Panera Bread Co. Q1 2009 Earnings Call Transcript

| About: Panera Bread (PNRA)

Panera Bread Co. (NASDAQ:PNRA)

Q1 2009 Earnings Call

April 29, 2009 8:30 am ET


Michele Harrison – Vice President Investor Relations

Ronald M. Shaich – Chairman of the Board & Chief Executive Officer

Jeffrey W. Kip – Chief Financial Officer & Senior Vice President


Jeffrey Farmer – Jefferies & Company

Robert Derrington – Morgan, Keegan & Company

Steven Rees – JP Morgan

Joseph Buckley – Bank of America Merrill Lynch

Sharon Zackfia – William Blair & Company

[Steven Crom] – Goldman Sachs

John Glass – Morgan Stanley

Bryan Elliott – Raymond James

David Tarantino – Robert W. Baird & Company


Welcome to today's Panera Bread Company 2008 fourth quarter and fiscal 2009 earnings call. Today's call is being recorded. Now at this time I'd like to turn our conference over to Vice President of Investor Relations and Corporate Development, Ms. Michele Harrison.

Michele Harrison

I'm Michele Harrison, Panera's Vice President of Investor Relations and Corporate Development. Here with me this morning are Ron Shaich our Chairman and CEO, and Jeff Kip our Senior Vice President and Chief Financial Officer.

Before we begin, let me cover a few regulatory matters. I'd like to note that during our opening remarks and in our responses to your questions certain items may be discussed which are not based on historical facts. Any such items, including targeted 2009 results or conditions and details relating to 2009 performance, should be considered forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995. All such forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially.

I would now like to ask Jeff to review Q1 2009 with you, Ron will then provide some color commentary on our strategic plans to move the business forward, Jeff will then provide you with our targets for Q2 2009 and full year 2009, and then we'll spend a half an hour answering your questions.

Jeffrey W. Kip

Last night we released earnings for the first quarter 2009. We're pleased to deliver year-over-year earnings growth of 39% for the quarter or $0.57 in diluted earnings per share versus $0.41 per share in the same period of 2008. The $0.57 is net of approximately $0.01 of charges for the write-off of smallwares related to our new China. I'd also note that during the first quarter operating profit grew 36% to $29 million and operating margin expanded 210 basis points from 6.9% to 9%.

We feel very good about both hitting the mark with our first quarter performance and our success in delivering on our key metrics, though these metrics have nonetheless manifested themselves differently than we had originally targeted.

For the quarter, we had targeted essentially flat comps and in fact our comps were essentially flat in the first quarter. However, when we issued our targets we had a view that the challenging business environment would manifest itself in pressure on traffic and thus we targeted transaction loss of negative 3.5% to negative 3%.

We also targeted average check growth of 3% to 3.5% based on an assumption of price at 4% and mix growth of negative 0.5%. Our assumption was if we hit these metrics, we will end the quarter with essentially flat comp store sales growth. The reality was different from this assumption. Better than expected transaction growth was generated because breakfast transactions over delivered. This transaction growth can be tied directly to the impact of our Share the Warmth breakfast initiatives.

On the other hand, our average check growth in the first quarter undelivered at 1.9% versus our targeted 3% to 3.5%. This came about because mix impact on check growth was negative 2.1% versus our targeted negative 1% to negative 0.5%. This weaker check growth from mix was driven as low average check breakfast transactions effectively replaced higher average check catering transactions.

Let's talk briefly about the performance of the catering business. We had internally projected our first quarter 2009 catering business to run double digits growth on a per store basis. This is what has happened each year for the last few years. Instead in the first quarter we were essentially flat. We are also currently running about three catering transactions per bakery-café per week off our plan.

Catering transactions are extremely high in average check essentially $125 per transaction versus roughly $850 or so for the rest of the day, so missing three transactions per week versus our target is nearly 100 basis points of lost average check growth driven by mix.

As I noted above, our breakfast out performance has also contributed modestly to our lower average check growth. Breakfast transactions are lower check than lunch, so when we have relatively more breakfast than lunch, our check average is down slightly mathematically.

Now, remember that comps are the best proxy for gross profit dollars growth, which is ultimately the metric that drives our business. And remember, all in we ended up with comps in the same place we targeted. We're happy to take more transactions and less check for fewer transactions and more check. Either one will net us the results we seek.

Let's now walk through some of the details of our results, starting with revenues. Our first quarter revenue increased 5% to $321 million versus $305 million in the comparable period for 2008. Let's now look at the components of revenue growth. Net bakery-café sales were up 5% to $273 million in the first quarter and comprised approximately 85% of total revenues. The 5% increase was driven primarily by bakery-cafés opened in the trailing 12 months.

In terms of new units, we opened 14 new bakery-cafés during the first quarter, four of which were company stores and ten of which were franchise operated. First quarter AWS for new units opened in 2009 grew 7% versus the prior year of $41,922 a week.

We've already covered company-owned comparable bakery-café sales growth and its components. One final note on comps, the first quarter company-owned comp store sales of 3/10 of a percent included approximately 0.5% of favorability through the impact of the shift in the Easter holiday between March and April between last year and this year. The favorable Easter impact in the first quarter of 2009 will have a reverse affect on the second quarter 2009 comparable bakery-café sales of a roughly equivalent 0.5%.

Moving on to franchise royalties and fees, our franchisees experienced modest sales growth in the first quarter driven by 1% comp store sales growth and the impact of new store openings in the trailing 12 months. Franchise-operated sales growth drove our royalty revenue and fees up 7% to $19 million for the quarter. To close our comp store sales growth discussion, system-wide comparable bakery-café sales growth was 0.7% for the first quarter of 2009 versus the comparable period in 2008.

The final component of revenues, fresh dough sales to franchisees, grew 8% to $29 million in the first quarter largely the result of year-over-year price increases. As a percent of total sales, fresh dough sales to franchisees were 9.1% of sales up 20 basis points year-over-year.

Let's now move on to first quarter expenses and profit margins. Bakery-café margin declined 30 basis points year-over-year driven by deleverage on flat comp growth offset by continued margin improvement from the company's category management initiatives and commodity cost savings. Let's touch on the key components of restaurant margin.

Cost of food and paper as a percent of sales was favorable by 80 basis points year-over-year reflecting approximately 50 basis points from category management initiatives and approximately 30 basis points driven by the year-over-year benefit in wheat costs. The cost of labor was up about 30 basis points in the first quarter versus the prior year due essentially to deleverage on lower comp levels flat comps.

