Panera Bread 2013 Annual Report Download

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Panera Bread Company
2013 Annual Report to Stockholders

Table of contents

  • Page 1
    Panera Bread Company 2013 Annual Report to Stockholders

  • Page 2

  • Page 3
    ... and expand growth opportunities ‰ Delivering Panera's 2014 financial plan Improve Panera's Competitive Position Future success for Panera begins with providing our customers a better alternative than our competitors. We are working to do this with initiatives focused on a number of key areas.

  • Page 4
    ... with our new menu boards and a number of other initiatives, will amplify our "barbell pricing" structure. Panera will also execute a more aggressive marketing strategy in 2014 that both reinforces our brand's differentiation and seeks to boost market share. We made the decision to launch our...

  • Page 5
    ... year, increasing annual labor expense by roughly $15 million to do so. To drive our many growth initiatives, we also continue to build out our executive ranks, with key additions to leadership roles overseeing our IT, Panerato-You, Strategy, and Development teams. Deliver Our 2014 Financial Plan...

  • Page 6
    ... 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, future earnings per share, and the impact of our investments in sales-building initiatives...

  • Page 7
    ... 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 Class A Common Stock at the close of business on June 25, 2013, was $3,716,017,782. As of February 18, 2014, the...

  • 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
    ...bakery-cafe locations in 45 states, the District of Columbia, and Ontario, Canada. We have grown from serving approximately 60 customers per day at our first bakery-cafe to currently serving nearly 7.5 million customers per week system-wide. We are currently one of the largest food service companies...

  • Page 10
    ... us to build deeper relationships with our customers and entice them 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...

  • Page 11
    ...service growth in revenues, along with maintaining competitive compensation for our associates, is fundamental to our 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...

  • Page 12
    ... modeling, we estimate projected sales and a targeted return on investment. We also employ a disciplined capital expenditure process in which we focus on occupancy and development costs in relation to the market. This process is designed to ensure we have an appropriate size bakery-cafe and...

  • Page 13
    ... information technology services to our franchise-operated bakery-cafes. As of December 31, 2013, we did not hold an equity interest in any of our franchise-operated bakery-cafes. Bakery-Cafe Supply Chain We believe our fresh dough facility system and supply chain function provide us a competitive...

  • Page 14
    ... for providing the appropriate menu prices, discount rates, and tax rates for system programming. Most bakery-cafes also provide customers free Internet access through a managed WiFi network. As a result, we host one of the largest free public WiFi networks in the country. We use in-store enterprise...

  • Page 15
    ... 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. The market in which we compete is highly competitive...

  • Page 16
    ... customer experience are among our highest priorities. As a result, we expect to make significant investments during fiscal 2014 and going forward in technology, operational tools, and related systems, as well as the labor necessary to support this technology, in areas designed to positively impact...

  • Page 17
    ... customer tastes and expectations; balancing unit growth while meeting target returns on invested capital for locations; identifying alternative formats for our bakery-cafes to enable us to open locations in more diverse locations; investing in technology and systems designed to enable our managers...

  • Page 18
    ...technology designed to drive demand, increase transaction counts and frequency in 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...

  • Page 19
    ...business. Our success depends substantially on the value of our brands and our reputation for offering high-quality food and a memorable experience with superior customer service. Our brands have been highly rated in annual consumer surveys and have received high recognition in industry publications...

  • Page 20
    ... and disclosure requirements; management and protection of the personal data of our employees and customers; and environmental matters. Our bakery-cafes and fresh dough facilities are licensed and subject to regulation under federal, state, local and foreign laws, including business, health, fire...

  • Page 21
    ... 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 ability to effectively manage...

  • Page 22
    ...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; and fluctuations in supply costs...

  • Page 23
    ...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...

  • Page 24
    ... 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 25
    ...New Jersey ...New Mexico ...New York ...North Carolina ...North Dakota ...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 26
    ... date of this Annual Report on Form 10-K, we are not a party to any litigation, the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our results of operations, cash flows, financial position or brand...

  • Page 27
    ...have current plans to do so. Share Repurchases On August 23, 2012, our Board of Directors approved a three year share repurchase authorization of up to $600 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...

  • Page 28
    ... information) December 31, 2013 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 and paper products...Labor...Occupancy ...Other operating expenses ...Total...

  • Page 29
    ... royalty income and franchise fees. 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...

  • Page 30
    ... 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...

  • Page 31
    ...27, 2013 2012 2011 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...

  • Page 32
    ...bakery-cafe data relating to Company-owned and franchise-operated bakery-cafes for the periods indicated: For the fiscal year ended December 31, December 25, December 27, 2013 2012 2011 Number of bakery-cafes: Company-owned: Beginning of period ...Bakery-cafes opened ...Bakery-cafes closed ...Bakery...

  • Page 33
    ... (dollars in thousands): For the fiscal year ended December 31, December 25, December 27, 2013 2012 2011 Bakery-cafe sales, net ...$ Franchise royalties and fees ...Fresh dough and other product sales to franchisees...Total revenue ...$ System-wide average weekly net sales ...$ 2,108,908 112,641 163...

