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Panera Bread Co. (NASDAQ:PNRA)

Q4 2012 Earnings Call

February 06, 2013 08:30 AM ET

Executives

Michele Harrison - IR

Bill Moreton - President and Co-CEO

Ron Shaich - Co-CEO

Analysts

Matthew DiFrisco - Lazard

Joe Buckley - Bank of America and Merrill Lynch

David Tarantino - Robert W. Baird

Michael Kelter - Goldman Sachs

John Glass - Morgan Stanley

Jeffrey Bernstein - Barclays

Mitch Speiser - Buckingham Research

Jason West - Deutsche Bank

Nicole Miller - Piper Jaffray

Brian Bittner - Oppenheimer & Co.

Keith Siegner - Credit Suisse

Peter Saleh - Telsey Advisory Group

Nick Setyan - Wedbush Securities

Alex Slagle - Jefferies

Robert Darrington - Northcoast Research

Operator

Good day, everyone and welcome to today's Panera Bread Fourth Quarter 2012 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Ms. Michele Harrison. Please go ahead.

Michele Harrison

Thanks Shelly. Good morning to everyone and welcome to Panera Bread's fourth quarter 2012 earnings call. Here with me on the call this morning are Ron Shaich, our Chairman and Co-Chief Executive Officer and Bill Moreton, our President and Co- Chief Executive Officer.

Before we begin this morning, let me cover a few regulatory matters. I'd like to note that during our opening remarks and in our responses to your questions, we may make forward-looking statements regarding future events or the future financial performance of the company. Any such items, including 2013 results and conditions and details relating to 2012 and 2013 performance, should be considered forward-looking statements within the meaning of the Private Litigation Security Reform Act of 1995

Such statements are only predictions and actual events or results could differ materially from those predictions due to a number of risks and uncertainties. I refer to you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the Company's last filed Annual Report on Form 10-K, which was filed on February 21, 2012 and the last filed quarterly report on Form 10-Q, which was filed on October 24, 2012. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

With that, I'll turn it over to Bill who will take you through the key business drivers in the fourth quarter. Bill?

Bill Moreton

Thanks, Michele. Good morning, everyone. Yesterday, we were very pleased to report fourth quarter EPS of $0.75 per share, which represents 34% growth over Q4 2011. If we exclude the impact of the $5 million legal reserve taken in the fourth quarter of 2011, our EPS growth would be 23% on an apples-to-apples basis. This marks the 11th out of the last 12 quarters that EPS has exceeded 20% growth.

For the full year 2012, our earnings per share were $5.89, which represents a 27% year-over-year increase, excluding the onetime legal expense. This also marks the fifth consecutive year that our full year earnings growth has exceeded 20%. We believe this consistently strong financial performance is an outgrowth (ph) of our strategy of continually investing in the quality of our food, marketing, operations, and overall customer experience. Looking at our sales results in Q4, Company on comparable bakery cafe sales were up 5.1%, which represents a two-year Q4 comp of 11% and is consistent with the two-year comps we generated throughout the year.

Specifically Q4 comps were comprised of 5.4% check growth and a 30 basis point decline in transaction growth. The check growth consisted of 2.9% mix and 2.5% price. Related to transactions we estimate that excluding the effect of Hurricane Sandy, our transactions were flat for the quarter.

Sandy affected approximately 200 companies owned bakery cafes and resulted in a loss of 192 restaurant operating days. Over 10 of the last 12 quarters our comp stores sales have increased 5% or better. We believe that performance puts us at the very top or near the top of our industry.

Our sales growth over the last several years has been driven by a combination of both transaction growth and check growth. At certain times transaction growth has taken lead and at other times check growth has been the primary driver. Check growth is made up of both price and mix. Our mix has gone through higher average check from our rapidly growing catering business and our efforts to offer consumers many alternatives that carry a higher price but are worth the money.

We believe that when customers think of the value they are getting at Panera, there is an equation in their minds in which they factor in the quality of the food, the warmth and comfort of the bakery cafe environment, the friendliness of the service as well as the innovative menu offerings, which adds up in total to their experience. They then compare that to the price they pay, that’s value, the Panera way.

In the fourth quarter, operating margin was 200 basis points favorable year-over-year approximately half of the improvement was result of rolling over the legal reserve taken in the fourth quarter of 2011. Excluding that reserve margins improved 100 basis points over the prior year.

Bakery cafe margins improved by 60 basis points, compared to the prior year as our strong sales results produced leverage in both the labor and the occupancy expense lines. Food cost, as a percentage of sales for the fourth quarter was flat year-over-year.

In the fourth quarter, our core food and paper inflation was 2.6%, which was essentially equal to our menu price increase; however, the new packaging program that we rolled out in the third quarter added approximately 35 basis points to food cost. For the full year in 2012, we were able to leverage sales growth and improve our bakery-cafe margin by 90 basis points.

Turning to our fresh dough margins, in the fourth quarter we continue to experience deleverage in the fresh dough cost of sales to franchisee margin of 90 basis points. This was primarily the result of our product mix. We sold more salads on a year-over-year basis and you have to remember that produce and lettuce flowed through FDF and have no margin attached to them. So in essence it’s a good thing when we sell more salads, even though that margin comes down.

In the fourth quarter, our G&A expenses were 140 basis points better than the prior year. However, last year’s expense included the $5 million legal reserve. Net of this charge, we saw 40 basis points of leverage in G&A as over had expense grew at a slower rate than sales.

