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Panera Bread Co (NASDAQ:PNRA)

F4Q11 Earnings Call

February 8, 2012, 8:30 am ET

Executives

Michele Harrison – Vice President, Investor Relations

William W. Moreton – President and Chief Executive Officer

Jeffrey Kip – Executive Vice President and Chief Financial Officer

Analysts

Matthew DiFrisco – Lazard Capital Markets

John Glass – Morgan Stanley

Peter Saleh – Telsey Advisory Group

Michael Kelter – Goldman Sachs

Jeffrey Bernstein – Barclays Capital

Jason West – Deutsche Bank

Joseph Buckley – Bank of America/Merrill Lynch

David Tarantino – Robert W. Baird

Mitch Speiser – Buckingham Research

Alexander Slagle – Jefferies

Robert M. Derrington – Morgan, Keegan & Company, Inc.

Nick Setyan – Wedbush Securities Inc.

Bart Glenn – D.A. Davidson & Co.

Bryan Elliott – Raymond James

Operator

Good day, everyone and welcome to today’s Panera Bread Company 2011 Fourth Quarter Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the call over to Michele Harrison. Please go ahead.

Michele Harrison

Thanks, (inaudible). Good morning to everyone, and welcome to Panera Bread’s fourth quarter 2011 earnings call. Here with me on the call this morning is Bill Moreton, our CEO and President; and Jeff Kip, our Executive Vice President and Chief Financial Officer.

Before we begin this morning, let me cover a few regulatory matters. I’d like to note that during our opening remarks and our responses to your questions, certain items will be discussed, which are not based on historical fact.

Any such items, including targeted 2012 results and conditions and details relating to 2012 performance, should be considered forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995. As such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Additionally, reconciliation’s from any non-GAAP numbers can be found in schedule four of our press release.

I’d like to now turn the call over to Bill now. Bill?

William Moreton

Thanks, Michele. Good morning, everyone. I’m pleased to announce another strong quarter. We are in the $0.42 per share in the fourth quarter, which represents 17% EPS growth over the prior year, excluding the impact of the one time charge of $5 million that we took related to the proposed settlement of the California litigation.

For the year, we are in $4.65 before charges, which represents a 28% EPS growth rate. This marks the fourth consecutive year that we’ve delivered 24% or greater EPS growth.

Our performance in 2011 was driven by our strong, both by our strong operating performance as well as our ability to generate EPS growth through deployment of our excess capital. Approximately 20% of our earnings growth in 2011 was driven by core operations, which was above our long-term operating earnings growth target of 12% to 17%. Additionally, an incremental 8% earnings growth was driven by the capital that we‘ve deployed over the last 12 months.

Looking first at our operating performance, there are many indicators that our investments in the quality of our concept and our competitive positioning are paying off. We’re very pleased to report we experienced transaction growth and gross profit growth in every day part again last year, marking the second consecutive year this has happened. This really speaks to one of Panera’s key competitive advantages that is that we compete in multiple day parts breakfast, lunch, chill, dinner and catering on a seven day a week basis.

Let’s now discuss sales in a little more detail. Our fourth quarter company comparable bakery-cafe sales increased 5.9%. This results in the two-year comp of 11.1%, which we believe is among the best in our industry. So far in 2012, our first quarter to-date company comparable store sales are up 8.9%. This includes approximately 350 basis points of positive weather impact as we roll over the storms in Q1 of last year.

For the first quarter, we are now targeting 7% to 7.5% comps, which includes an estimated 200 basis points of positive weather impact as the weather moderated last February and March. We’re now raising our comp guidance for the full year from 4% to 5%, to 4.5% to 5.5% based on the strength of our sales driving initiatives.

I would now like to quickly update you on our five key areas of investment that we’re making to drive continuous improvement in the quality of our customer experience and competitive differentiation. This has been at the heart of our success over the last several years and will be again in 2012.

First, the investments in our food. We’re continuing our strategy of category ownership. We will continue to bring new innovative products to our menu, while improving quality of ingredients we use in our existing menu items. One of the key focus areas in 2011 was the rollout of our new Panini program, highlighted by our new proprietor Panini grill, and the introduction of several new proteins using the sous-vide cooking method.

Our Panini sandwich sales have increased 16%, since the rollout of the grills in the second quarter of 2011, and our hot breakfast sandwich sales increased 15% in 2011. While we are appreciative of this success, we recognized that it takes time to truly cement yourself in the consumer’s minds as the place to go for quality hot sandwiches at breakfast and lunch. As a result, Panini sandwiches and breakfast sandwiches are again going to be a focus for us in 2012.

In the first quarter, we rolled out our new Mediterranean Egg White Breakfast Sandwich that is performing very well, and we will be rolling out our new roasted turkey cranberry Panini later this year that tested very well in the Chicago market in the fourth quarter of last year.

We believe that the quality of our hot sandwiches in concert with our increased messaging will again drive significant growth in this category in 2012. Another key focus area for us this year will be the continued improvement of our [produce]. We’re now focusing on tomatoes. And just as we did with lettuce, by controlling the quality from the field to the fork, we expect to be able to bring a considerably higher quality, fresher tomato product to our customers that will noticeably improve both our salad and sandwich offerings.

The second key area of investment that I’d like to touch upon is marketing. As we've mentioned previously, we continue to be early on in our advertising journey and spend relatively less money on advertising than most of our national competitors. In 2011, our advertising spending increased 32% over 2010 levels. However, that only equates to our spending going from 1.1% of system wide sales to 1.3%. In 2012, we intent to grow our advertising spending by 26% over 2011 levels and go from 1.3% to 1.5% of sales.

