Panera Bread Company F4Q09 (Qtr End 12/29/09) Earnings Call Transcript

| About: Panera Bread (PNRA)

Panera Bread Company (NASDAQ:PNRA)

F4Q09 2009 Earnings Call

February 12, 2010 8:30 am ET


Michelle Harrison – Vice President, Investor Relations & Corporate Development

Ronald Shaich – Chairman, Chief Executive Officer

Jeffrey Kip – Senior Vice President, Chief Financial Officer

William Moreton – Executive Vice President, Co-Chief Operating Officer


David Tarantino – Robert W. Baird

Jason West – Deutsche Bank

Jeffery Bernstein – Barclay’s Capital

Jeffrey Farmer – Jefferies & Co

Joe Buckley – Bank of America

Matthew Difrisco – Oppenheimer

Steven Kron – Goldman Sachs

Mitch Speiser – Buckingham Research

John Glass – Morgan Stanley

Steven Rees – J. P. Morgan

Bryan Elliott – Raymond James

Sharon Zackfia – William Blair & Co.


Welcome to today’s Panera Bread Company 2009 fourth quarter earnings call. (Operator Instructions) At this time for opening remarks and introductions I would like to turn the conference over to your host, Ms. Michelle Harrison. Please go ahead.

Michelle Harrison

Thank you very much. Good morning to everyone and welcome to Panera Bread’s fourth quarter earnings call. I am Michelle Harrison, Panera’s Vice President of Investor Relations and Corporate Development. Here with me this morning are Ron Shaich, our Chairman and CEO; William Moreton, our Executive Vice President and Co-Chief Operating Officer and Jeff Kip, our Senior Vice President and Chief Financial Officer.

Before we get started let me cover a few regulatory matters. I would like to note that during our opening remarks and in responses to your questions, certain items may be discussed which are not historical facts. Any such items including targeted 2010 results or conditions and details relating to 2010 performance or beyond should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially.

With that, I would like to now turn the call over to Jeff who will give you an outline and review Q4 results. Jeff?

Jeffrey Kip

Thanks Michelle. I will now provide you the details of our fourth quarter results. Ron will then discuss our strategic plan and provide color commentary on the metrics that underpin our results. Ron will then hand it over to Bill to review with you our targets for the first quarter and fiscal year 2010. Ron will then return with a final comment.

Let’s begin with our fourth quarter results. Yesterday afternoon we released earnings for the fourth quarter of 2009. We are pleased to deliver a quarter of $0.95 of earnings per diluted share net of charges of approximately $0.05 per share, applying $1.00 in operating earnings per share and growth over the fourth quarter of 2008 prior to and net of charges of 19% and 13% respectively. Please note that the fourth quarter of 2009 had 13 weeks versus the 14 weeks in the fiscal fourth quarter of 2008. If we normalize the fiscal fourth quarter of 2008 for 13 weeks earnings per share growth prior to one-time charges was 28% on an average week basis.

As we discussed on our third quarter earnings call the $0.05 in net charges arose from planned asset retirements from the closure of three cafes and the rollout of new Panini Grills.

Let’s now walk through some of the details of our financial results starting with revenues. Our fourth quarter revenue increased 3% to $367 million versus $358 million in the comparable period of 2008. Let’s now look at the components of revenue growth. Net Bakery Café sales were up 3% to $313 million in the fourth quarter of 2009 and comprised approximately 85% of total revenues versus 85% of total revenue in the fourth quarter of 2008. Normalizing the fourth quarter of fiscal 2008 for 13 weeks net Bakery Café sales were up 11% on an average week basis. The 11% increase was driven by positive comparable store sales growth and by Bakery Cafes opened in the trailing 12 months.

Our fourth quarter company owned comps on a calendar basis were up 7.4% as the strong transaction growth and gross profit per transaction growth trends we saw in the third quarter continued to build throughout the fourth quarter. On a fiscal basis, company owned comps grew 5.9% in the fourth quarter of 2009.

Recall from our third quarter release that the calendar basis comparison matches specific weeks in 2009 to the same specific weeks in 2008. For example, the second week of November 2009 compares to the second week of November 2008 on a calendar basis and the third week of December 2009 compares to the third week of December 2008 on a calendar basis and so on. The fiscal basis compares the 13 weeks of fiscal fourth quarter 2009 with the first 13 weeks of the 14 fiscal weeks of the fourth quarter of 2008. So the second week of November 2009 would compare to the first week of November 2008 on a fiscal basis and the third week of 2009 would compare to the second week of December 2008 on a fiscal basis and so on.

We believe the calendar basis provides the best understanding of our underlying business performance and by the way in 2010 the distinction will go away. Fiscal comparisons and calendar comparisons will be the same so we won’t refer to these two definitions anymore. In a few minutes Ron will provide you with more detail on our comp growth.

Moving on to new unit growth. We opened 22 new Bakery Cafes during the fourth quarter. 13 of these were company owned stores and 9 were franchise operated. Average weekly sales for our company owned new units opened in 2009 was $38,057 in the fourth quarter of 2009 versus $36,943 for company owned new units opened during 2008 in the fourth quarter of 2008. AWS per company owned new units opened in 2009 was 37,618 for the full year of 2009 compared to 36,694 for company owned new units opened in 2008 for the full year of 2008.

Moving onto franchise royalties and fees. Our franchisees also experienced solid sales growth in the fourth quarter driven by positive comps and Bakery Cafes opened in the trailing 12 months. Franchise royalty revenue and fees increased 0.5% to $21 million for the quarter, however, normalizing the fourth quarter of 2008 to 13 weeks franchise royalties and fees grew 8% year-over-year on an average week basis. As a percent of total revenues franchise royalties and fees decreased from 5.9% in the fourth quarter of 2008 to 5.8% in the fourth quarter of 2009.