Lastly, let me touch on our other income and income taxes, as we had non-recurring items in each line in Q4. In the other income line, we had the benefit of an adjustment of approximately $0. 04 to our unclaimed property reserve. However, on the other hand our fourth quarter income tax expense included a onetime accounting charge of $0.06 to take an allowance against deferred tax asset associated with our NOLs in Canada.

This adjustment was taken in response to a technical accounting rule related to the startup losses. So, just to be clear, the net of these two non-recurring items had a negative impact on Q4 EPS of $0.02 or it would have been $0.02 higher if these hadn’t occurred. Neither item is expected to repeat and our effective income tax rates are expected to return to approximately 38.4% in 2013.

I’d like to spend a few moments discussing our use of cash. As we’ve always said, our best use of capital is to build new bakery cafes. Our development efforts have been a key driver of our success this year. During the fourth quarter, we opened 32 new bakery cafes system-wide, 18 company and 14 franchised, bringing our year-to-date openings to our 123 new units, ahead of our initial expectations. This represents an acceleration in our pace of new year openings compared to 2011 and an 8% system-wide growth rate this year.

Even more important than the number of new units we’ve opened has been their productivity. The best proxy for our new unit productivity is their sales. The class of 2012 new company owned bakery cafes had average weekly sales of $47,029 year to date versus $41,637 in the class of 2011. This again is a record performance for Panera. These average weekly sales have been positively impacted by the opening of eight urban bakery cafes this year in Manhattan, Boston and Toronto.

Excluding the impact of the urban cafes in both years, our new unit average weekly sales on a full year basis has grown from $39,544 in 2011 up to $43,156 in 2012 which is still a record. Our new franchise bakery cafés have also performed at record pace, with average weekly sales of $46,781 year-to-date in 2012, compared to $41,438 year-to-date last year. Further we expect our strong development efforts to continue into fiscal 2013 and currently anticipate that we'll open between 115 and 125 new bakery cafes.

Let me now discuss the other uses of our capital in the quarter. During the fourth quarter, we were able to repurchase approximately $20 million of shares under our new $600 million authorization. The average price of repurchase was $161 per share. While the repurchase had a nominal impact on the quarter, we expect that it will provide a $0.03 EPS benefit in 2013.

Additionally our Q4 results also included approximately $0.15 benefit from the Raleigh acquisition that we completed last March. We've generated approximately $70 million cash flow for the fourth quarter, resulting in $23 million for free cash flow after approximately $47 million of CapEx. We ended the year with $297 of cash on the balance sheet and no debt.

I’d now like to turn the call over to Ron to provide color commentary on our key business initiatives. Ron?

Ron Shaich

Thank you Bill and good morning everyone. As Bill mentioned our financial performance over the last half decade has been at or near the top of our industry. Our strong EPS growth has been driven by consistently strong comp store sales over many years. In fact we saw comps of 2.4% in 2009, 7.5% in 2010, 4.9% in 2011 and 6.5% in 2012. That nets to average comp growth of 5.3% over the last four years. This in turn has been fueled by our ability over many years to drive positive transaction growth and to create opportunities for customers to choose products that have a higher check and higher profit for Panera.

Specifically we saw transaction growth of 30 basis points in 2009, 2.1% in 2010, 1.8% in 2011, and 80 basis points in 2012. This averages to transaction growth of 1.2% over the last four years. Correspondingly we saw the average impact for mix at 1.4% over the same four years. We also took price of between 2% and 3% each year since 2009. As you know these price increases were essentially consistent with inflation and were executed without any material degradation of our value scores.

We believe it's important for investors to recognize that no individual quarter during these five years were our comps, our transaction growth, or our mix impact the highest in the industry, but I would wager a bet that when measured over a long and sustained period of time, for example from 2009 to 2012, our comps at 5.3% and our transaction growth at 1.2% have been among the best in the industry.

I further add that our ability to execute both transaction growth with discipline and without degradating (ph) margins has allowed us to grow bakery cafe margin 350 basis points over those same four years. We believe these results are directly related to the stew of smart investments that we made to continuously improve the quality of our customers' experience.

This cycle of making investments in the current year to benefit us in future years has clearly paid off. As we told you on the last call, the pace of investment will increase in 2013, as we look to continue to build the foundation for growth in 2014 and beyond. With the competition continuing to copy us, we must continue to raise the bar.

This year we will specifically be investing in food in marketing, in catering in and ops. We will also be working to increase customer access to Panera and investing in our capabilities, more effectively produce our food in cafe. Specifically we believe that a combination of our culinary skills, increased and more powerful marketing activities, expanded operational and catering capabilities and the smart utilization of our size and scale will allow us to continue to provide a truly differentiated customer experience, will allow us to increase comps and will allow us in turn to grow our earning strongly well into the future.

First, let me talk about the investments we are making in food. As we’ve discussed before, we strive to marry the strength of our supply chain and our size and scale with the innovation and craftsmanship of our culinary team to deliver to our guess menu offerings that are truly cravable and differentiated. During 2012, the partnership between our supply chain and culinary team result in continued growth in our signature and hot sandwich categories, as well as in our signature salad category.

During the fourth quarter and for the full year, we saw the signature sandwich category continue to perform exceptionally well. Indeed, sales increased year-over-year by 34% in the quarter and 18% for the year. The strong growth in the quarter was primarily the result of the continued success of our roasted turkey and avocado BLT sandwich, as well as the introduction of the Big Kid grilled cheese.