Other operating expenses as a percent of restaurant sales in the first quarter were up 50 basis points versus the prior year due to deleverage on flat comps, a modest increase in media spend versus the prior year, and approximately $0.01 per diluted share or about 20 basis points of expense in write-offs related to the rollout of our new China, which I mentioned earlier, which will continue into the second quarter. In total, the full impact across the bakery-café P&L of deleverage from flat comps is probably 100 to 125 basis points.

Now, let's look at key costs and expenses below restaurant margin. The fresh dough cost of sales to our franchisees improved 1,080 basis points in the first quarter driven by year-over-year benefit in wheat cost, as well as the year-over-year roll in of dough pricing taken in the first half of 2008.

G&A expenses as a percent of revenues improved 80 basis points in the first quarter versus the prior year primarily as the result of a development charge of $2.7 million included within G&A in the first quarter of 2008 related to severance, the write-off of capitalized assets and overhead costs and the termination of leases for specific sites that we decided no longer developed last year when we lowered our development targets at the beginning of the year.

This was offset a bit by flat comps, which had a negative deleveraging impact of about 20 basis points. Additionally, I'd like to note that we had expected approximately a penny per share of legal expense in the quarter related to class action lawsuits, which we did not spend, but we still expect to later in the year. This is partially why we did not raise and don't encourage analysts to raise their EPS guidance despite a strong first quarter.

Moving on to pre-opening expenses, pre-opening expenses improved 30 basis points to 0.1% of total revenues in the first quarter of 2009 from 0.4% in the same period of 2008, as we opened ten fewer company-owned new units in the first quarter as in the same period of the prior year.

Below operating margins, the first quarter effective tax rate was 38.5% compared to 37.5% in the comparable period of 2009 driven by changes in state tax laws. Net income for the first quarter was $17 million or 5.4% of total revenues compared to $12 million or 4.1% in total revenues for the same period in the prior year.

Let me know conclude with a few key cash flow and balance sheet items for the first quarter and the full year, excuse me, just for the first quarter. Operations and employee stock option exercises generated cash flow of approximately $46 million for the first quarter. We ended the first quarter with approximately $115 million in cash, excluding the Bank of America Columbia Strategic Cash Fund investment, which I'll catch up on in a minute, and zero debt we had capital expenditures of approximately $8 million.

During the quarter, we again adjusted the net asset value of our investment in the Bank of America Columbia Strategic Cash Fund from $0.65 on the dollar to $0.58 on the dollar to reflect the increased risk in the remaining portfolio, which now contains a higher percentage of distressed and defaulted securities.

We ended the first quarter with $2.6 million book value of these investments on $4.5 million of remaining face value compared to the $4.1 million 2008 year end book value of investments and $6.3 million face value. To date, we have received in redemptions about 83% of the original $26.6 million face value of original holdings at about $0.95 on the dollar.

Our current expectation, based on the guidance we have received from Columbia, is that about 50% of the remaining holdings will liquidate this year and the remainder some time thereafter. Finally, on average for the quarter there were about 30.7 million fully diluted shares outstanding, including the impact of 1.3 million stock options outstanding with an average exercised price of $41.50.

Let me know turn it over to Ron to discuss key initiatives.

Ronald M. Shaich

Let's get right to it. Last quarter we told you about our multi-plank plan to move the business forward by focusing on growing gross profit dollars per baker-café by focusing on driving operating leverage and by focusing on using our capital smartly, all while putting in place the drivers long-term earnings growth and concept differentiation. This remains our focus.

I'd like to update you on the progress we made on each of our planks in Q1 2009 and I'd like to walk you through what we have in the works for the rest of the year. Let's begin with our efforts to grow gross profit dollars per bakery-café. As you know, gross profit dollar growth is important because it is the key driver of bakery-café operating profit growth. Integral to an overall improvement in gross profit dollars is growth in gross profit per transaction. Let me note that growth in average check is a proxy for growth in gross profit per transaction.

As Jeff indicated, our growth in gross profit per transaction in quarter one was moderated by weakness in our high average check, high gross profit per transaction catering business. Having said that we saw positive impacts on gross profit per transaction from several of our strategic initiatives. The first of our strategic initiatives that I want to review with you is the execution of our high low pricing strategy.

We successfully took a $0.05 per cup increase on our new coffee when we rolled it out in early Q1. The growth of breakfast transactions is indicative of the success of that price increase. In addition, as planned, we took an additional 1% price increase primarily on our higher priced signature items with the start of Q2, though it's too early to fully understand the impact of this price adjustment on transaction growth. All anecdotal data suggests that the impact of this price increase will be consistent with our testing, which is to say it will have no impact on transactions at all.

As I've noted in prior quarterly updates, our value scores have remained stable and strong over the last 18 months. As you know, we conduct regular research on value and our research most recently conducted indicates over 80% of Panera's customers rate us a good or great value. This is a number that has now been stable for the better part of 18 months.

Having said that, our research indicates limited head room for additional price increases in the next 12 months. As a result of this research and because we are now projecting little or no inflation in Q3 and Q4 and well into 2010, we are planning limited price increases for the remainder of 2009.

To be precise, we are in test, and assuming the test goes as planned, we expect to take a very modest price adjustment in Q4. This is essentially a dime on our beverages. As a result, it is safe to say we do not expect additional price increases to be a key driver of gross profit per transaction improvement at Panera in 2009.

Let me review with you how we do expect to continue to drive gross profit per transaction growth. You will see us continue to work the change mix by driving sales of higher gross profit items like our signature salads and our You Pick Two. You will also see us introducing new items that deliver higher gross profit dollars per transaction than existing product on our menu.

In a few minutes I will review with you a number of new products we're rolling out this summer in an effort to drive transaction growth. You should also know that, not only do we expect these products to be strong transaction builders, but each of them carries a gross profit that is among the highest in their respective menu categories, but more on these products in a few minutes.

The next way you will see us driving gross profit per transaction growth is through increased add-on sales, including both bakery sale and bread sales. We are disciplined in testing all of our initiatives and our add-on projects are no exception. We are currently in test on initiatives like the You Pick Four and bulk bakery goods as an add-on or gift purchase, but have not cleared either for rollout at this point.

As you know, it takes time to see the degree of gains exceed the cost and we are moving forward in watching for that. We are, however, currently in the process of rolling out our bread heritage program, which is the title we used for our effort to sell more bread through better merchandising of our bakery goods. You will see this initiative live in bakery-cafés across the country this fall.

As we announced on our last call, we have also added a merchandising function to our team to help support our retail and cash wrap sales building initiatives. Our new retail merchandising folks taught me that word. Please stay tuned for updates on their work in the coming quarters.