The final component of revenues, fresh dough sales to franchisees, fell 2% to $33 million in the fourth quarter largely a result of the extra week in the fourth fiscal quarter of 2009. Again, normalized in the fourth quarter 2008 to 13 weeks fresh dough sales to franchisees actually grew by 5% on an average week basis as a result of new Bakery Cafes opened in the prior 12 months. As a percent of total sales fresh dough sales to franchisees were 9% of revenues, down 40 basis points year-over-year from 9.4% of revenues in the fourth quarter of 2008.

Let’s now move to expense and profit margins for the fourth quarter of 2009. Bakery Café margin increased 160 basis points year-over-year primarily as a result of category management initiatives, cost improvements and leverage from positive comp growth. Let’s touch on the key components of Bakery Café margins.

Cost of food and paper as a percent of sales was favorable by 90 basis points year-over-year driven by category management, purchasing improvements and food cost deflation. On a simple level we grew gross profit per transaction faster than our revenue per transaction, that is our average check, through these initiatives and our margin expanded. Ron will provide additional color on our gross profit per transaction growth in a few minutes.

Cost of labor as a percent of sales in the fourth quarter improved 40 basis points. Occupancy as a percent of sales improved 10 basis points and other operating expenses as a percent of sales in the fourth quarter improved 20 basis points year-over-year, all as a result of comp store sales leverage. Again, in sum we held the growth in expenses below gross profit; that is labor, occupancy and other operating to a slower growth rate than we grew our sales and gross profit. Our Bakery Café margin expanded 160 basis points as a result.

Now let’s look at key costs and expenses below Bakery Café margins, lines on our P&L where we show operating margin. Fresh dough cost of sales to franchisees improved 570 basis points in the fourth quarter driven by year-over-year input cost increases and additional manufacturing leverage from new Bakery Café additions and sales growth. G&A expense as a percent of revenues increased 70 basis points in the fourth quarter versus the prior year primarily as a result of higher incentive based compensation driven by the company’s extraordinary operating performance. This 70 basis point increase will only repeat itself going forward with a comparable operating outperformance.

Note that for the full year G&A expense as a percent of revenues improved 40 basis points from 6.5% in fiscal year 2008 to 6.1% for fiscal year 2009 providing positive operating leverage to our earnings even with the incentive comp increases. In total, operating margin expanded 130 basis points from 11.6% in the fourth quarter of 2008 to 12.9% in the fourth quarter of 2009, our 7th straight quarter of 100 basis points or more operating margin expansion.

Our full year fiscal 2009 operating margin is 10.4%, up 170 basis points from 8.7% in 2008 as we have achieved strong operating leverage across the business. As a side note, the $0.05 in charges in the fourth quarter associated with asset retirement expense and Café closures impacted respectively other operating expense, occupancy and depreciation by 55, 10 and 10 basis points.

The fourth quarter effective tax rate was approximately 38.1% compared to 37.5% in the fourth quarter of 2008. We expect the rate to rise modestly to 48.3% in 2010 given shifts in state tax laws and sales distribution across states. Net income for the fourth quarter of 2009 was $30 million or 8.1% of total revenues compared to $26 million or 7.1% of total revenues for the prior year.

Let me now conclude with a few key cash flow and balance sheet items for the fourth quarter summarizing our uses of capital. In terms of cash flow generated, operations and employee stock option exercises gave us cash flow of approximately $89 million in the fourth quarter. Capital expenditures in the fourth quarter were approximately $17 million. CapEx was focused primarily on new unit investment in the quarter as we opened 13 new company units.

In terms of other uses of cash during the fourth quarter, 27,000 shares were repurchased at an average price of $62.98 per share under our $600 million share repurchase authorization. There was essentially zero impact to our fourth quarter EPS growth in the repurchase. Recall that our share purchase price and volume targets are set each quarter by our board based on rigorous return analyses. We look at repurchasing shares on a 10-year return basis for our shareholders and hold to our repurchase discipline and required returns. Our analysis prefers long-term returns over near-term accretion.

We ended the fourth quarter with approximately $246 million in cash and zero debt versus $172 million in cash and zero debt in the third quarter. Finally, on average for the quarter there were approximately 31.2 million fully diluted shares outstanding. This figure includes the impact of 800,000 stock options outstanding with an average strike price of $44.04 per share and also includes the negligible impact of the 27,000 repurchased shares.

Let me now turn it over to Ron to discuss [conditions].

Ronald Shaich

Thank you Jeff. For the past few quarters we have told you about our multi-plank plan to move the business forward. We are intent on growing store profits through transaction growth and growth in gross profit per transaction while driving operating leverage and using our capital smartly, all while investing in our business to benefit the customer, to build competitive advantage and to capture market share.

Unlike our competitors who we believe are focused on G&A cuts, labor reduction and food cost optimization to blunt the impact of negative sales leverage we are focused on continuing to build a basis for long-term future earnings growth through competitive advantage and greater market share. Frankly, as contrarian as it may be, this plan is working for Panera.

I am pleased we were able to report yesterday we delivered 25% 2009 EPS growth on top of the 24% EPS growth we produced in 2008. We have exceeded all the targets we originally set for ourselves. I am particularly pleased we reported today that average weekly sales for the class of 2009 reached a 6-year high for new units which when coupled with lower occupancy and development costs in 2009 means the class of 2009 has the potential to be one of the highest ROI classes in our history.

What I am really excited to report to you today is that our same store comparable sales have been tracking north of 9% for the last 2.5 months. This metric more than any other is the best proxy we have to understanding the underlying trends in store profit growth in our Bakery Cafés. As well, it speaks to the strength of our concepts and our strategies.