We saw the interesting trend with the Big Kid grilled cheese, which illustrates the power of the choice we provide our guests. Our initial belief was that the Big Kid grilled cheese would take share away from other hot sandwiches. However, what we experienced was many customers trading up out of café sandwiches to the Big Kid grilled cheese, which provide a check rough (ph). After all, who can resist a grilled cheese done the Panera way with gruyere cheese, Vermont white cheddar cheese, organic American cheese and Applewood-smoked bacon grilled on our all-natural white bread.

Similarly, we have seen continued growth in our signature salads, which experienced sales growth up 10% year-over-year in the fourth quarter and up 13% year-over-year in full year 2013. This again is a result of the menu choice we provide guests to trade up and enjoy our fresh and innovative, high quality Panera salads.

It also marks the 13th out of the last 14 quarters in which our signature salads have grown at a rate 10% or greater year-over-year. To us, this demonstrates that we have broken through to our customers and we are at or near the top of their list when they consider where to go for a high-quality salad.

By the way, in January, we rolled out our new power spinach salad which has been a huge success. If you haven’t tried it you should. Many people have told us this is our best salad yet. Late in the first quarter, we will be rolling out a new menu category, signature pasta. For more than two years we have been hard at work developing several high quality pasta offerings that fit within our production system and complement our soup and salad platforms.

Initially we will roll out three pasta dishes to the system, Tortellini Alfredo, Pasta Sacchettini and Rustic Penne Bolognese and we hope these items will become permanent menu offerings. The pasta dishes will be offered in large and small sizes and both will include a half salad or a cup of soup.

To give you a sense of what pasta at Panera will be like, let me tell you about one of the pasta dishes. The Pasta Sacchettini is a purse like pasta filled with six cheeses including Ricotta cheese, Parmesan cheese, Romano cheese, Monterey Jack cheese, Cheddar cheese and Mozzarella, dressed with basil, pesto an sprinkled with Asiago and Parmesan cheeses. Much like our Big Kid Grilled Cheese, we think that we have been able to add our own twist to our pastas that will make them cravable to our customers and unique to Panera.

Our expectation is that the pastas would help with our lunch and dinner day parts. However, let me at one note of caution. Please, please don’t expect dramatic sales increases from these new pasta products. Rather you should expect our pastas will serve as a platform for sustained long term growth at Panera.

Let me conclude our discussion of culinary innovation, by noting that since the third quarter of 2009 our sales and growth profit have grown year-over-year at every day part, in every quarter. This is a direct result of menu innovation and the application of supply chain capabilities. Indeed, over the last several years we have consistently been able to use our culinary skills and our size and scale to improve quality and drive competitive differentiation.

The next business driver we should discuss is marketing. Our effort to build a real marketing function and execute our marketing strategy has been a multiyear effort for us and it continues to build strength. Let's start with our new advertising campaign.

We expect that campaign to roll out later this month, and give voice to what makes Panera special in the eyes of so many customers. We think it is differentiated and unique enough to stand out in the clutter of advertising. Most importantly this new campaign titled “Live Consciously, Eat Deliciously” will speak to the quality of our ingredients and to the values that consumers identify with Panera. This advertising will also speak to the intent Panera brings that everything it does.

To be clear this campaign is not intended to simply drive short term sales; not to say we’re opposed to that but rather to drive a deeper affiliation between Panera and our customers. Indeed we believe such an effort has the potential to deliver a greater long term return on investment from advertising, than exclusively running promotional messaging.

Now let's discuss our media spend. In 2011, we spent 1.3% of sales on media. In fiscal 2012, we spent approximately 1.4% of sales on media. In 2013, we are targeting an additional 20 basis point increase in direct media spend to approximately 1.6%.

Let me also note that as we increase our media spending, we’re also getting smarter on how we spend our money. We are continuing to learn and to adjust our mix of radio, TV, digital, out-of-home and social media spending both nationally and by market. We should mention that once again in 2013, our national advertising, mostly cable TV will be at very modest weight. We now estimate that it will not be until 2015 that national advertising will become a more significant part of our overall marketing mix.

I would now like to update you on our loyalty program. We're pleased with the way this program has developed over the past several years. We went from one market test at beginning of 2010 to full system rollout by the end of 2010 and 4.5 million registered members.

In 2011, we operationalized this program and the membership more than doubled to 9.5 million members. Currently, the My Panera program has over 13 million members and we believe there is room to substantially grow that number. We are also focused on involving the program that underlies My Panera to build deeper and more personal relationships. Indeed this is what we call one-on-one marketing, hence the focus of our efforts.

And let me remind you, the real power of the loyalty program is that it provides the opportunity to capture real-time customer behavior data. This data is already allowing us to understand our business in ways we never did before, enabling us the more smartly evolve our product offerings and enabling us to improve the effectiveness and efficiency of our marketing. In 2012, we gathered significant purchasing behavior data on our customers. If we utilize our learning wisely, we believe we have the ability the drive frequency and ultimately transaction growth.

The next business driver I’d like to discuss is catering. Catering continued to positively impact our sales in Q4. Last quarter, catering grew 19% year-over-year net of acquisitions. This comes on top of the 32% year-over-year catering sales growth we experienced in Q4 2011. Taken together, we saw catering growth of 51% in Q4 2012. For the full year 2012, catering sales, net of acquisitions were up 21% year-over-year.

We continue to believe that there is great demand for the Panera experience outside of our four walls. We plan on capturing that demand. Although we have experienced significant growth in catering sales, we continue to believe that we are still in the early innings of catering.