  • Page 34
    ... management initiatives. The increase in average weekly net sales for Company-owned bakery-cafes in fiscal 2012 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...

  • Page 35
    ... the 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...

  • Page 36
    ...Change in 2013 15.4% % Change in 2012 18.4% The increase in other operating expenses in fiscal 2013 as a percentage of net bakery-cafe sales was primarily a result of increased marketing expense and certain other controllable expenses, including increased repair and maintenance expenses related to...

  • Page 37
    ... 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...

  • Page 38
    ... 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...

  • Page 39
    ... the tax benefit from exercise of stock options. Share Repurchases On November 17, 2009, our Board of Directors approved a three year share repurchase authorization of up to $600 million of our Class A common stock, pursuant to which we repurchased shares on the open market under a Rule 10b5-1 plan...

  • Page 40
    ... 2012, our Board of Directors 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 2012 repurchase authorization, pursuant to which we may repurchase shares from time to time on the open market or in privately negotiated...

  • Page 41
    ... are received. As gift cards are redeemed, this liability is reduced and revenue is recognized. Sales of soup and other branded products sold outside our bakerycafes are generally recognized upon delivery to customers. Further, franchise fees are generally the result of the sale of area development...

  • Page 42
    ... 2013 and concluded that there was no impairment as the estimated fair value of the reporting unit exceeded its carrying value. The fair value of the reporting unit is the price a willing buyer would pay for the reporting unit and is estimated using a discounted cash flow model. The goodwill balance...

  • Page 43
    ... fair value, and the carrying value of the long-lived assets. Our estimates of cash flow were based upon, among other things, certain assumptions about expected future operating performance, such as revenue growth rates, operating margins, risk-adjusted discount rates, and future economic and market...

  • Page 44
    ...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...

  • Page 45
    ... the future. The extent of the impact will depend on our ability and timing to increase food prices. A majority of our associates are paid hourly rates regulated by federal and state minimum wage laws. Although we have and will continue to attempt to pass along any increased labor costs through food...

  • Page 46
    ...use in our business. These commodities are sometimes purchased under agreements with terms of one month to one year, 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 2013, 2012, and 2011, we did not...

  • Page 47
    ... 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 48
    ... accompanying consolidated balance sheets and the related consolidated statements of comprehensive income, of changes in equity and of cash flows present fairly, in all material respects, the financial position of Panera Bread Company and its subsidiaries at December 31, 2013 and December 25, 2012...

  • Page 49
    PANERA BREAD COMPANY CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share information) December 31, 2013 ASSETS Current assets: Cash and cash equivalents ...$ Trade accounts receivable, net...Other accounts receivable ...Inventories ...Prepaid expenses and other ...Deferred income ...

  • Page 50
    PANERA BREAD COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands, except per share information) For the fiscal year ended December 31, December 25, December 27, 2013 2012 2011 Revenues: Bakery-cafe sales, net ...$ Franchise royalties and fees ...Fresh dough and other product sales ...

  • Page 51
    ... the fiscal year ended December 31, December 25, December 27, 2013 2012 2011 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...

  • Page 52
    ... (net of forfeitures)...Exercise of employee stock options . Stock-based compensation expense . Conversion of Class B to Class A...Exercise of SSARs ...Repurchase of common stock ...Tax benefit from exercise of stock options...Balance, December 27, 2011...Comprehensive income: Net income ...Other...

  • Page 53
    ... of three months or less to be cash equivalents. The Company maintains cash balances with financial institutions that exceed federally insured limits. The Company has not experienced any losses related to these balances and believes credit risk to be minimal. Investments Management designates the...

  • Page 54
    ... 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 price fluctuations, results of past impairment tests...

  • Page 55
    ... carrying value of the long-lived assets. In performing this analysis, management estimates cash flows based upon, among other things, certain assumptions about expected future operating performance, such as revenue growth rates, operating margins, risk-adjusted discount rates, and future economic...

  • Page 56
    ... the accounting standard for real estate in the Company's consolidated financial statements. The Company capitalizes direct 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...

  • Page 57
    ... 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 preparation for opening, but exclude manager training costs which are included in labor expense in...

  • Page 58
    ... Statements of Comprehensive Income. Fair Value of Financial Instruments The carrying amounts of cash, accounts receivable, accounts payable, and other accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities. Stock-Based Compensation The Company...

  • Page 59
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) common stock each calendar quarter through payroll deductions at 85 percent of market value on the purchase date and the Company recognizes compensation expense on the 15 percent discount. For option awards, fair value ...

  • Page 60
    ... 2012 and paid the remaining $3.6 million with interest during the fiscal year ended December 31, 2013. The Consolidated Statements of Comprehensive Income include the results of operations from the operating bakery-cafes from the date of their acquisition. The acquired business contributed revenues...