A final initiative we will use to improve gross profit per transaction growth is to reenergize growth in our catering business. You will see us bring a laser-like focus to this initiative in the coming weeks and the months. To be clear, it is our understanding that many of our catering competitors have been off 20% or more this year. This makes sense because the primary consumers for catering are the very corporations that are under the most pressure in this recession and catering is an easy cost reduction to execute for CFOs of companies under pressure.

However, we know that if fewer people are ordering catering, we must get more catering customers in the door. Likewise, we must reduce customer churning. Thus, we are intensely focused on bringing enhanced tools and greater discipline to the work of our regional catering sales managers. The real test for catering in 2009 will be whether or not our team can effectively leverage our size and scale to build catering sales despite the recession. I'm betting with the focus our people are bringing to this effort we will get this job done.

Let's move on to the other key driver we utilized to drive gross profit dollars per bakery-café, and that is holding transaction falloff to a minimum. During the last year, Panera was able to blunt the impact of the recession by adding transactions at breakfast. In fact, we did just that in Q1 but at a rate even more dramatic than we expected.

As you recall, our Share the Warmth celebration in January brought renewed focus to our breakfast sandwiches and allowed us to introduce a new strawberry granola parfait and our new light and dark coffee roast. The intent of the Share the Warmth day was to offer our customers the opportunity to experience these offerings. The result was that many of them thought it was good enough to return and try our breakfast again and again.

The reality is that based on our Share the Warmth breakfast celebration, breakfast transactions grew 6% in Q1 2009. Our intent this summer is to bring to lunch and dinner the same impact that the Share the Warmth celebration brought to breakfast. This summer expect to see some of the biggest new product introductions in the history of Panera. We are bringing back some old seasonal favorites, things like strawberry poppy seed salad and summer corn chowder, as well as introducing some very strong and exciting new menu items.

In early June, customers will begin to experience our new chopped Cobb salad. This salad features all natural antibiotic-free, pepper mustard chicken, apple with smoked bacon, crumbled gorgonzola cheese, vine-ripened tomatoes, hardboiled egg and crisp romaine lettuce tossed with our herb vinaigrette dressing. I should add that this new chopped Cobb salad takes advantage of our new lettuce program, which I'll describe to you in just a minute.

I should also add that as a big fan of Cobb salad this is one of the best salads I've ever tasted, and it's made even more delicious because the lettuce is chopped and particularly fresh. In addition to the chopped Cobb salad, we will roll out a barbecued chicken chopped salad in late August. This one is made with fresh chopped romaine lettuce as well and is tossed with our signature barbecue ranch dressing, crispy tri-colored tortilla strips, all natural antibiotic-free chicken, roasted corn, Poblano peppers, black beans and finished with a drizzle of barbeque sauce.

The barbecue chicken chopped salad represents the second introduction in our line of chopped salads. And let me tell you, as someone who's been eating this quite regularly, this salad is dynamite. The key to both of these salads is our new lettuce program. Our sourcing team has revolutionized the way Panera sources lettuce by developing a system that cuts approximately a week off the age of the product.

We now have much tighter quality and much tighter temperature controls over our lettuce, all the way from the field through distribution to the bakery-café, and this insures that the highest quality lettuce possible, and I mean that in a genuine sense not in the kind of way that most people speak about it, but really high quality product lands on our customers plates. Simply put, this new lettuce gets to the core of our value proposition we do not define value as the cheapest food.

While the rest of the world discounts and competes with fast food to offer a $3.99 salad, we will focus on delivering a $12 salad for under $8. And under the new lettuce program, our lettuce will be far superior to anything you'll find in the market place. This is an excellent example of how Panera intends to build competitive advantage.

Let me note that, not only do we have two particularly strong salads coming out this summer, but a range of other products as well. In early June, we will debut a new toffee nut cookie and a new cinnamon swirl and raisin bagel while celebrating our strawberry poppy seed salad, which you remember is made of crisp romaine lettuce, fresh strawberries, fresh blueberries, pineapple tidbits, mandarin oranges, pecans and our fat free reduced sugar poppy seed dressing. It is truly the perfect summer salad.

In addition, for the chill time you will see us celebrate our frozen beverages, things like the frozen lemonade, our frozen mocha and the ever-popular low fat strawberry smoothie. This last product is my accompaniment to the Southwestern barbecue chicken salad I've been eating, one I drink every single day. It is made simply with fresh perfectly ripe strawberries, sourced straight from California and Stonyfield Farm organic, low fat, vanilla yogurt.

It's another example of what we're doing to raise the competitive end by offering high quality, healthy, differentiating dining experiences for our customers. But that's not all, in late August we will also introduce a new and improved almond chicken salad sandwich. We will prepare the chicken salad for this sandwich fresh in the bakery-café with all natural antibiotic-free chicken, fresh red grapes, diced celery and sliced almonds.

It will be a light chicken salad utilizing olive oil rather than heavy mayonnaise and is a significant improvement over the chicken salad we presently serve. Not only does it offer some of the best consumer rating scores we've ever seen, but it also offers us a higher gross profit dollar per transaction than the existing sandwich. And there will be yet other strong new products coming in our late August celebration. We will introduce new brownies and new blondies as a means of driving afternoon chill.

And we will also roll out a healthy power breakfast sandwich to support our breakfast business. This power breakfast sandwich is made with all natural freshly cracked eggs, a thick slice of Vermont white cheddar cheese, fresh ham, all grilled between two slices of our whole grain bread, lower calories higher protein. Taken together, we are hopeful that these new products will help in our drive to build transaction growth.

Before I conclude our discussion of new products, let me share with you an interesting tidbit. We've been testing these new products individually for the better part of the last year, but only recently brought many of them together in one test in one of our major markets. Prior to that multi-product test, that market was generating comps that were in the bottom third of comps of all Panera markets.

Since we began testing these products, this market has moved dramatically to the top of the middle tier of comps among Panera markets. Based on this success, we expect the strength of our summer products to give us a nice lift in quarter three and into quarter four. Media will also be integral to our plans for minimizing transaction falloff in 2009.

As we told you on our last call, we will have significantly more media impressions in 2009 than in 2008. However, you should also remember that 50% of our markets are now in their second year or third year of marketing and much of the impact of the radio and outdoor media serves to retain the customers we acquired in the last year or two.