So let’s begin our color commentary with a review of comps. As Jeff told you earlier in Q4 on a calendar basis company comps were up 7.4% and franchise comps were up 6.4%. In total system comps were up 6.8% in Q4. By period, company comps were up 6.8% in October 2009, 6.1% in November 2009 and 9.6% in December 2009. Even more significantly, our comps for the first six weeks of Q1 were up strongly with the company up 8.4% and the franchisees up 9%. What is most gratifying to us is this comp growth has been fueled by real transaction growth. I am also pleased to note the comps we are reporting today for the first six weeks of fiscal 2010 include the impact of the recent snowstorms that dramatically impacted life on the east coast and our comp store sales. To be clear we estimate the last week and a half our comps were off 4% as a result of the storms that affected both the Midwest and the East Coast.

With that said I would now like to walk you through the initiatives we executed in Q4 that allows us to achieve these results. As well I would also like to walk you through our plan to continue to drive store profit through transaction growth and through gross profit per transaction growth. To do so we have several areas of focus here at Panera including product development, marketing, operations, category management and catering. I will cover each with you in turn.

I would like to start with a discussion of our product development efforts. As I would suggest that transaction growth begins with serving food people crave. Crucial to our strength in recent months has been our extraordinary success at lunch. Our Summer Celebrations focused on salads which featured our improved Heart of romaine lettuce and this celebration began and fueled significant growth at lunch.

Our lunch business has stayed strong since the summer as we rolled out our new Chopped Cob Salad and our Barbeque Chicken Chopped Salad as well as the improved Napa Chicken Salad Sandwich. The recent addition of our Mac and Cheese in late 2009 only fueled further growth at the lunch day part. As we entered 2010 we again improved our salad and sandwich offerings with the addition of a new protein Salmon and our improved soup, low fat garden vegetable with pesto.

New to our salad menu in 2010 is the Mediterranean Salmon Salad and the Salmon Caesar Club. Our new protein also appears on the sandwich menu as the Salmon Club Croissant. As ever, the success of these new items has generated higher checks and higher gross profit dollars per transaction. As we move through 2010 know that we will continue to increase our strength in salads and hot sandwiches with a variety of new offerings.

Moving onto breakfast, sales growth at breakfast has stayed strong based on the strength of our breakfast sandwich business and our coffee business. Last month we introduced the Asagio Bagel Breakfast Sandwich. While inspiration for our new products routinely comes from our culinary team, this sandwich was actually inspired by our customers. In talking to our associates and our guests we learned it was becoming more common in Panera Cafes to combine two favorite breakfast options; the Asagio Bagel and the Breakfast Sandwich into one. Once our culinary team tried the unique combination they decided the craveable flavor profile needed to be added to our breakfast menu. The Asagio Bagel Breakfast Sandwich combines a freshly cracked egg, Vermont white cheddar cheese and two strips of applewood smoked bacon grilled together on Panera’s tangy Asagio Cheese Bagel. When the Bagel is grilled in the Panini press the Asagio sprinkled on the bagel caramelizes for a very satisfying crunch. This is the product I am suggesting to you that you get out to the Café and try. It is a very good one.

Know that we will continue to strength our breakfast business in 2010 with adjustments to the ever popular breakfast sandwich line and support for our breakfast beverage program. From our bakery we debuted a new line of brownies and blondies in Q4 as a means to drive the afternoon business. We also introduced a reformulated French baguette. Also taking center stage in Q4 was our bread heritage and retail impulse initiatives. To remind you, Bread Heritage is the title we use for our efforts to sell more baked goods through better merchandising of our bakery products.

As part of this effort, we merchandise gift breads, specialty seasonal breads, daily breads and bulk baked goods including bagels, scones and muffins for take home and the office to spurn more add-on purchases and bakery sales. These products are merchandise and special fixtures placed directly in the path of the guest.

Our retail initiatives also took form in Q4 specifically around the holidays. At each register in Q4 customers experienced baked goods individually wrapped in new, environmentally friendly packaging. Our new Gingerbread Man Cookie was available starting in November. You should expect to see these types of rotational baked goods more frequently at Panera in 2010. As ever, we expect these products will serve to be excellent add-on and gross profit per transaction builders.

Let’s now move onto another area of focus that allows us to grow store profit per Bakery Café food transaction growth and that is marketing. Marketing is one of the key mechanisms we have to use our size and scale to build even greater customer benefit, differentiation and ultimately market share. As we have told you over the last 3-4 years, we have a very clear marketing strategy in place to build quality awareness and deepen relationships with our target customer as defined in our segmentation studies.

While we all know that marketing is not a silver bullet I have come to believe it is an important tool in our arsenal if executed with discipline. Indeed it is our belief that marketing represents a real opportunity for Panera to further leverage our scale with our target customers and create further competitive advantage. There are two ways we will be doing that in 2010.

The first is through media. As you know, we have continued to test a range of media and messaging over the last several years. It appears that media when applied with continuity more than pays for itself at Panera. Thus our media effort will continue to be a focus. That said, in 2010 you should expect to see nothing dramatic, just more of the same but always improving and always increasing in the quality of execution. Because we are getting better at media buying you will see us buying more efficiently in 2010. That is to say we will get more impressions per dollar in 2010 than we got in 2009.

On top of that we expect to increase our media spend. While we will not supply specific dollar amounts for competitive reasons we do want you to know that spending is going up in 2010. So what does better buying and more dollars add up to? It adds up to materially more impressions in 2010 than in 2009 and even greater confidence in our ability to hit what some of you might consider our aggressive comp targets in 2010.

