Panera Bread 2014 Annual Report Download - page 61

PANERA BREAD COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
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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
also include information technology-related fees for access to and the usage of proprietary systems. Franchise fees were $3.6
million, $2.2 million, and $1.9 million for fiscal 2014, fiscal 2013, and fiscal 2012, 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 $120.1 million, $110.5 million, and $100.2 million for fiscal 2014,
fiscal 2013, and fiscal 2012, 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 was $2.5 million and $3.4 million as of December 30, 2014 and December 31, 2013, respectively.
Costs associated with coupons are classified as a reduction of net bakery-cafe sales in the period in which the coupon is redeemed.
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. During fiscal 2014, fiscal 2013, and fiscal 2012, the Company
recognized gift card breakage as a reduction of general and administrative expenses of $4.9 million, $2.8 million, and $1.8 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 $65.5 million, $55.6 million, and $44.5 million for fiscal 2014, fiscal 2013, and fiscal 2012,
respectively.
Pre-Opening Expenses
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 an aggregate of 15 years. The reasonably assured lease term on most fresh
dough facility leases is the initial non-cancelable lease term plus one to two renewal option periods, which generally equates to
an aggregate of 20 years. In addition, certain of the Company’s lease agreements provide for scheduled rent increases during the
lease terms or for rental payments commencing at a date other than the date of initial occupancy. The Company includes any rent
escalations and construction period and other rent holidays in its determination of straight-line rent expense. Therefore, rent