Let me also note for those of you who keep score by quarter, quarter two company comps were our strongest of 2008. In fact, quarter two comps were up 6.5%. On the other hand, quarter three comps were up only 3% and quarter four comps were up only 1.9%. My point is, if we can deliver flat to positive comps in quarter two, our prospects for transaction and comp growth in quarter three and four, particularly with the new products we're rolling out, gets relatively more attractive.

Let me now speak to a number of tests that are going on relative to our effort to use our scale to deepen our relationship, that is to say marketing with our customers. As we told you on our last call, we will be testing our first television advertising in three markets beginning in the early summer. We've also begun a pilot of a loyalty program in one market with 30 bakery-cafes and have received positive feedback from many of the 30,000 plus people who have enrolled in this test program.

And as ever we intend to use operations as a means to build transactions. For us this means speed, this means accuracy and this means an improved customer experience to increase a long-term concept differentiation. As you well know, neither category management, nor product development, nor media, nor operations will single-handedly improve our transaction in the face of a weak consumer environment.

But taken together, we're hopeful these initiatives will be strong enough to blunt much of the recession's impact and help us to meet our gross profit dollar targets by driving both transaction growth and gross profit per transaction growth.

Let me now move on to the second plank of our plan, driving operating leverage and thereby improving our operating margin. As we all know, operating leverage occurs when we're able to build gross profit dollars per café without incremental costs. Operating leverage also occurs when we're able to utilize our scale to effect better purchasing efficiency.

Let's begin our discussion of operating leverage by reviewing our progress on driving purchasing efficiency. Let's discuss our projected cost inflation first, specifically we now believe we will be able to hold our cost inflation in Q3 to less than 0.5%, and similarly we expect that in Quarter 4, 2009, we can hold cost inflation to less than a 0.5%.

I can also tell you that we are preliminarily projecting deminimus inflation in 2010. This means we need less price, excuse me, this means we need less price to obtain our gross profit per transaction targets and it increases the potential for operating margin expansion.

Let me also note that another mechanism for driving operating leverage and improving operating margin, is managing the growth of controllable expenses. Our controllables and our overhead continue to be in good shape consistent with our goal to hold growth at a rate significantly less than the growth of our gross profit.

To do so, our team is looking to many potential areas of savings from energy reduction to office supplies to uniforms. Simply put, there's a lot of opportunity for us to proactively manage our expenses without executing the destructive cuts you're seeing being made in many organizations. For Panera, expense management is business as usual and we intend to keep it that way.

Let me now turn to the third plank in our plan, smartly using our capital. As you know, average weekly sales of our bakery-cafes is a key driver of our return on invested capital, and our AWS, that is to say average weekly sales, in the class of 2009 continues to be very strong. In fact, the volumes are much higher than expected, with AWS for new company bakery-cafes in Q1 at $41,900.

Yes, this is good news, but you should not read too much into this news. We do not expect our full year class of 2009 to perform at this level. Rather, we think it makes sense to assume our class of 2009 delivers AWS at the $36,000 to $38,000 sales level we targeted.

Let me share with you one other thing we're seeing on the development front. Given the condition of many developers in the industry, we are seeing a number of projects in which we have commitment stall. And we are finding occasions when landlords or even whole centers are not being completed. As well, some developers remain unwilling to enter into real estate deals at prices consistent with the new supply and demand realities of the marketplace.

In other words, we find some developers unwilling to move away from the prices of yesterday, but we and our franchises refuse to give into this. We know that the commercial real estate market will follow a pattern like the residential real estate market and these developers will ultimately come around. We know our patience will be rewarded with higher ROI bakery-cafes.

As a result, based on the number of projects we are seeing being suspended or pushed into 2010 and the time it's taking us to step up our development again, we are increasingly concerned about our ability to hit our development targets for 2009. The result of this is we now expect to be at or below the low end of our target of 80 to 90 new unit openings system-wide in fiscal 2009.

On one other note, we continue to work towards materially reducing our investment for bakery-café by testing a smaller store prototype that will reduce our capital investment by $200,000. This also offers the potential to drive return on investment and represents an additional means to improve our use of capital.

Let me now discuss the last plank in our plan, utilizing the recession and our scale to drive competitive advantage. As ever, we continue to be prepared to take advantage of the recession. We will remain focused on building our competitive position, executing a strong development program and strengthening our organization with the many good people now available. A manifestation of this effort to drive competitive advantage will be seen in the many new and differentiated products I've described to you and you'll see us roll out this summer and this fall.

As I have said before, our goal for 2009 and beyond is to use our scale to further long-term concept differentiation and ultimately competitive advantage. To us, this means, not simply cost reduction, but sourcing and equipment development that allows us to do things for our customer experience that no one else in our competitive set has been able to do to date. And to us, that means utilizing our scale to execute more aggressive marketing.

We are not interested in marketing simply to build name recognition and awareness. Rather, we will use our marketing to build deeper relationships with our target customers. In summary, our intent is to use our size and scale to improve our competitive position.

Taken together, I think you have to agree that Panera has the means in place to delivery on its key 2009 strategic planks, driving gross profit dollar growth to improve gross profit per transaction and transaction growth, improving operating margins through operating leverage, and smartly investing its capital while improving competitive advantage. I think I've given you probably more than you wanted to know.

So it's time to turn it back to Jeff who will take you through our targets for Q2 2009 and our targets for full year 2009, and then we'll take it back for some questions.

Jeffrey W. Kip

I'd like to now review with you our financial outlook and targets for full year 2009 and provide new targets for the second quarter of 2009. In our press release last night, we reaffirmed our previously issued EPS target range of $2.55 to $2.71 for the full year, which represents 15% to 22% growth over 2008 EPS.

As discussed earlier, first quarter performed in total how we targeted, but we got there a bit differently than we had targeted. Higher transactions than expected with greater pressure on average check than expected. This is a result of a stronger breakfast and weaker catering business than we'd originally anticipated.

What we saw in the first quarter gives us confidence relative to the full year, but it also modifies our outlook for how the rest of the year will unfold. We continue to hold our 2009 full year target for comparable company-owned bakery-café sales growth at 0.5% to 2.5%. However, we now believe that transaction falloff will be less than our original full year target, which was negative 3.5% to negative 2%.

Our revised transaction growth target, or transaction falloff target, is negative 1.5% to negative 0.5%. On the other hand, based on our experience in the first quarter, we're now targeting average check growth, which is our proxy for gross profit per transaction growth, as Ron told you, at a level less favorable than our previous full year target of 4% to 4.5%. Our revised target is 2% to 3%.