In order to sustain catering growth over the long term, we are continuing to make investments in increasing the number and quality of our regional catering sales managers, in rolling out a new sales force management system and in rolling out the next version of our web based catering ordering system. All of these initiatives are expected to roll out in the first half of the year.

Let’s now talk specifically about operations. We continue to improve the quality of our overall guest experience by investing in the quality of our people and our operating processes. Let’s discuss operating processes. As I noted a few minutes ago, we’re making material investments in our operational capabilities. This requires a significant step up in expenditures on IT in 2013. The intent of this increased investment will be to significantly expand access to Panera, to improve the operational capabilities of our cafes and to strengthen our core enterprise systems.

By doing so, we believe we can materially improve the customer experience and materially improve the throughput in our cafes and as well improve our capabilities to support new culinary innovation, all by removing a administrative burdens from our managers and thereby allowing them to focus even more intently and delivering the Panera experience day in and day out.

We believe that these investments taken together will impact the P&L by roughly $20 million in the following buckets; labor, G&A and depreciation and amortization expense. Although these investments are been made throughout the year the largest amounts will be focused in the back half of 2013. This spend is already built into our full year guidance and we would expect to see the benefits of these investments late in 2014 and predominantly in 2015. In addition of the P&L impact we will also have a significant CapEx investment for these investments in 2013.

Let me conclude by stating what you know about us, we believe that competitive advantage is everything in our business; trust that the inventions we are now contemplating and the initiatives we are now focused on are designed to drive exactly back.

With that, I would like to turn it back to Bill to provide our guidance for the full year and our guidance for the first quarter of 2013. Bill?

Bill Moreton

Thanks Ron. Let me now spend a few minutes providing you with our targets for Q1 and full year 2013. We're setting Q1 earnings per share target of a $62 to a $60 per share or 16% to 19% growth versus a $1.40 we earned in Q1 in 2012. Our Q1 target is based on our company owned comparable bakery cafe sales targeted increase of 4% to 5%, and an operating margin improvement of 25 to 75 basis points over the prior year.

I’d like to note for the first 41 days of the first quarter company owned comp store sales growth was 3.9%. To put this in context, one has to remember that we're rolling over a weather added 8.9% comp increase in the prior year. Thus our two year comp through the first 41 days of the quarter is 12.8%, which represents an acceleration over our two year comp growth last year. Finally, we're targeting Q1 2013 op margin to be 25 to 75 basis points better versus last year.

Turning to our full year targets, we're maintaining our previously stated full year 2013 EPS targeted growth rate of 17% to 19% despite a very strong finish to 2012. Our full year EPS target is based on the following key assumptions. Our company comparable store sales are targeted to increase at 4.5% to 5.5% over the prior year and our full year 2013 operating margin is targeted to be flat to 50 basis points up versus the prior year. This includes the $20 million of incremental investment that Ron previously discussed. Also as I previously mentioned our new unit’s growth target is expected to be in the range of 115 to 125 new bakery cafes this year.

I'd now like to briefly comment on health care reform. There's been a lot written about the implementation of the Affordable Health Care Act in 2014, but there's still some uncertainty in the detail of how the act will roll out. We wanted to share with you our initial thoughts on how we're approaching the Healthcare Act.

Our base philosophy is that we'll treat the increase in healthcare costs as any other inflationary item in our P&L. That is to say we've been working on this issue for over a year with our outside consultants on how to best manage the cost. It's our belief that everyone in our industry will need to pass along these costs to the customer. We currently are not intending to change the way in which we schedule our employees to avoid the full term classification.

Just as a reminder currently we offer healthcare coverage to employees who work more than 25 hours versus the mandated 30 hours in the Healthcare Act. In addition given the nature of our workforce, we'd expect some associates under the age of 26 will choose to be covered by their parents' medical plan. So our only real uncertainty at this point lies within the anticipated rate of acceptance as current opt out penalty for associates is much less than the cost of buying the coverage. Only time will tell how this all plays out for us.

Lastly let me take a minute to talk about our new CFO. As you saw in the release we issued last night, Roger Matthews will join us in March as our new Executive Vice President and Chief Financial Officer. Ron and I have known Roger for more than 15 years and are very excited to have him join the senior leadership team.

In his role as Managing Director and sector head of the U.S. restaurant industry for Goldman Sachs, Roger developed a deep knowledge of our industry and brings significant strategic and financial skills that will serve Panera well. Having had Pat Kelley on board as our interim CFO allowed us to do an exhaustive search to identify the right candidate that both had the skills we were looking for as well as someone that would be a great cultural fit. Ron and I would like to thank Pat for his service and contribution and welcome Roger on board. You'll all going to get to know him well in the coming months and years.

So just to conclude, Ron and I are very pleased with our 2012 results and our outlook for 2013. As we said earlier 2012 was our fifth consecutive year of growing our earnings 20% or greater. In 2013 we're making substantial incremental investments to lay the foundation for our growth over the next three to five years. We believe that our multi-year strategy of continuing to invest in the quality of our customer experience will continue to drive earnings growth well into the future.

With that, I'd now like to turn it back to you Shelly for your questions. Shelly?

Question-and-Answer Session

Operator

(Operator Instructions). And our first question is from Matthew DiFrisco from Lazard.

Matthew DiFrisco - Lazard

Gentleman, I guess, just going back to sort of the traffic and the comments made about ad spending in the loyalty program, the long term detail that you gave is very helpful but I guess on 2015 target for national advertising, can you speak to sort of how we can look at the next couple of quarters as far as how you are going to spend the ad spending versus promotion of products and promoting maybe the check rather than traffic driving? When do you think we’ll start to see ad spend and marketing spend drive traffic a little bit more as well as the loyalty program? And then I guess if you could tie that into the quarter-to-date trend, if you can bifurcate that, I might have missed that if you give the traffic number for the 3.9 comp.