As well, you can expect us to add online as a medium to our existing portfolio of billboard and radio advertising. We will also be using television in a limited number of markets where it is economically viable. We are bulking up on our marketing leadership. That is one of the drivers of our better media buying and will also result in ever stronger creative.

Let’s discuss the second way we will be executing our marketing strategy in 2010 and that is through our loyalty program. As we have described to you before we have been working on a surprising loyalty program for almost two years. That loyalty program is now in test. Without providing specific numbers from the test I will tell you we are very pleased with the results we have seen in our original major market test and have now expanded the test to three other markets. Based on the real lift the test is giving us we hope to roll out the program if approved to go in Q4 of 2010.

With that said, let’s now move onto another area of focus that allows us to grow gross profit through transaction growth and that is operations. As you know, Panera took a contrarian approach to operations in the recession. Over the past year many restaurant companies said they were able to improve labor productivity while running negative comp store sales. Frankly we don’t know how you can do that unless you are reducing labor hours more than sales fall off.

It is our belief that ripping labor out of a restaurant implicitly taxes the customer by creating longer wait, slower service and more frazzled team members. Instead we took the approach of maintaining labor consistent with sales and continuing to invest in our people while staying focused on delivering for the guests. This has led to higher engagement scores and lower turnover for our team members and improvement in speed and accuracy and higher satisfaction for our customers.

Though operations are never given credit for driving sales, I am convinced we would not be having the success we are without improved operations. I am also convinced of the success of our joint venture program, now 60% of our company operators, is a fundamental underpinning of our ability to deliver higher quality execution and management turnover of approximately 12% in 2009.

Further, I believe our commitment to maintain our compensation for our retail associates is providing significant competitive advantage and is fundamental to our success. As ever, we expect this focus on the quality of our operations and our people to continue to differentiate us in 2010 and beyond. Category management has also been essential to driving store profit growth in the recent quarter and we expect it to continue to do so going forward. As in the past our category management team will continue to work to improve store profit by driving gross profit per transaction through the sales of higher gross profit items.

You will also see us introducing new items that deliver higher gross profit per transaction than existing products on our menu. We remain focused on delivering our high/low pricing strategy and delivering higher priced items that are worth the money people are paying for them. Our salmon products are recent examples. As well, our initiatives to drive add-on sales through bread heritage and retail impulse as mentioned earlier arise from our commitment to category management.

Additionally our category management team is looking for ways to build gross profit per transaction without forcing customers to spend more. The meal upgrade program we currently have in test is an example of such efforts. With the meal upgrade a customer orders an entrée; that is to say a soup, salad, sandwich or a you-pick-two and also orders a beverage will be offered the opportunity to purchase a baked goods to complete their meal at a special price point. Since our cost on a baked good is relatively low this is potentially a real gross profit per transaction booster. We have tested and fine-tuned the meal upgrade program over the past two years in multiple markets and expect to roll this out in company owned Cafes in April of 2010.

In terms of pricing, we believe it makes sense to take a very modest price increase. That is to say about 2% to offset the inflation we are projecting in non-food cost items. Specifically things like labor and to offset increases in other line items, particularly those that are covered by contracts. By that I mean things like occupancy which are contractually mandatory with built in inflation. We are prepared and feel comfortable taking this price increase based on the testing we executed in the latter part of 2009. This 2% price increase will go into effect in late April.

Let’s now look at another one of the key mechanisms available to us at Panera to grow store profit per Bakery Café, catering. As you know, catering does not drive transaction growth but rather it drives gross profit per transaction growth. In my view the best thing that ever happened to Panera was to experience challenges in catering in early 2009. Many of you know that catering was under huge pressure in 2009 and Panera was no exception from that pressure. As we have told you before Q1 and Q2 2009 catering at Panera was off.

In my view our weakness in catering was a good thing. It forced our team to determine what really mattered in building catering sales. Our team became intensely focused on getting more catering customers in the door. Likewise, we focused on reducing customer churn. To that end we brought new discipline to our catering sales organization and new tools to support the effort. I believe this newfound discipline and these tools help us create a much stronger catering sales organization and the ability to build catering sales well into the future.

I am pleased to report that our commitment to executing catering well is already paying off. In Q3 2009 catering sales were up 3% over the prior year. In Q4 2009 catering sales were up 14% over the prior year and year-to-date for 2010 we are tracking with catering sales up nearly 17% over the prior year. Please know this, this is a trend we expect to continue and one we look forward to updating you on next quarter and in quarters in the future.

Let’s now move onto the second prong in our plan. As ever, operating leverage continues to be a key driver of our ability to expand operating margins. One way we drive operating leverage is by using our scale to purchase better and drive cost reductions. We continue to see this in food costs. In the fourth quarter we saw approximately 1% deflation in the cost of retail food. Additionally we have seen improved operating margin from our manufacturing business, that is to say the fresh dough facilities as they have benefited from growth in Bakery Café sales. Lastly, we have been able to drive operating leverage by holding the growth in G&A. In 2009 our non-marketing and non-bonus G&A grew 2.9% while revenue grew 6% on an average weekly basis.

Let’s move onto the final prong of our plan, using our capital smart. We believe that the highest and best use of capital is to build a high ROI at new Paneras. 2009 was a good year for high ROI new unit development at Panera. In fact, our company-owned new unit average weekly sales of $37,618 in 2009 is the highest we have seen in the last six years. In addition, development costs and occupancy costs are down about [20%] and 15% year-over-year respectively in 2009.

As I mentioned earlier the class of 2009 is likely to go down as one of the highest ROI classes in our history as a result. I salute our development team which held the discipline which enabled us to drive down inputs while selecting locations that can deliver the volume. An outgrowth of this is we can expect to see expanded growth of new company and franchise units in 2010 and 2011.

