incurred. The Company’s advertising costs include national,
regional, and local expenditures utilizing primarily radio, billboards, social networking, television, and print. The total amounts
recorded as advertising expense were $44.5 million, $33.2 million, and $27.4 million for the fiscal years ended 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 pre-
opening rent expense, labor, and food costs incurred during in-store training and preparation for opening, but exclude manager
training costs which are included in labor expense in the Consolidated Statements of Comprehensive Income, are expensed when
incurred.
Rent Expense
The Company recognizes rent expense on a straight-line basis over the reasonably assured lease term as defined in the accounting
standard for leases. The reasonably assured lease term for most bakery-cafe leases is the initial non-cancelable lease term plus
one renewal option period, which generally equates to 15 years. The reasonably assured lease term on most fresh dough facility