Ron Shaich

Matthew, this is probably a great-not-answer to be straight but we are making no guidance on 2015 other than suggesting that we’ll be reaching, if at all, national advertising levels in 2015. Relative to individual quarters and marketing spend, I think we are giving guidance for the full year at 1.6%. I think we are suggesting to you that this is part of stew of what has allowed us to deliver these comps at 5.3% over a very long period of time and be able to drive transaction growth positive over a very long time and to do so without degredating margin but in fact being able to increase operating margin.

That’s the story. It’s not the one piece of the other, it’s the combination of the totality and being able to move the business. I would say to you very specifically, we don’t know what transactions would be or growth would be if we weren’t doing these two other things. What we are saying to you is that we believe that the stew of factors that we have in place over the year have the capability of delivering within our targets.

Bill Moreton

And just a last part of Matthew’s question, we didn’t break out traffic and check for the first 41 days. It’s too short a period of time. So we will do that on a quarterly basis.

Operator

And our next question is from Joe Buckley of Bank of America and Merrill Lynch.

Joe Buckley - Bank of America and Merrill Lynch

Could you elaborate on the comments about the loyalty program, what the learnings are and how you may use it, differently or not, going forward?

Bill Moreton

I mean the learning, as you understand the loyalty program allows us to have individual customer behavior, information of an individual customer behavior on large percentages of our transactions. So the learning isn’t an aggregate of learning, it’s actually a learning about you Joe Buckley, and based on that we are able to assign you to one of hundreds; if not thousands of different tracks that allow us to market to you in an individual way.

So let me give you an example. You may come in at breakfast and only breakfast, and somebody else may come in at breakfast and has been in several times at lunch. For you Joe Buckley, you may buy a bagel at breakfast, we may give you a breakfast sandwich as a reward, and that’s an effort to encourage you to choose to leave more behind, to have a relationship with that breakfast sandwich.

On the other hand somebody who has been in occasionally for lunch, we may give them a salad because we are trying to activate their purchases during lunch. So the power of the learning is at the level of the individual, as opposed to at the level of generalizations.

Operator

And we will go to David Tarantino with Robert W. Baird.

David Tarantino - Robert W. Baird

I wanted to come back to the question on the traffic or transactions growth and in light of the performance you had in Q4 flattish year-over-year, and I think that came in lower than what you were thinking few months ago. So just wondering what might have surprised you on the traffic side and secondarily what’s given you the confidence and the ability to grow the traffic this year in light of what you have seen recently? And then may be finally, sorry for the multipart question here, but finally are you running into any limitations or restrictions in terms of throughput during some of the key day part periods that might restrict the traffic growth?

Ron Shaich

Sure, I think that any given quarters there is lots of noise, there is lots of things that are going on. I think as you broaden out to a full year, you get a broader perspective as you further elevate to three, four, five years you get an even better perspective.

I think what we’re really saying, I think we all know none of this is precise science and we most certainly can’t guide or target or with high degrees of confidence relative to a quarter and all the elements that drive comps. I think that what our approaches and what we would encourage investors to appreciate about how we’re approaching it is to drive a stew of initiatives organized around ways that impact the customer experience and offer opportunities for them to choose to leave more they so wish. And in those initiatives as in any portfolio some work little better, some little less, some work a little sooner, some work a little later.

I think we feel cautiously optimistic we will hit our targets for 2013 as we’ve felt in the past. I think as you start to descend into individual quarters or individual months and you start to separate that into all the elements, I think we’re much more cautious in trying to provide specific guidance particularly if people are going to compare against that with 10 basis points of variance. I guess I would basically end it there. I think there was another piece to it but forget it.

Bill Moreton

Yes, so just to finish with the first thought Ron had, David I think we pointed in the fact that for the full year transactions increased by 80 basis points. so on a full year basis we feel pretty good about how that worked out. The second part was his throughput limiting the amount of transaction growth that we can see and…

Ron Shaich

No, I would simply add yes, that’s part of why we’re making the investments we’re making. Again don’t make a generalization. It’s not all stores, every day, all hours; but in certain stores, at certain times, on certain days there are throughput challenges and again this business is no bigger than 1650 stores than one store done 1650times.

It’s not bigger than one transaction than done 8 million - 9 million - 10 million times a week and so we have more transactions and we would like in which were not giving that customer the experience we would like to give him. So our focus is on evolving with specificity to what the consumer wants and what job they are hiring us to complete for them to deliver that experience. Throughput us part of that.

Operator

(Operator Instructions). And our next question is Michael Kelter of Goldman Sachs.

Michael Kelter - Goldman Sachs

I wanted to ask about the same store sales guidance of 4% to 5% for the current quarter and I know its short term in nature, but there is a longer term reason why I’m asking it. You said that the two year run rate in the first 41 days of the quarter was 12.8%, which was as you said a modest acceleration, and the 4% to 5% same store sales guidance seems to imply a straight line of that 12.8% run rate in February - March.

So, I guess my question is that implicitly suggests that you expect no adverse impact from the increased payroll tax you wanted to affect a few weeks ago. And I just want to understand why you’re confident in that and maybe if there anything you’re seeing that suggest the consumer is completing shrugging this off and it won’t be an impact to your business in the near term?