  • Page 61
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) $5.1 million. The Company paid approximately $4.6 million of the purchase price on July 26, 2011 and paid the remaining $0.5 million with interest during the fiscal year ended December 31, 2013. As a result of this ...

  • Page 62
    ...2012 were carried at fair value in the Consolidated Balance Sheets based on quoted market prices for identical securities (Level 1 inputs). 6. Inventories Inventories consisted of the following (in thousands): December 31, 2013 Food: Fresh dough facilities: Raw materials ...$ Finished goods...Bakery...

  • Page 63
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) The Company recorded depreciation expense related to these assets of $97.2 million, $82.7 million, and $74.2 million for the fiscal years ended December 31, 2013, December 25, 2012, and December 27, 2011, respectively. ...

  • Page 64
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. Accrued Expenses Accrued expenses consisted of the following (in thousands): December 31, 2013 Unredeemed gift cards, net ...$ Compensation and related employment taxes...Capital expenditures ...Insurance ...Taxes, ...

  • Page 65
    ...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 or in privately negotiated transactions and which may be made under a Rule 10b5-1 plan...

  • Page 66
    ... liabilities in the Consolidated Balance Sheets. In connection with the Company's relocation of its St. Louis, Missouri support center in the third quarter of fiscal 2010, it simultaneously entered into a capital lease for certain personal property and purchased municipal industrial revenue bonds of...

  • Page 67
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) Legal Proceedings From time to time, the Company is subject to various legal proceedings, claims, and litigation that arise in the ordinary course of its business. As of the date of this Annual Report on Form 10-K, the ...

  • Page 68
    ... of the Company's total gross unrecognized tax benefit liabilities for the periods indicated (in thousands): December 31, December 25, December 27, 2013 2012 2011 Beginning balance...$ 3,051 $ 3,544 $ 2,896 Tax positions related to the current year: Additions...653 530 526 Tax positions related to...

  • Page 69
    ... or outstanding in fiscal 2013 and 2012. 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 41,601 shares of Class A common stock at a weighted-average cost of...

  • Page 70
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 2006 Stock Incentive Plan In fiscal 2006, the Company's Board of Directors adopted the 2006 Plan, which was approved by the Company's stockholders in May 2006. The 2006 Plan provided for the grant of up to 1,500,000 ...

  • Page 71
    ... related to restricted stock included in additional paid-in capital in the Consolidated Balance Sheets. This unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 3.7 years. For fiscal 2013, fiscal 2012, and fiscal 2011, restricted stock expense...

  • 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 2013: Weighted Average Contractual Term Remaining (Years) Outstanding at December 25, 2012 ......

  • Page 73
    ... 2011, the Company recognized expense of approximately $0.5 million, $0.5 million, and $0.4 million in each of the respective years related to stock purchase plan discounts. Effective May 13, 2010, the Plan was amended to increase the number of the Company's Class A common stock shares authorized...

  • Page 74
    ... dough is sold to a number of both Company-owned and franchise-operated bakery-cafes at a delivered cost generally not to exceed 27 percent of the retail value of the end product. The sales and related costs to the franchise-operated bakery-cafes are separately stated line items in the Consolidated...

  • 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 31, December 25, December 27, 2013 2012 2011 Revenues: Company bakery-cafe operations ...Franchise operations ...Fresh dough and other product...

  • Page 76
    ...fiscal year ended December 31, December 25, December 27, 2013 2012 2011 Amounts used for basic and diluted per share calculations: Net income ...$ Weighted average number of shares outstanding - basic ...Effect of dilutive stock-based employee compensation awards ...Weighted average number of shares...

  • Page 77
    PANERA BREAD COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued) 21. Selected Quarterly Financial Data (unaudited) The following table presents selected unaudited quarterly financial data for the periods indicated (in thousands, except per share data): Fiscal 2013 - quarters ended (1)...

  • Page 78
    ...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, to provide...

  • Page 79
    ...with the 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 2014 Annual Meeting of Stockholders, which the Company intends to file with...

  • Page 80
    ...part of this report are listed under Item 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...

  • Page 81
    ... behalf by the undersigned, thereunto duly authorized. PANERA BREAD COMPANY By: /s/ RONALD M. SHAICH Ronald M. Shaich Chairman and Chief Executive Officer Date: February 19, 2014 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following...

  • Page 82
    ...to the Registrant's 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...

  • Page 83
    ... herein by reference). Credit Agreement dated as of November 30, 2012 by and among Panera Bread Company, as borrower, Bank of America, N.A., as administrative agent, swing line lender and L/C issuer, and each lender party thereto (filed as Exhibit 10.1 to the Registrant's Current Report on Form...

  • Page 84
    ... in stock or 12/31/2008 in index, including reinvestment of dividends. Indexes calculated on month-end basis. Panera Bread Company NASDAQ Composite Index S&P MidCap Restaurants Index December 30, December 29, December 28, December 27, December 25, December 31, 2008 2009 2010 2011 2012 2013 $100...

  • Page 85
    ... 2014 Annual Meeting of Stockholders Thursday, June 5, 2014, 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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