As you saw in our release we expect to build 80-90 new units system-wide in 2010. Growing new, high ROI Panera Cafes is our best use of cash but that still does not utilize all of our cash resources. So I am sure investors are wondering what we will do with the cash we have. As we have shared with you before, another way we are willing to use our cash is to acquire at attractive valuations [essentially] our own business and operator meaning either opportunistic franchisee acquisitions or highly synergistic acquisitions of our business under a different flat as was the case of our acquisition of Paradise.

If this is not possible, then a third way we will use our cash is to return capital to our shareholders through our announced $600 million share repurchase program. As you realize this was authorized by the board last quarter. As we have reviewed with you we are repurchasing shares under a tightly structured 10B51 program based on long-term return [inaudible]. Let me reiterate that we have not built any repurchase assumptions into our 2010 EPS targets.

I would now like to make one final comment before I turn it over to Bill who will review our targets for full-year 2010 [teamwork]. Many of you have wondered how we have been able to generate the extraordinary performance we have seen in the last several years and in particular over the last several months particularly the 9% comps, the 6-year high new unit AWS and the near 25% EPS growth. I personally continue to believe the answer to that question is the stew of initiatives that come from our commitment to using our size and scale to benefit the customer and drive market share. Folks, the stew is cooking.

With that said I would like to turn it over to Bill who will take you through the targets. I will then come back and wrap up with a personal comment.

William Moreton

Thanks Ron. I would now like to provide you with our updated targets for the full year 2010 and new targets for our first quarter. As Ron just discussed the investments we are making in our business are providing measurable results and increasing our confidence in the inherent strength of our business even in the face of the lingering recession.

Most importantly, I am pleased to tell you the plans of our long-term business model continue to remain solid and we expect our initiatives in each area to again produce great results in 2010. These planks include increasing our Bakery Café level profits primarily through increased transactions and gross profit per transactions driving operating leverage primarily through supply chain initiatives, our fresh dough operations and our disciplined approach to G&A and finally utilizing our cash smartly to build additional high ROI new Bakery Cafes and enhance shareholder returns.

Let me now walk you through our full-year targets and the corresponding metrics and assumptions behind these targets. Given the momentum of the business and the continuing positive trends we are raising our 2010 full-year earnings per share target range to $3.26 to $3.34 per share from a previously announced range of $3.05 to $3.15. Our expected year-over-year earnings per share growth is 19% at the midpoint of our 2010 targeted range.

Our 2010 EPS target does not include the impact of any potential share repurchases. Having reviewed the street EPS consensus estimate on an analyst by analyst basis we have found that the street consensus of $3.38 includes $0.10 of buyback impact from estimated share repurchases and $3.28 of operating EPS. Our 2010 EPS target of $3.26 to $3.34 is directly comaprisoned apples-to-apples with the consensus of $3.28 earnings per share excluding the buyback impact. We recommend to analysts for comparability purposes they exclude or at a minimum segregate share repurchase impact so we can compare earnings on an apples-to-apples basis throughout the year.

Now let’s move onto the key metrics underlying the 2010 EPS target starting with comparable Bakery Café sales growth. We are currently targeting comparable Bakery Café sales growth in a range of 4.5-6.5% based on current one and two-year comp store sales trends and our continued confidence in our product development, marketing, operations, category management and catering initiatives that Ron just laid out.

In setting our full-year sales targets we factored in the great success we had in the back half of 2009 when many of our early 2009 product, marketing and operating initiatives came to fruition. As a result, our current Bakery Café sales growth is expected to be stronger in the front half of 2010 than in the back half of the year.

Breaking down comparable store sales growth into its constituent parts in 2010 we expect positive transaction growth of 1.5-2.5% from our product development, marketing and operating initiatives. We are also targeting average check growth of 3-4% driven by positive mix of 1-2% from category management initiatives and the positive contribution from our catering business and price of 2%. As you know, we expect to take a 2% price increase in March to cover modest inflation in our other operating costs other than food costs which we expect to be modestly deflationary in 2010.

In terms of operating leverage, we will continue to leverage our size and scale in three primary ways. Firstly, our supply chain group is able to truly partner with some of the best manufacturers and suppliers in the country to provide high quality and unique products that our competitors cannot match. Additionally, from the cost side we are able to negotiate better national pricing than our competitors.

Secondarily, our fresh dough business consists of 20 manufacturing facilities across the country with approaching $100 million of capital invested and as our system and our sales grow we enjoy the operating leverage of a manufacturer. Nearly 30% of the retail products we sell in our Bakery Cafés are produced in our manufacturing facilities.

Finally, as Jeff and Ron both noted earlier we have been very disciplined around the growth of our G&A expenses and we will continue to be. As a result, for the full-year 2010 we expect a 75-125 basis points improvement in our operating margin on top of the 170 basis point improvement last year.

Moving to using our capital smartly, we continue to target 80-90 new high ROI Bakery Cafes in 2010. Company owned development is up 50% from the 2009 level. We have been able to significantly accelerate our company Bakery Café growth to take advantage of the positive development and cost environment that Ron discussed while holding discipline around our site selection criteria.

Our franchise growth in 2010 in terms of units will remain similar to franchise growth in 2009. We have historically seen a one-year lag between the time the company has accelerated its growth and when the franchisees have followed suit. As a result, we would expect to see franchise growth ramping up in 2011. Our average weekly sales range for new units remains unchanged for 2010 at $36,000 to $38,000 per week, a level that will generate our desired 15% return on capital.