Bill Moreton

So the last part of your question first, no, we think that that is an impact to everybody’s business; its money out of consumer discretionary spending, a part that could spend. But that said, how we look at our first quarter comps is we know that we’re rolling over two of the most difficult weeks of the year by comparison between 2012 and 2013 that we’re just ending now. So, we believe that we’ll see some normalized trends and that we’re confident that we can get in that 4% to 5% range for the first quarter.

There is a lot uncertainties, there is storm coming up east coast this week, who knows what effect that will have. Touched very much with the weather, you try to shake out of the first quarter and then you kind of see what you’re at on a steady state basis.

That set our best part and we always try to give you guys our best part, our 50 yard line expectation is that we’ll be in that 4% to 5% range, believing that we will accelerate somewhat as we go over relatively easier comparisons year-over-year. That said, we’ll see together and we’re not looking forward to the storm coming up the coast over the weekend. But that’s the nature of comps in the first quarter and it always is fairly weather dependent, but our best expectation right now is the compares get easy as we go through the quarter and that we think we'll get enough 4% to 5% range.

Operator

And we will go to John Glass with Morgan Stanley.

John Glass - Morgan Stanley

Have you ever studied the impact that catering is having on your traffic or potentially could and I say that in a positive way, that it will be a good trade to make because I think the catering business is a higher margin business for you and if not, do you think its worthy of studying? And just separately, what was catering as a percentage sale for 2012 if you did mention it on the call?

Bill Moreton

Yes, I'll answer the last and then maybe Ron can give perspectives on the former. Catering as a percentage of sales John, with 7.7% for the year. So we're getting close to 8% of total sales. Obviously given the catering growth was right at 20% for the year. And then Ron, do you want some perspective?

Ron Shaich

Yes, we think that catering is essentially non-cannibalizing of our transaction growth in our retail cafes and potentially actually business building, because it gets us into new opportunities to get exposed to people and it allows us to build a relationship with them. That then transfers to the in-store channel and so we think catering is a good business. It's a good business because it is non-cannibalizing at a minimum. It does build relationship and as you stated, it has the potential for gross profit at 20 times what an individual transaction’s gross profit would be in a retail store.

Operator

And we'll go to Jeffrey Bernstein with Barclays.

Jeffrey Bernstein - Barclays

Just looking at the comp at different way, obviously the two main components being the traffic and the average check; you've talked about the traffic, it seems a bit slowed a little bit the past few years and it was still positive for ‘12 and on the flipside we’ve seen the average check accelerating, and that was up at least 5% for more than a year. I know catering has helped there, I'm just wondering if you could talk about whether there's any concern of pricing out of the consumer mindset or whether there's an opportunity of more of a value platform. I know you talked about it, what you pay for what you get but it just seems like directionally their moving opposite and that’s despite a loyalty program that seems like with 13 million users that you will help to attract have been moving in the other direction. I wanted to talk about how you think about that average check side and if average check is a little concerned with a 3% price roughly that you've been running in the past few years, would there be a need to maintain at that level? Is there an opportunity on that front to lower?

Ron Shaich

Yes, just to be clear and get it out there Jeff; we saw transaction growth as we indicated by year at only 0.1 in 2009, 2.1 in '10. That was a reaction probably of the recession, 1.8 in '11, coming off of that, and then 0.8 in 2012. I think you have essentially pretty stable and solid transaction growth, particularly if you knock out that hit from the recession in '09 into '10, in the range of approximately 1%. In fact it averages out to 1.2%.

I think as we indicated to you, our price has been very steady, at the rate of inflation not more than that. It's grown 2.7%, over those same four years. I’d further indicate that our value scores and I think you see this in some of the work that a number of you learn independently, our value scores have stayed pretty stable.

So we do not think pricing with inflation has been a problem for us. I think you may have noted the article in the Wall Street Journal roughly two months ago, which compared us to McDonalds and Chipotle and said maybe one of the reasons Panera's been able to do that is that our average demographic has a higher income level than those two alternatives, significantly higher.

I believe our customers' average income is about $75,000, give or take compared to average incomes in those other operations and most food service companies significantly less. So I think it's got to be looked at in the context of what customers are capable of and what they want.

Now, having said that Panera continues to explore all options and we'll continue to explore our options to both offer products that bring in higher gross profit per transaction and are worth the money and we'll also continue to explore and look at options to use lower price entrees to open up new categories of consumer interaction. I think that they're both within the realm of reasonableness in testing, we'd be silly not to, but we see nothing that indicates to us in any substantive way that the way we've approached pricing has been anything other than favorable to the bottom line of the company and to the growth of our business, both in transactions and in operating profit.

Operator

And we will go to Mitch Speiser of Buckingham Research

Mitch Speiser - Buckingham Research

Can you give us a little more insight into the pasta launch and maybe within the context of, I believe about 20% of your sales are dinner, I am sorry if you can confirm that; I don’t think you really have many dinner products. Pasta should let itself to dinner. I was wondering in test have you seen any skew toward dinner and with pasta in general, can you give us a sense of the food cost? Is it at, above or below the average food cost of your products?

Bill Moreton

Yes dinner is roughly 20%. I would say to you this and I think it’s very important. We don’t have products for day parts with the exception of certain items that we run at breakfast. So we basically think that the business pre ‘11 and post ‘11 and again we’re going to compete as a dinner house, we are not the place you are going to go for a celebratory dinner. There is certainly no alcohol in a Panera. We are light foods that you eat it in the afternoon, when you eat at noon time and also you may eat in the evening as you are out and about shopping, going to the movies and the like.