Among the components of average check growth, our pricing target for the full year remains unchanged at about 3%, so implicitly our mix impact on check growth previously targeted at positive 1% to positive 1.5% has been revised to negative 1% to flat. We think the net impact of the changes to the degree of difficulty to hit our full year 2009 guidance of $2.55 to $2.71 is now modestly higher than it was.

We say that because we now believe that we're more likely to land in the bottom half of the full year range on comps than the top half. Having said that, I want you to know that we believe we can be in the lower half of our comp target range and still achieve the middle of our earning's target range. And if our initiatives kick in and our comps strengthen, we can do significantly better than the middle of our range.

Let's discuss the operating leverage metric because that will tie out what I just said about comp ranges and earnings ranges. We continue to target approximately 75 to 125 basis points of improvement in our operating margin for the full year 2009. But converse to the comp range comment, we now think that we're more likely to land in the upper half of this range rather than in the lower half of the range.

Why? Well, primarily because, as Ron mentioned, the company continues to make progress on bakery-café food inflation for 2009 and has brought inflation in the third and fourth quarters down to about 0.5%, excluding the effect of wheat, and is now projecting full year 2009 inflation of approximately 1.9% versus the previous estimate of 2.4%. This too increases our confidence.

Moving on to return on investment capital, as Ron discussed, we now believe that we will be at or below the lower end of the target range of 80 to 90 new bakery-cafes. Again, as Ron commented, this update reflects the woes that have plagued commercial real estate industry and have inhibited our ability to increase our pace of development. Rest assured that we are not backing away from our intent to increase the rate of development of new bakery-cafes.

Finally, as a side note, subsequent to the quarter, we exercised our option to purchase the remaining equity interest in Paradise. We expect that close to happen sometime near the end of the second quarter. This transaction was fully expected and built into our targets.

Let's now talk specifically about our second quarter targets. The second quarter of 2009 the company's targeting earnings per diluted share was $0.62 to $0.66 versus $0.52 per diluted share in the comparable period of fiscal 2008. If we meet target, we'll be up 19 to 27%.

Second quarter of 2009 EPS target assumes the following key assumptions. First, its second quarter company-owned comparable bakery-café sales growth will be negative 1% to flat, including the negative 0.5% impact of the swing in the Easter holiday on the quarter. Our second quarter comp target assumes transaction declines between negative 2% and negative 1% again including that negative 0.5% of Easter impact, and check growth of approximately 1% consisting of negative mix of approximately 2% and price of approximately 3%.

Let's move on to our second quarter operating leverage metrics. In the second quarter, we're targeting approximately 75 to 125 basis points of operating margin expansion as a byproduct of the initiatives Ron discussed earlier and the year-over-year benefit in wheat costs. To quantify that, the benefit from wheat cost will be approximately $5 million in the second quarter.

This benefit will be split about 40/60 between retail cost of food and paper, and fresh dough costs to sales to franchisees. Profit on fresh dough cost to sales to franchisees will also improve an additional $1.5 million in the second quarter when the roll in of 2008 dough price increases.

Finally, in terms of uses of capital, the company is targeting approximately 10 to 14 system-wide new unit openings in the second quarter of fiscal 2009 with average weekly sales for company-owned new units consistent with our full year target of $36,000 to $38,000 a week.

Let me now conclude. In summary, we are very pleased to deliver a solid first quarter of 39%. We got there differently than we expected with stronger transactions and lower gross profit per transaction growth, but the same total gross profit dollar growth.

Despite the recession's impact on our catering business, we are able to drive transactions through our successful breakfast programs, and despite the many countervailing forces at work on our business below the surface, it's steady as she goes on the surface. As a result, we remain confident in our ability to deliver our 2009 EPS target of up 15% to 22% and our ability to expand our earnings well into the future.

With that, I would like to turn it back to the operator for our Q&A sessions. We'll answer your questions, as is our custom, one question at a time. If you have two questions, we'll ask you to return to the queue. We'll stay on the line for a full 30 minutes or until you run out of questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Jeffrey Farmer – Jefferies & Company

Jeffrey Farmer – Jefferies & Company

I think you touched on this but with retail development down, are you pursuing more conversions than you have in the past, and is there still an opportunity to align your development with big box retailers like Target and the like?

Ronald M. Shaich

I'll take that as one question. I don't know what you mean by conversions, are you referring to conversions of competitors?

Jeffrey Farmer – Jefferies & Company

Existing retail units, they don't have to be restaurants, but any type of again, retail establishment that was there that's sort of pulled out and you've assumed the lease or have converted the unit into a Panera.

Ronald M. Shaich

I'd say it to you this way. I think that for most food concepts and focus food concepts like Panera, where we have a menu and an environment that we execute and we have a fair amount of equipment, basically we need to take an empty shell. We pick up somebody else's restaurant, the equipment package is wrong. The counter structure is wrong.

So, essentially we're open to real estate opportunities, traditionally we're open to real estate opportunities with people that are closing, we're open to real estate opportunities of any kind. So, if there are competitors out there closing and their space meets our needs or we suspect that they'll be closing in the next year or two, we are certainly going to be in touch with the landlords about becoming the new tenant coming in after them.

As well, we will discuss with anybody who is trying to cutback on space and some of the big box retailers certainly are, we'll discuss cutting out a corner, typically at the front of their store, we'll discuss cutting out a corner such that Panera can put its full café in there.

What I'm indicating to you is that, Panera is interested in doing real estate. It's unlikely we're going to pickup somebody else's physical plan and it's also unlikely we're going to do a knockdown version of Panera that doesn't give voice to the concept as an offshoot in a different big box retailer.

Jeffrey Farmer – Jefferies & Company

And just to be clear, the big box opportunities are still there for you, Target's not slowing down to a point where you're having a problem aligning yourself with them?

Ronald M. Shaich

We are not in a relationship with Target so I don't understand what you're talking about.

Jeffrey Farmer – Jefferies & Company

I guess historically you've built a lot of your restaurants near Targets, so again I'm not sort of implying you have a relationship with them, just historically you've built some of your restaurants near again big box Target would be one of them.

Ronald M. Shaich

We will continue to look for good locations following our real estate [bids] wherever we find them to the degree Target's there or not there has not been a key driver of that.


Your next question comes from Bryan Elliott – Raymond James.

Bryan Elliott – Raymond James

Just wanted to follow up on the food inflation commentary, Jeff, if you strip the wheat decline impact out, what sort of the rest of the package look like, and do you have contract or lock-in protection on some of the other big items, and when you look into 2010, have we begun to lock-in wheat for next year?

Jeffrey W. Kip

Bryan, the numbers we gave were excluding the impact of wheat.