Let’s now talk about our targets for the first quarter of fiscal 2010. We are targeting earnings per diluted share of $0.74 to $0.76 in the first quarter. This compares to an earnings per share of $0.57 for the first quarter of 2009 or growth of nearly 32% in the midpoint of the range.

Let’s now walk through the key metrics underlying our first quarter EPS target starting with comps. We are targeting Bakery Café sales for the quarter to be up 8-9% based on transaction growth of 3.25-3.75% and check growth of 4.75-5.25%. The check growth consists of year-over-year price increases of 1.75% and mix impact of check of 3-3.5%. Our first quarter target for operating margin improvement is 150-200 basis points.

Finally, in terms of uses of capital the company is targeting between 5-10 system wide new unit openings in the first quarter of fiscal 2010. Average weekly sales for the company owned new units for the quarter are targeted at $36,000 to $38,000.

Now I would like to turn it back over to Ron for some closing comments.

Ronald Shaich

Thank you very much Bill. Before we open it up to your questions I would like to provide a perspective of my pending evolution to Executive Chairman. As we announced in November at our annual meeting on May 13, 2010 I will transition from my role as CEO to Executive Chairman and William Moreton, our present Executive Vice President and Co-Chief Operating Officer will become the company’s CEO.

To be clear, this is not about me leaving Panera but rather it is my intent to free up the time to begin to explore how I might take what I have learned at Panera to the broader world. I will remain the company’s Executive Chairman and the largest individual shareholder of the company. As you can expect my time within Panera will be devoted to where my interests are the greatest. That is to say innovation projects and the opportunities to mentor the senior team.

Bill and I have been working closely on this transition for the better part of a year and a half and I am happy to report the transition is going extraordinarily well. The organization is ready for Bill and Bill is ready to lead Panera. As I now reflect on my 28 years with Panera I am pleased that we have been able to deliver for the stockholders of our company. I am particularly pleased we have been able to deliver for those who have believed in us.

Since we went public in 1991 the stock is up over 15-fold. Indeed our stock has been the best performing major restaurant stock I am aware of for the last decade. I am equally proud that Panera’s stock has been up over 100% in the last two years. I am most pleased we have in place a strategy that is today delivering among the best average weekly sales in our history and almost double digit comps in the face of the recession. As well, I am pleased we have a prospective new CEO in William Moreton who brings to the job both continuity and new perspectives.

I am gratified Bill has the management team in place that is strong and capable of delivering on the promise of the Panera concept. Most importantly though I am pleased that based on that strategy and the management team we have to take us forward we can look to the future as confidently as we do and target the kind of results that Bill has just reviewed with you.

At this time we would like to open it up to your questions. As is our custom, we request that you ask only one question at a time in order to get as many of those on the call an opportunity to weigh in. If you have additional questions please return to the queue. We are happy to stay on the line with you until all questions have been asked or until the market opens at 9:30 a.m.

Operator, we are ready for the first question.

Question and Answer Session


(Operator Instructions) The first question comes from the line of David Tarantino – Robert W. Baird.

David Tarantino – Robert W. Baird

A question on the marketing strategy. First a clarification. Did you mean to intend your marketing spending would be up as a percent of sales? Also if you could clarify or give directionally how much the level of impressions might be up year-over-year this year?

Ronald Shaich

Let me be very specific if I can. It is up in dollars. It is up as a percent of sales. Giving quantitative information relative to impressions is actually hard as I think you know given your background because we are talking about not just radio or TV which is measured but you have to include the billboards, the out of house and the [offline]. I think it is actually, we are not able to actually give definition to the impression change. What I can say is impressions will be up materially. That is an outcome of both more dollars and better volume.


The next question comes from the line of Jason West – Deutsche Bank.

Jason West – Deutsche Bank

I wonder if you could talk about the competitive environment in the quick casual environment? Do you think you are taking share? Are you seeing most of your competitors, and a lot of them are local, are they seeing some strength as well? Are you seeing any signs of price competition? This space has been pretty fortunate for not seeing a lot of that. I am just wondering if there has been any changes there.

Ronald Shaich

First, I have to share with you our perspective or context on competition. We don’t think customers wake up and say we want to go to a quick casual restaurant, which one are we going to choose. We think people choose what kind of food they want to eat and then choose who is the best alternative for that food. So my guess is that generally we share a constant paradigm with other fast casual operators like Chipotle or [inaudible] as opposed to a competitive position.

I would say relative to Panera and the market share question I think the answer is that it is quite fragmented, the competitive set, and therefore the market share gains we are taking is coming from a broad swath of competitors. If you realize we really compete in 3-4 different businesses or consumer solutions from one platform. We have a breakfast business and in the breakfast business we compete against anybody offering a baked goods and a beverage. We know the folks that are in that competitive set. We have an oasis or [choke] business, the mid-morning and late afternoon business we compete with anybody who has an environment you want to sit in. That is a different set of competitors.

We have a third business which is the lunch business totally different than the breakfast business and in that business we compete with anybody offering soup, salad and a sandwich. Fourth we have a take home business for bread and bakery where we compete with other bread bakers or the like. So I think given that Paneras business is a unique mix of consumer solutions there is no singular competitor we look at. My frank guess is the market share gains we are taking are widely spread across a number of different businesses and in fact industries and it is doubtful it is noticeable elsewhere.


The next question comes from the line of Jeffery Bernstein – Barclay’s Capital.

Jeffery Bernstein – Barclay’s Capital

As you look out to 2010 in terms of earnings growth and contribution it looks like you are forecasting high teens EPS growth through the back half, some of the unusual that flowed through 2009 and the earnings growth would probably be more in the low to mid teens. I am wondering if you could give a little bit of color in terms of the relative impact to earnings from the accelerated company operated unit growth and does that perhaps benefit from [week] favorability and how much contribution that brings versus the prior year. I am just trying to size up the pluses and minuses to the earnings growth since it seems like those are the biggest things.