Pasta fits in and we expect and hope it will be effective at both lunch and dinner. It may have a slightly more split towards evening than shall we say soup or some of our other products but I think the takeaway I would suggest to you and investors is to see it within the range of all of our products, both a lunch and dinner product and not to see it as driving one day part or another. Relative to food cost, you can assume it has essentially or relatively the same margins as all products that we’re carrying within Panera.

Operator

And we will go to Jason West with Deutsche Bank.

Jason West - Deutsche Bank

Just a question on some of the throughput opportunities. We have seen some of the new things in test here around at Boston’s market around delivery and online ordering and rapid pickup. I am just wondering with all those initiatives, sort of near the stage of rollout and is that part of the investment that you were referring to for 2013 or are those things very, very early days and you really think about more 14, 15 for types of initiatives?

Bill Moreton

I think we have something in the order of 50 different things in test somewhere in the country. So A, I would never comment on any individual test and if anything we are close to near rollout, we’d be telling you about it. So I would take it for what is worth, which is not much.

Operator

And we will go to Nicole Miller with Piper Jaffray. Your line is open Ms. Miller.

Nicole Miller - Piper Jaffray

Could you just flush out, please again, the current quarter or two-year trends. If you take out weather, would that be down on a tier basis and if so how should we factor that in then for the rest of the year?

Bill Moreton

Yes, Nicole it’s almost impossible to do right, to take out without weather. Once we looked at the first 41 days, there is only few days that you would consider how weather influenced it in one way or other. So all that we have taken out of the first quarter is that we are pleased with, when you look at it on a two-year basis which should equalize whether it’s a slight acceleration on a two-year basis compared to the prior year.

That said we would encourage you not to take, we don’t take a whole lot out of it and try to forecast through the rest of the year. We really like come back to the targets we had coming into the year, which was based on consumer trends and the initiatives that we had and that’s how we guide you to the 4.5 to 5.5 for the full year. So nothing in the first 41 days has caused us to alter that opinion and we got to wait till kind of the first couple of months going, the weather clears out and then see where we are at on an ongoing trend basis. But nothing has changed our way of thinking of that 4.5 to 5.5 for the full year.

Operator

Our next question is from Brian Bittner of Oppenheimer & Co.

Brian Bittner - Oppenheimer & Co.

When you look at your footprint today, how would you classify as what percent is now urban or its non-urban and when you think about the new units coming this year, and really for the next couple of years, what’s the mix going to be like between your urban, because I think that there is are still a very large urban opportunity ahead of you?

Bill Moreton

This year again we had what we called out is a true urban bakery cafe openings, and those were in Manhattan and Boston and Toronto, and one in Chicago. And as we think about it, it’s still a very small piece of the overall portfolio. When we do our bit, remember we’re not talking of Dakota main and main in downtown anywhere. What we are talking about is urban, it still is driven by a mix of traffic generators, retail business and residential.

So as we look at it, it is into a huge part of the portfolio, it’s an opportunity for us but with our core concept as it’s constructed today it will continue to be kind of on the edge or urban where we get all those three traffic generators. So we don’t view this as a huge opportunity at this point, but we’re continuing to test and understand how consumers use us as, as Ron said what job we’re completing for the consumers in the urban areas, but it really has lot of the attributes of our suburban bakery cafes to date.

So this year there was more urban cafes than in the past. There are higher sales volumes but as we mentioned before they also have higher rent and higher capital. So our expectation is they will similar returning bakery cafes in terms of ROI to us, and we’ll see as we progress through the years, but we’re not considering that just multiple hundreds of opportunities at this point, the way Panera presents itself to the consumer and competes.

Operator

And we will go to Keith Siegner with Credit Suisse.

Keith Siegner - Credit Suisse

Just a quick question on COGS, especially given some of the media attention on the draught in the winter wheat producing states; Bill could you give us an update on what your current expectation is for inflation and commodities for 2013 and along with that where you might be in terms of contracted positions et cetera, thanks?

Bill Moreton

Sure Keith, so for the full year we expect 2% to 3% for inflation this year and we would expect to price according to that. In terms of COGS, as you recall we can lock up in advance about 80% of our total purchases. There is something to say we can’t do that on the dairy side and diesel and some local produce, but so about 80% of our purchases we have ability to lock and advance. Of that we’ve locked about 84%. So 84% of 80%, so about 65% of our total purchases for 2013 are locked.

One of those things that we do lock is we lock about 90% of our wheat purchases a year in advance. So that’s already laddered in and to give some sense on a global basis without being specific by quarters, in 2012 though, we did run well ahead in 2011 in the first three quarters. It was slightly ahead of’11 in the fourth quarter that we just ended and now going into ‘13 wheat, there is a little bit of a positive tailwind to us, where again it’s locked essentially, 90% plus of our wheat is locked and we’re favorable in the first two quarters and it gets a little closer to even in the fourth quarter.

So, on an overall basis, what we’ve said before is wheat was a negative drag in 2012 by about $6.4 million or so for the full year and we’d expect next year wheat to be positive year-over-year again by price, by a $2 million. So we have that going in our favor and that’s what together adds to about 2% to 3% inflation expectation we have for this year and we think that it would start a little bit higher in the year and then go down as we go through the year.

Operator

And our next question is from Peter Saleh with Telsey Advisory Group.

Peter Saleh - Telsey Advisory Group

Just wondering if you could talk a little bit more about the drive through strategy. How may drive throughs did you end in 2012 with and what is the plan for 2013?

