Panera Bread 2015 Annual Report Download - page 62

PANERA BREAD COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
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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 Income; however,
such gift cards will continue to be honored. During fiscal 2015, fiscal 2014, and fiscal 2013, the Company recognized gift card
breakage as a reduction of general and administrative expenses of $6.9 million, $4.9 million, and $2.8 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 Income.
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 $2.7 million and $2.5 million as of December 29, 2015 and December 30, 2014, respectively.
Costs associated with coupons are classified as a reduction of net bakery-cafe sales in the period in which the coupon is redeemed.
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 Income, while the Company’s own local bakery-cafe media costs are recorded as part of other operating
expenses in the Consolidated Statements of 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, Internet, television, and print. The total amounts recorded as advertising expense
were $68.5 million, $65.5 million, and $55.6 million for fiscal 2015, fiscal 2014, and fiscal 2013, 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 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
expense for new locations is charged to expense beginning on the date at which the Company has the right to control the use of
the property. Many of the Company's lease agreements also contain provisions that require additional rental payments based upon
net bakery-cafe sales volume, which the Company refers to as contingent rent. Contingent rent is accrued each period as the
liability is incurred, in addition to the straight-line rent expense noted above. This results in variability in occupancy expense over
the term of the lease in bakery-cafes where the Company pays contingent rent.
The Company records landlord allowances and incentives received as deferred rent in the Consolidated Balance Sheets based on
their short-term or long-term nature. This deferred rent is amortized on a straight-line basis over the reasonably assured lease
term as a reduction of rent expense. Additionally, payments made by the Company and reimbursed by the landlord for improvements
deemed to be lessor assets have no impact on the Consolidated Statements of Income. The Company considers improvements to
be a lessor asset if all of the following criteria are met:
• the lease specifically requires the lessee to make the improvement;