Panera Bread 2013 Annual Report Download - page 57

PANERA BREAD COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
49
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, or 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 $2.2 million, $1.9 million, and $2.3 million for the fiscal years ended December 31, 2013, December 25, 2012, and
December 27, 2011, respectively. Royalties are generally paid weekly based on the percentage of franchisee sales specified in
each ADA (generally five percent of net sales). Royalties are recognized as revenue when they are earned. Royalties were $110.5
million, $100.2 million, and $90.5 million for the fiscal years ended December 31, 2013, December 25, 2012, and December 27,
2011, respectively.
The Company maintains a customer loyalty program referred to as MyPanera in which 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 $3.4 million and $4.7 million as of December 31, 2013 and December 25, 2012, respectively.
The Company sells gift cards that do not have an expiration date and from which the Company does not deduct non-usage fees
from outstanding gift card balances. Gift cards are redeemable at both Company-owned and franchise-operated bakery-cafes.
Gift cards sold by either Company-owned bakery-cafes or through wholesalers and redeemed at franchise-operated bakery-cafes
reduce the Company's gift card liability but do not result in the recognition of revenue. When gift cards are redeemed at Company-
owned bakery-cafes, the Company recognizes revenue and reduces the gift card liability. When the Company determines the
likelihood of the gift card being redeemed by the customer is remote ("gift card breakage"), based upon Company-specific historical
redemption patterns, and there is no legal obligation to remit the unredeemed gift card balance in the relevant jurisdiction, gift
card 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. For the fiscal years ended December 31, 2013, December 25, 2012,
and December 27, 2011, the Company recognized gift card breakage as a reduction of general and administrative expenses of $2.8
million, $1.8 million, and $1.9 million respectively. Incremental direct costs related to the sale of gift cards are deferred until the
associated gift card is redeemed or breakage is deemed appropriate. These deferred incremental direct costs are reflected as a
reduction of the unredeemed gift card liability, net which is a component of accrued expenses in the Consolidated Balance Sheets
and, when recognized, as a reduction of bakery-cafe sales, net in the Consolidated Statements of Comprehensive Income.
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 $55.6 million, $44.5 million, and $33.2 million for the fiscal years ended December 31,
2013, December 25, 2012, and December 27, 2011, 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.