Ronald Shaich

I will start. I have this question all the time when people ask what is the impact of this factor versus that factor. I don’t always know. I guess I would say the results as a whole stand on their own. We had EPS growth last year, 25% the year before. You have a quarter we are going into where as Bill announced we are expecting EPS growth north of 30%. We are targeting that. We are going into the year targeting EPS growth of 19%. I would let them stand on their own as a total. I am never able to talk about all the plusses and minuses and pull them apart because they are all present.

William Moreton

The only comment I would add is we have talked about the fact that the significant uptick in company owned new unit development brings with it pre-opening training and of course our accounting pre-opening rent. There is a couple of million bucks of additional pre-opening when you think about it but it is not a big deal. The point is building the good stores and the performance of the whole business. There is a slight drag there that we have talked about but it is not something we are over-focusing on.


The next question comes from the line of Jeffrey Farmer – Jefferies & Co.

Jeffrey Farmer – Jefferies & Co

You touched on this but with your stock price pushing an all-time high can you provide a little more color on how your 10B51 plan is structured? I guess more specifically the board’s appetite for repurchase north of $70 per share?

William Moreton

I think we have really provided the color we want to provide. It is determined quarterly and that is price level and volumes at different prices. So at our next board of director meeting we are going to review all that criteria and set it for next quarter. Obviously we have done $75 million of share repurchase in the last couple of years at one time. We have been in the market when the prices have hit our price levels and we will keep going on as such.

Ronald Shaich

The process is simply to go forward and do a 10-year analysis of where we see value and that has all of its own inherent risks to it but that is essentially the process and it is reset on a quarterly basis.


The next question comes from the line of Joe Buckley – Bank of America.

Joe Buckley – Bank of America

A question on some of the initiatives that you mentioned that will pick up in the second half, the [inaudible] and the retail bakery items. What kind of incidents did you have with those? What main percent of customers bought the bread or bought the retail bakery items? I am looking for obviously some quantification of those two impacts.

Ronald Shaich

I think we are trying very hard not to give specificity on individual items that were either in test or recently rolled out. I think you would agree that Panera more than most gives extraordinary specificity in terms of its targets and metrics. As much as I would love to start to get into that I think our history tells us every time we try to take every single item and tear it down and explain it we actually just create more complexity. So, I think we would refrain from giving individual detail on individual initiatives within the Panera mix.


The next question comes from the line of Matthew Difrisco – Oppenheimer.

Matthew Difrisco – Oppenheimer

Just looking first a bookkeeping question that I might have missed. With respect to guidance and the level of achievement in margin expansion at the fresh dough facilities, I think in prior quarters you referred to some favorable commodity costs helping you there with diesel and wheat. Are you holding those gains and is that built in your model to hold that level? At a higher level, I am asking also about the acquisition strategy. Following on to some of those questions about your competitive set out there and you have said there really isn’t someone who looks and feels like you guys whether it is the size of your store, the volume of your store you do or the breadth of your menu, would you be adverse to doing something in a smaller, tighter prototype that might be more conducive and easier for you to acquire but a slimmed down Panera version or menu? Is that too early for your stage of growth right now to take something like a jump into the California more aggressively with an Einstein or something of that nature?

Ronald Shaich

First, we got two questions. I can’t help but take the bait. I will answer the acquisition question. We are not moving into the bagel business. We are not moving into another food line area within food within that category or whatever you would call it. We are talking about food that feels, looks and behaves like a Panera. What the definition of that is, is a matter we are not going to define on this phone call. I think that we are continually looking at whatever is out there but I want to be very clear in saying Panera has no interest in acquiring outside of its core competency which is running our business.


The next question comes from the line of Steven Kron – Goldman Sachs.

Steven Kron – Goldman Sachs

A question on the philosophy around development as you go forward. I am wondering whether the success of the 2009 class was a function of opening far fewer stores as a system as you have done in the past. You were a little bit more focused and selective. If you can give some context around I know you said franchise growth typically lags company reacceleration so clearly an indication for 2011 with respect to continue to ramp up company store development as well, how do you think about that and maintaining the returns you are doing right now?

Ronald Shaich

I think the simple answer to your question is one word; discipline. We increased the discipline with great intensity. We put a ton of money and energy into real estate learning, into our modeling. We have put a lot more attention into making certain we were hitting our hurdles and the result is the numbers you saw is the quality of real estate you saw in the class of 2008 and in particular into 2009. But we also did that with holding the line on the input costs. As important as a measure as AWS is the measure that we were able to bring occupancy costs down as much as we did and development costs. We could have done more units, as we were saying all last year, but we held the line. What you are finding in commercial real estate is that continues to be the market going through gyrations. There are a number of commercial developers that have to get used to the fact it is a new world and not the old world. They will eventually get there.

I think the sum of it is we have the confidence to increase our growth rate for 2010 by 50%. You have heard us announce that. I think that we will continue to evaluate and look at it. I think we are making no announcements relative to 2011 at this time. We will as we get closer to it. I would tell you that the one thing that will not vary is the discipline. We will use your capital well. We will use your capital smartly.


The next question comes from the line of Mitch Speiser – Buckingham Research.

Mitch Speiser – Buckingham Research

I was in Costco recently and I did see Panera soup, branded Panera soup. I am wondering is that just a test? You haven’t talked about ancillary revenue streams like that. Should we expect more out of this type of third-party sales?