Bryan Elliott – Raymond James

Oh, I missed that, I'm sorry, okay.

Jeffrey W. Kip

We're done to about 0.5% in the back half of the year, one nine over all excluding wheat. And with the wheat pickup, we just kind of categorize it differently because the wheat pickup is kind of an outlier. We're obviously deflationary over all.

Let me take these couple of points here, the first thing is our purchasing process, which we've discussed at some length before, is that our philosophy is that we want to ladder in at least six months ahead of time certainty on prices. And by laddering, we'd like to buy it in over the course of three to six months rather than kind of taking a shot all at once six months ahead, which is essentially playing the lottery on the commodity ahead.

Now, different items work differently. Those that have higher process components tend to be locked a little further ahead etc, but that's the essential philosophy, okay. So, essentially '09 is locked the 80%, 85% of our ingredients that have materiality to lock, and we have started working through '10.

We're now looking ahead at deminimus inflation for '10, as Ron mentioned, and we probably have a 1/4 to 1/3 of the wheat locked as is our laddering discipline where we start a year ahead to ladder in pieces of each month, a month at a time, at roughly $8 once we get the basis in, because we expect the basis to trade at historical levels of about $1, $1.50 and the bushel have been about $6.50, so that's kind of the comprehensive view of I think all the pieces you're mentioned.

Bryan Elliott – Raymond James

All right, and are you locked, refresh my memory, how much cheese do you guys use and are you protected from a milk rebound?

Jeffrey W. Kip

So we follow just to cover off, as we gone to the multi-layered question here, just to cover off, we use a reasonable amount of cheese mid to high single digits, the rest of our total ingredient level, and we work through cheese the same way we work through every other with our discipline laddering purchasing process.

Ronald M. Shaich

I just want to add to enunciate what Jeff said, our principal of purchasing built actually over the last two years is we don't have a clue where the market is going. If you do, I will personally take some of my own cash and invest with you because I don't have a clue. We, therefore, our whole principal is we want to have enough visibility to be able to adjust our prices. At the same time, we want to make small commitments, so we'll be out that six months but we will make a commitment as short as we can once we're post that six months so we can ladder it.

So, what you can expect with Panera is, Panera will not win or lose on the commodity lottery, Panera will float like a surfboard on a wave with where that market is going.


Your next question comes from Robert Derrington – Morgan, Keegan & Company

Robert Derrington – Morgan, Keegan & Company

Jeff, could you give us a little bit of help in understanding as we work through modeling out the year, how G&A is likely expected to change through the course of the year?

Jeffrey W. Kip

G&A is going to probably be relatively stable as a percent of sales year-over-year. I don't think that, we tend not to try and model quarter-by-quarter for everybody the movements. I don't think it's going to move materially differently than last year.

Robert Derrington – Morgan, Keegan & Company

What I'm trying to understand is, obviously, with the revenue growth this year and unit growth relatively light relative to historical levels, G&A as a percent certainly is a bigger deal to the bottom line, so I'm just trying to understand will the growth in that line likely be less than revenue growth?

Jeffrey W. Kip

That's always our goal to grow our G&A at 2/3 or 3/4 of our revenue growth and we've been pretty successful the last couple of years at doing it, especially in the context of last year we slowed our unit growth. We have always run a relatively tight ship. We have not built out our G&A ahead of growth because we've never wanted to be in a position where the growth stopped and we had to trim 10% or 20%.

So, we've always worked very hard to make sure we staffed key positions, stay in line with our growth, and we've been fortunate to be in a place where, at the time we slowed our growth for strategic and return on capital reasons, our G&A was not ahead of it. So we've been able to rein it in and we've got a great team here that's been able to work through supporting the key initiatives of the business that Ron walked through earlier, and still keep the G&A growing slower than revenues.

Robert Derrington – Morgan, Keegan & Company

As part of that and this is not a follow on question this is tangent to it, you talked….

Ronald M. Shaich

It's your third question, Bob but go ahead.

Robert Derrington – Morgan, Keegan & Company

A $0.01 EPS impact from a class action some litigation, can you help us understand what's going on there?

Jeffrey W. Kip

Lawyers cost a lot of money, Bob. The hourly rates run up, we had a couple of class action law suites in play last year. You may recall when California wage an hour and one was shareholder litigation, and we expected to have more outside counsel fees this quarter than we did, and we still expect to spend that money.


Your next question comes from Steven Rees – JP Morgan.

Steven Rees – JP Morgan

Ron, it sounds like your value scores are still holding up at historically high levels, maybe can you just comment on how your core lunch traffic trended from the fourth quarter throughout the first quarter maybe into April in the face of some pretty aggressive discounting and casual dining with some low price points and what looks to be more discounting in QSR as well.

Ronald M. Shaich

It's hard for me to start to break it out and I'm going to avoid it because it's a slippery slope. I've got catering that we actually calculate into lunch, now do I take it out, and then if it gets sorted in analytical issues. I would simply say to you that we've seen, basically in the core lunch business, it's been slightly off in transaction growth.

That's my sense of it, flat to slightly off, but basically holding its own in every essence in the environment we're in, and we've seen no material changes over the last six months so to speak, and by that I mean that since the November, December meltdown, which is when we really saw just a notching down. I don't think we see much impact from QSR or even casual dining's discounting.

I mean the reality is that guys can offer a soup and a salad for $5.95, but they've got two taxes that they get placed on top of that, and I'm not referring to sales tax. One is the tax of the tip, which is a 15% tax, and the other is the tax of time, getting them in and out through a waitress's services.

Panera can give you quality food and we think it's getting even better, a quality experience in an environment that's comfortable. We can get you in and out and you can do so without a tip, and I think it's pretty hard to compete against that. And I think we have seen, I know when Applebee's pushed very hard last year with television, we saw no impact. My own sense is most of our competition is essentially fragmented. There's no one competitor that impacts us and so whatever actions anybody takes seems to dissipate.


Your next question comes from Joseph Buckley – Bank of America Merrill Lynch

Joseph Buckley – Bank of America Merrill Lynch

Could you share some insights into maybe the components of the Share the Warmth program and why you think it was as effective as it was in the first quarter driving the breakfast transaction counts, and then you alluded to sort of transferring some of those strategic moves over to breakfast and lunch so if you could kind of bridge that gap as well that would be helpful.

Ronald M. Shaich

The Share the Warmth was really a new thing for us, it was an integrated effort and it began with some great products, the granola parfait is really superb. It's just strawberries and low fat yogurt. We added to that the superb breakfast sandwiches and we spent two years working through the coffee.