Bill Moreton

Let me give you a couple of things Peter. We ended the year with just under 200 drive throughs. It was a 192. And what we experienced this year is about 40% of our new unit growth was drive through and we would expect it to be similar in 2013. I think what we found drive through to be is a good opportunity for us.

We’re getting certain transactions and we wouldn’t get otherwise, as we’ve said in the past where people are tied to their car because they are on their way to soccer game or whatever and so it’s been a great thing and operationally we’ve got it to the point where certainly we’re not as quick as QSR folks but the times on the outside to get your food are similar to the times in the inside of the cafe and our customers are very willing to wait for that for the quality food they can get through our drive through.

So, it’s been a very nice addition to the portfolio. So we would not do a good side because it couldn’t be a drive through but we are opportunistically looking for drive through sites and as I said, that was about 40% of new units this year for both company and franchised and we’d expect it similar next year. But given it’s a little under 200, it’s still a relatively small piece of our overall portfolio of today 1,650 bakery-cafes.

Operator

And next we’ll go to Nick Setyan of Wedbush Securities.

Nick Setyan - Wedbush Securities

Just a quick follow up on health care. To what extent are you self-insured or in other words underwrite your own risk and then what that would imply or respect to that extent you’re insulated from a sharp rise in premiums should that occur, aside from any change in the percent of employees that opt in. And then just would you tell what percent of your employees currently sign out?

Bill Moreton

Nick, we wouldn’t give you some of those specifics. We are self-insured and then we have umbrella coverage over certain limits. What I would tell you as we’ve looked at it, again, as I mentioned during the call today we offer a limited medical plan to or hourly retail associates that have worked 25 hours or more. As we put it all in the mix, there's so many uncertainties in terms of how many people really opt into this coverage. Given the average age of our associate, there are a lot of people that are under 26 years of age that are eligible to stand a parents coverage and then the actual cost for opting out will be less, a fair bit less than it will be for them to opt out and pay a penalty than it would be for normal healthcare coverage. So, we're going to wait and see how this all affects us but again we'll treat it as inflation, part of our inflationary impacts on our core financial statements and what our philosophy has always been is to price roughly equal to inflation and we don't think that this will be have a huge impact to our P&L.

Operator

And we will go to Alex Slagle with Jefferies.

Alex Slagle - Jefferies

As a quick follow up on catering area you've been investing aggressively in and just wondering if you could talk more about how any of initiatives that are rolling out in ‘13 are different than the previous versions and when we’d see it roll out and sort of what gives you confidence you can maintain this double digit growth in the selling business?

Ron Shaich

I think as we indicated in our prepared comments, the three initiatives we mentioned will roll out in the first half of the year. They are essentially continuing to build out our catering sales organization. That always has direct impact. Secondly, we continue to bring more discipline in the entire sales process and professionalize that with the addition of the sales force management systems. This is something we've been developing; we're now going to a second generation of that management system.

And then third, you heard us talk about the web ordering capabilities. We're now going to the second generation of that and we believe that's a major step up in what we're headed, from where we've been. I think that again, each of these are not in and of themselves new but are part of a process of continuous improvement in the quality of execution that Panera brings to this important part of its business. I would further add that what gives us confidence in our ability to grow catering is the underlying growth of its business and demand and I think shall I say the unaided that Panera has as a catering provider is I think very strong, We probably have among the highest market shares in the country in this business today, and I think that plus the energy and effort we’re bringing to it and the track record, having done that over many years gives us confidence in our ability to grow catering strongly in 2013.

Bill Moreton

Shelly, we'll take one more question please.

Operator

We'll go to Robert Darrington of Northcoast Research.

Robert Darrington - Northcoast Research

Yes, thank you. Ron could you give us a little bit of color on the loyalty program, the fact that you've grown the user base to about, over 13 million at this point, does that provide you a tailwind when you talk with your users about things like hidden menu, or new pasta programs or how do you intend on using the access to all those folks.

Ron Shaich

Well you said it real well, you know Bob. I think that the key is we understand those 13 million people. We understand them as unique individuals, not as an aggregate of 13 million, not even as segments of millions of people but individually and therefore we can talk to them about what's relevant to them. For some pasta may be very relevant, for others, catering may be more relevant and based on their behavior we're able to speak to them with greater relevancy. Obviously greater relevancy means that we have more of the ability to impact that, and that's all this is about, it's about being able to speak to people as individuals and moving away from speaking them as mass.

Robert Darrington - Northcoast Research

Is that one of the key things Ron that gives you all confidence to look forward with sales expectation that continue to be ahead of the industry, up 4.5% to 5.5%?

Ron Shaich

I would say it’s one of the things, but I think I’ll end it, with this the last question, I speak for Bill when I'm saying this, it’s the store factors, Bob. We're never, as we go into it and as you know, we'd be silly if we bet on one thing. We have a whole bunch of initiatives out there spread across a number of ways to leverage the customer experience and drive competitive advantage. It begins with food and some very exciting food initiatives this year. It follows with a range of marketing initiatives including royalty.

It then gets intensified by our efforts around catering and some of what we’re trying to do operationally. I think we're seeing that each of those in their own right make sense to us. We'd be foolish if we told you how they're all going to play and what's going to actually make it to market and what isn't, but we think that working on multiple fronts with that kind of portfolio approach and with a track record of having done it over a very, very long period of time, augurs well for the future.

Bill Moreton

Thank you everybody and as always Ron, Michele and I are here for your questions, so thank you. Shelly, that’s the end.

Ron Shaich

Thank you.

Operator

That concludes today's Q&A session. We thank you all for your participation.

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