Ronald Shaich

As I think many of you have heard me say in the past there are between 30-50 different tests going on somewhere in the Panera system around something. This is a test of Panera branded soup in certain club stores. I think you can expect Panera to do what we have been saying now for the better part of two decades which is to stay consistent with our concept, our vision to stay focused on our retail stores as our primary business but to look at and understand opportunities to take advantage of our brand credibility but always to do so in a way that is respectful and supportive of our store business. All that is to say, it is simply a test and we will see where it takes us.


The next question comes from the line of John Glass – Morgan Stanley.

John Glass – Morgan Stanley

If I could just go back to your 2010 targets, you have greater same store sales growth and greater unit growth but you have lower earnings growth. I understand some of the factors that may be there. Can you speak specifically to G&A? Do you need to put more money into G&A in 2010 as it relates to getting to those levels? Also I don’t think you ever answered the question about marketing spend. Is it in fact higher as a percentage of sales in 2010?

William Moreton

I will consider that one and I will take it. To be clear, marketing spend as a percentage of sales is up as it is up in dollars.

Ronald Shaich

We expect G&A to be flattish as a percent of sales which means that we are going to grow it at the same as revenues which is more than we have done for a few years here. I think at the 6 I think our G&A percent was about 7.2% of revenues. We are down to 6.1 so if we stay flattish that is a deviation from what we have done and it represents an investment really in sales.


The next question comes from the line of Steven Rees – J. P. Morgan.

Steven Rees – J. P. Morgan

You talked a lot about breakfast, lunch and catering being significant drivers of the business. Can you talk about how dinner is holding up? Then, with the success of Mac and Cheese at lunch do you now see more opportunity to develop more of the hot entrée type products that are geared towards dinner?

Ronald Shaich

Thanks for asking that. People often make this mistake. They think of the evening business as dinner. We don’t. We think of the evening business as lunch in the evening. Many of you have heard me tell the story I will come home and say to my wife, let’s go to a movie and she will say to me that’s great where are we going for dinner? I will look at her and say, “What do you mean where are we going for dinner? What are you making?” We are both looking at each other and realize we have 45 minutes and we will look at each other again and say Paneras. We are really going for lunch in the evening. Panera is never going to be in the business of serving what would be considered classically casual dining fare for date night. What Panera is in the business of and it is very appropriate to service lunch fare in the evening.

The result is our third and fourth highest hours of the day are 5-6 p.m. and 6-7 p.m. A point I make based on that context is that macaroni and cheese helps us with lunch. It helped us even more in the lunch in the evening day parts; 5-6 p.m. and 6-7. So I think as we continue to build out lunch items that are relevant to guests and have [inaudible] particularly those that are higher gross profits per transaction generated, that is to say food that is worth going out of its way for and potentially less like in a pure sense of the word that we may continue to pick up gains from that in our lunch in the evening business. I hope that helps.


The next question comes from the line of Bryan Elliott – Raymond James.

Bryan Elliott – Raymond James

Thinking about the advertising you talked about, I understand your desire for lack of specificity, but I would like to get a better sense of sort of the channel mix particularly thinking about TV which you mentioned some markets will have TV. You have grown into one of the biggest food service brands up there now and typically that is consistent with a fairly ubiquitous presence on TV and sort of strategically big picture I would like to get your thoughts on sort of the TV versus the other channels and whether it is just taking it one step at a time and monitoring or if there is something more strategic or fundamental that is driving your mix thinking at this point.

Ronald Shaich

First, let me say that each of the media we have seen has had impact above its costs. The question is the relevant costs we look at, we compare two things. We compare from our testing what the impact is for a given level of impressions or impact what is the sales lift from that. Then we compare that to what is the cost per Café to produce that. If you are in a highly dense market, shall we say St. Louis, the cost per Café on TV is very, very low. You can compare that to a less dense market, let’s say L.A. the cost per Café is very high. The impact may be the same for a given level of impressions but the costs are different.

What we do is we go through an analytical process by market of looking at…and by the way in different markets different media have different impact and different costs. Out of house is one that is very market dependent. So we go through and we really analyze we know from our testing what the impact is. We look at that down to what it is going to generate in profit and we compare that to what the cost per Café is and try to make certain we are [audio break] for ourselves and generally worthy paying for when we consider the tail we get from it and the degree to which it is consistent with our marketing strategy.

Having said all of that I want to be clear in saying Panera is I think the 15th largest food service company in America. There should be no expectation that we are doing national TV this year or in the near future. We will take it year by year and we will build all of this marketing up from an individual market and make certain what we do has the maximum impact as compared to cost per Café in that individual market.


The next question comes from the line of Sharon Zackfia – William Blair & Co.

Sharon Zackfia – William Blair & Co.

A follow-up to some of the questions on company owned development. From a franchise standpoint I know you said an acceleration in 2011. I am curious about the pace of that acceleration. If you think you will get back to the point over the next couple of years where you are at those 2006/2007 development levels on the franchise side and if some new partners need to be added on that side of the equation?

Ronald Shaich

Let me start again by saying I think it is way too early to comment on 2011 unit growth rates. We are not generally commenting on them or providing any specificity. We are trying to do that because it is just too early to tell. I would say to you relative to adding new partners, I would say most of the country, 90-95% of the country is already designated with area developers or company markets. So though we continue to look at some potential franchise sales and some secondary markets I would not want anybody to suggest that Panera is going to have a dramatic increase in the sale of new [ABAs] domestically or that is to say in the 48 states of America.

I think that brings to an end our call. On behalf of myself, Bill and Jeff and Michelle we thank you. As ever, all of us are available. I think Jeff and Michelle are ready for any of your calls. Thank you.


Thank you again everyone for your participation in today’s conference call. This does conclude the event.

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