We took these great products and we then created an opportunity for people to try them. In stead of sampling throughout the day for weeks on end in sort of a passive sampling mode where we put it out on a display, we literally took a day and during that day we, let me actually step back. We took our own people and for several weeks before this Share the Warmth day we held these meetings and we spent a lot of money to do it.

We held meetings, which we now hold five times a year, where we let them actually taste the product and decide whether they liked it and begin to affiliate with it. We took our entire operating team, that is to say everybody from our district mangers on up. We took them to where we roast the coffee, so we got very deep in trying to get our own organization affiliated.

Then we took a single day in January and we released the entire company and we said get out in front of your café as people walk in and give them a breakfast sandwich. Give them a taste of coffee. Let them enjoy the granola parfait, and talk about it just be yourselves and this is an opportunity to share the warmth of Panera with your guests.

We tied that with the donation program in which we said if you'd like Panera is giving you the food free, but Mr. Customer, Ms. Customer, feel free to contribute $1 to our operation donation. The net effect was that we got lots of this food into people's hands. It was not done in a corporate way but done by people to people, and at the same time we raised a couple of hundred thousand dollars that we were able to give to all kinds of local organizations.

I don't know what it is, but we got something like a million impressions with the media as part of this. It was a big hit and surprised us. I think what we are attempting to do this summer is a similar kind of effort. We start with great products. If the products that we sample with people aren't worth going out of the way for it doesn't mean anything.

Secondly if our own people aren't excited by it, it doesn't mean anything. And third, if we can find mechanisms to get this product into people's mouths they respond to it. And so we will continue with that kind of thing. Either you are going to see Panera continue to do more active sharing, and by active sharing I mean opportunities to engage with our guests and give them opportunities to experience the many good things that we do and people seem to respond to that. Hope that's helpful


Your next question comes from Sharon Zackfia – William Blair & Company

Sharon Zackfia – William Blair & Company

So, I'm curious since your new unit volumes actually held up quite well over the past year and a half, I mean I understand what's happening with the landlords, but how do you think about expansion plans and the pace of that expansion as we exit the recession at some point. And kind of concurrent with that, what efforts are you to taking to further your pipelines so we don't see development kind of shortfalls going forward?

Ronald M. Shaich

First, are you calling the end of the recession?

Sharon Zackfia – William Blair & Company

You didn't hear that here. I hope it ends at some point.

Ronald M. Shaich

I think you said as the recession ends, but at any rate, I won't hold you to it. I think for us the issue for us is the effort quite frankly to re-energize our development effort in the context of the huge chaos that's occurring in the commercial real estate markets.

I think as many of you know, roughly now about 16 months ago we cut back on development and I think many of you also know the development cycle is 12 months or more, typically. And so we then said at the beginning of this year as the recession seemed very clear to us to create lots of opportunities that we wanted to take advantage of that opportunity. So, I think what you're experience now is in our real estate re-energizing cycle you're premature to the re-energizing and we're simply experiencing the chaos in the commercial real estate markets.

Developers don't know whether they're opening their centers or not. They don't know whether they're big box tenants are showing up and they don't know whether they have the financing and that's causing lots of changes or slippages in the development process. I think simultaneously we're being very disciplined about our deals and want to see the new reality take form and in the context of that, that also requires patience.

The way we do a deal today is we look at it and then we go back to the developer a second time and say, okay where are you going to land on this project. Having said that, you're getting the impact of all that and yet we're not because it's a 12-month cycle getting any of the benefit of our renewed push. So I think that's where we are in the process.

I'm hopeful that we'll be able to see it ease up as we move into 2010, but I guess I'm being very cautious in stating that. I think we have to see what happens in the development world and we have to see what the capabilities are. To us development is a way to invest our money well. We have a great concept and we'll continue to do as much of that as we can while investing our money well and doing it with discipline.


Your next question comes from [Steven Crom] – Goldman Sachs.

[Steven Crom] – Goldman Sachs

Question on the mix side of the business and clearly a lot of emphasis last quarter and this quarter on driving that mix as price kind of comes off a bit, and understandably so this quarter the unexpected slowdown in the catering business drove some of the gross profit shortfall that you expected. But I'm curious if you could maybe just dive in a little bit on some of the things you talked about last call on things like more indulgent or add-on sales at the counter, the testing of You Pick Four, things like that as we move through the year. How are the early reads on those types of initiatives?

Ronald M. Shaich

I think I indicated in the prepared comments, but I'll sort of give voice to it with some more perspective. Let me first just correct one thing you said. I think you suggested the gross profit was down. In fact, the gross profit dollars were essentially on our target. The difference is that we got there differently than we had originally targeted, which is to say we got less mix and at the same time got more transactions.

As Jeff indicted, that was directly related to a larger swing in our business. Breakfast did far better than we thought that offers a lower check and lower gross profit per transaction. Those transactions simultaneously, our catering business was off. The transactions in catering don't mean anything its $125 transaction.

Three transactions in catering can nail us for 100 basis points of gross profit per transaction. And so catering it was essentially a compression on the gross profit growth. So, there was a swing that by the nature of that swing in the mix of the business led to more transactions and lower gross profit per transaction, but net we came out just where we hoped to be.

Specific to the initiatives you verbalized around gross profit per transaction, as I indicated to you folks in the comments, we are in testing those. The tests continue to look interesting. Let me be clear, there are different things. We are in test in our Your Pick Four, which is essentially buy any entrée buy a beverage and get a baked good for $0.99. We are in test on that. We are in one market today we're going to a second market. We have seen some impact from it, some positive impact in the pickup in sales.

And on the other hand, we haven't gotten enough incremental gross profit dollars to say it's a no-brainer runaway hit. And we now need to take it to a second market and then we need to give it enough time to work, which is to say the kind of thing that has to be changed in the conscientious of the consumer so it becomes part of what they're doing. It's not something you test for an hour and a half and roll the next week.

I would say to you bulk baked goods continue to be an important part of our mix. You'll see that as part of our bread heritage this year the whole push on bulk bagels. Bulk baked goods continue to be in test. They're moving into a second or third market. We are testing it so I feel very positive about what we're seeing. Our whole retail merchandizing zone let me step next maybe to bread heritage, which is a subset of that.

As we verbalized on the prepared comments, bread heritage is really our effort to rollout stronger bread merchandizing, bread is an add-on. That's been worked on for over a year. It's been in test now in four or five markets. It's now in rollout as we talk and you will see that in the fall, and basically it's a new and more aggressive way to merchandize bread as an add-on product for your visit to Panera.

And then fourth, what we talked about was the addition of retail merchandizing disciplines. We brought in a senior merchandizing executive from Godiva. She's been very focused on this bread heritage initiative, and as we move to the end of the year into next year, we're really going to begin to look at additional offerings consistent with Panera that we can offer on an impulse basis as you're waiting in line or at the cash wrap station, which is literally where you ring up and pay.


Your next question comes from John Glass – Morgan Stanley.

John Glass – Morgan Stanley

I wanted to go back to the question about the rate of development and three years ago revenue growth was 30% and today it's 5%. So, what do you think the intermediate term right correct revenue growth or development growth is in this business? And in answering that, can you also talk about what are the benefits you're receiving this year in particular as you don't have the cost of growth embedded in the business, right, not just pre-opening but presumably less immature stores coming into the base and if you tried to quantify what that margin benefit has been.

Ronald M. Shaich

Let me take the last piece of it. I don't know about the margin benefit, but I think basically our new stores have about a five-year cycle where their comps are a couple hundred basis better than the norm. So, we continue to be in basis some places we've been for the last couple of years, which is having whatever benefit there is from new store growth in our comps. I think relative to the margins, I'll let Jeff comment on it and the revenue question.

Jeffrey W. Kip

I think there's a number of pieces that you threw out there, John, so let me try and give a comprehensive answer and if we got to talk about it more maybe you can come back or we can go through it offline, but on a very simple level, we don't approach the business as let's hit 10% revenue growth going forward, put that in the model and let's go.

The way we think about it is, if we have a high quality real estate site, we're going to invest our capital there because our goal is to get ROI not units. And it's a little bit of the change in headset, not that we weren't there before, but we've really deeply focused on it about 15 months ago when we pulled in our development.

So, we're going to build as many stores as there are great sites that are going to hurdle for us. That being said, our sort of headset on it is mid to high single digits we think is the kind of units we should be able to generate, but we're only going to build them if they're there. And then I think generally our view is we should be able to generate over the last five years we've averaged 4% comp, 2% to 4% whatever the rate of GDP growth is, is a reasonable number.

And so that's how we thing about revenue growth, probably high single digits low double digits if you're looking for some kind of proxy, but again, we don't plug it into a model and run it forward that way.

Ronald M. Shaich

I think I would also add, and I may have commented this to some degree in my response to Sharon, is I think that development is the longest lead item we have. That is to say, we cannot jerk this around in a given quarter or even a given year. So that we think about development in a year to two kind of cycle, and so we slowed it down 16, 18 months ago, we're now in the process of trying to push it back up.

That is those challenges are then magnified by the fact that we have a very chaotic commercial real estate market out there. And we said that this will be fine and we'll get through it. I would further just reinforce what Jeff said, we are not driving the business to a revenue growth target. For us, the numbers that we deliver are the byproducts of the right business decisions for the customer and for the use of our capital.

And so what Panera continues to search for is how to use its capital best. The best capital we can invest is capital in our existing company stores. The second best capital we can invest in is, shall I say, our franchisees or acquisitions of franchisees at attractive multiples where we absolutely know it. There aren't a lot of franchise markets that are unattractive multiples, Panera franchise that are attractive multiples today. Third, we see acquisitions of like concepts like Paradise that's been very, very good for us.

When they're synergistic, when we have a supply chain we can bring to it and we have an understanding and a discipline and it gives us some market. And then finally, we utilize capital in the context of share buyback, but always looking at it over a very long period of time because we know that it's stock that we're bringing in and we're locking in for the long-term. And that's the context in which I'd like to hold development without attempting to give you guidance on the unit growth rates.


Your next question comes from Bryan Elliott – Raymond James.

Bryan Elliott – Raymond James

I'd like to follow up on that. Given your current infrastructure looking at historic growth rates back several years, I appreciate all the comments about the current environment and certainly the ROI focus and a lot of companies have gotten in trouble by not maintaining that discipline, but if you think about sort of your current infrastructure the ability of the company to manage expansion, are we limited by that now that we've been at this growth rate that's slower than historical levels for a while now.

Ronald M. Shaich

No. I mean, I think Panera can do well. I think Panera is a very deep company with management that…

Bryan Elliott – Raymond James

So, if we hypothesize a world that normalizes and there's plenty of developments again and ROI hurdles were showing up all over the place, you would be able to re-gear up.

Jeffrey W. Kip


Ronald M. Shaich

Yes, all given time, I mean that's what we're doing, right, yes. I don't think the organization limits us. I think our ability to do things well always limit us.

Michele Harrison

Operator, we'll take one more question.


Your next question comes from David Tarantino – Robert W. Baird & Company.

David Tarantino – Robert W. Baird & Company

Question about Ron's comments on the test market that has all the new products that you're introducing, you mentioned a pretty meaningful comp lift. Could you give us an idea of how much the comps improved in that market and how you factored that into your second half guidance?

Ronald M. Shaich

I guess I'd say it to you this way, I'd like to classify it under that interesting tidbit that I wanted to share with you because it's true and real, and yet I think we would be foolish if in our third or fourth quarter guidance we internally where you built it into some model. I think we saw the comps pick up a couple hundred basis points from where they were running relative to the rest of the markets. It was noticeable the change.

Having said that, as ever these are stews of the other factors that we're going on and I really would like to tell you that, and at the same time take the air out of that as a projectable defined experience. It is one data point on market, but maybe I tell you that story because I just want to share with you the genuine excitement I have for the summer and into the fall, and it's really true.

I've never felt better about the products we have rolling out. I've never felt stronger about what we're putting out in the competitive marketplace and yet I don't want anybody going anywhere with that, otter than to their nearest Panera to try this. And my hope and sense is that we'd love to spark the kind of craving that we've seen other summers and we're doing everything in our power to do that, standby for the results.

Jeffrey W. Kip

That being said, if you look at the way our guidance runs, there is sequential comp improvement built in and there is sequential average check growth from mix built in. That's based on analytically looking at how our transactions and our units per transaction levels have been running this year and how they'll run against the comparisons last year. Remember that in the back half of the year the comparisons get easier.

It's also based on a view of some of the test results we've had and what some of these projects will produce analytically. So, it's not one factor it's just not dusted off from the few weeks of data we have in that one market and thrown on top purely. So, it's actually built up with some discipline in the same way we always build our forecasts.

Ronald M. Shaich

I think this concludes our call. We thank you as ever for your participation. We thank you as ever for your support of Panera, and Jeff, I and Michele are here and ready and able to take anything you want offline.


That concludes today's conference. We do appreciate your participation. Everyone, have a great day.

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