As we carefully increase our spending, we continue to monitor its effectiveness and continue to believe that we’re getting more than $1 of profit for each $1 of media that we’re spending. Even more importantly, we’re continuing to increase consumers’ quality awareness of Panera’s key points of differentiation. I would also like to note that we’ll be running our first national cable advertising at the end of the first quarter.

Turning next to our loyalty program, our membership continues to grow. we now have 9.5 million members. as a reminder, the MyPanera loyalty program is designed to deepen our relationships with our customers. This is one of our key long-term initiatives and we’re entering the next phase of this program. We rolled out the program in 2010, operationalized it in 2011 and now, we are truly moving toward one-to-one marketing. based on the purchasing data we’ve been able to accumulate from our customers, our rewards are now being much better targeted to individual customer desires.

We are currently in process of rolling out individual reward tracks to all, 9.5 million members of our loyalty program. We are also sending out more than 6.5 million e-mails to our customers each month with dynamic content that changes based on their interests in buying patterns.

Finally, we’ve also begun testing, utilizing the purchasing information to drive our customers behavior and ultimately drive frequency. For instance, if we see that a customer occasionally buys a smoothie (inaudible) with lunch, we can try to get them to come in during the afternoon show period for a smoothie and a bake good by offering them a specific reward.

Our next story of investment is in catering. Our catering sales grew 29% in 2011 and contributed more than 1% to our comp store sales growth, and this comes on top of 24% growth in 2010. We continued to believe that by bringing the quality of the Panera experience to customers outside of our four walls is a huge area of growth for us. Our national footprint and loyalty of our customers gives us a large competitive advantage.

In 2012, we are continuing to roll out new sales building tools to our regional catering sales managers. Additionally, we will continue to improve our online ordering system to provide ease of use for our customers. Finally, we’re increasing our marketing messaging, primarily in digital media to drive awareness. We believe that 2010 will again be another year of very solid catering growth.

The final area of investment that I’ll touch upon is the quality of our operations and people. We continue to believe that the quality of operations is a primary driver of the customer experience and ultimately sales growth. All of our key metrics on the quality of operations, that being the quality of our food, friendliness, accuracy and speed of service continue to improve.

In 2012, we will continue to drive our operations excellence initiatives through all of our processes. You will also see us continue to expand our table delivery test. We now have table delivery in 132 comp net bakery-cafes and 214 across our system. We continue to believe that this is the right way to position our concept to deliver the type of customer experience that we’re striving for.

Additionally we’re investing in our infrastructure for growth. This is an area that a number of companies don’t pay enough attention to and it ultimately proves to be a limiting factor in their ability to grow or even hurts the customer experience. We’re investing in both our IT infrastructure to support our bakery-cafe, production and accuracy initiatives as well as our Customer Facing technology Ease-of-Use initiatives.

And finally we’re investing in our HR infrastructure to make sure we have the people and systems in place to hire, deliver and retain the highest quality associates in our industry. Now I’d like to discuss the other key driver of our EPS growth, the deployment of our capital. 2011 was another great year of development for us. The quality of development continues to drive our top line growth. We opened 112 new bakery-cafes, which was an increase of 47% over 2010. At the same time we were able to increase a number of new openings, our new unit average weekly sales volumes were in all time high record for both company and franchise bakery-cafes, with opening average weekly sales of $41,637 and $41,438 respectively.

Clearly our concept is resonating with our customers as we more deeply penetrate the markets that we serve. As a result of the high return on investments in both the company and our franchisees have seen no new unit openings over the last several years. We are raising our new unit bakery-cafe target to 115 to 120 in 2012, and also raising our new unit average weekly sales target to $40,000 to $42,000 a week.

Yesterday, we announced the opening of our 1,500th Panera bakery-cafe. This is an achievement that few organizations reached and we’re very proud of this accomplishment. Our 1,500th cafe was also significant, because it was our first bakery-cafe opening in Manhattan, which is located at 29th in Seventh.

Our entry into Manhattan is building upon the success that we’ve had in our urban openings in Washington, D.C., Boston and Chicago. We intend to open two more bakery-cafes in Manhattan, one at 86th in Lex, the other at 39th in Fifth this spring.

Another key enhancement to our return on investment has been the acceleration of our drive-through program. In 2011, 30 of our new bakery-cafes were drive-through units, bringing our total at the end of 2011 to a 119 drive-throughs. We expect approximately 50 of our new units in 2012 to be drive-through openings. Additionally, we’ve done 37 drive-through retrofits over the last two years and have 25 more plans for 2012.

In addition to our new bakery-cafe growth, we’re very pleased that we’ve been able to deploy almost $400 million of excess capital to increase shareholder value and drive EPS since the second quarter of 2010 through share repurchases and franchise acquisitions. Included in that $400 million number is our agreement to purchase 16 bakery-cafes in the Raleigh-Durham and Chapel Hill market from one of our franchisees in the Carolina’s for $48 million.

We target this transaction to close by the end of the first quarter. We expect the transaction to be $0.02 to $0.03 accretive after deal and transition costs in 2012 and an incremental $0.03 to $0.04 accretive in 2013.

Given our increased comp expectations and the accretion from the North Carolina acquisition, we are today raising our full year EPS guidance from $5.38 to $5.48 per share up to $5.50 to $5.55 per share, which would equate to an 18% to 19% growth rate versus 2011. We are also today issuing our Q1 guidance at a $1.33 to $1.35 per share, which would represent 22% to 24% earnings growth rate from Q1 2011.

Finally, let me take a quick moment on the $5 million legal reserve we took in the fourth quarter. This reserve was established for the proposed settlement of a legal matter in the State of California, alleging, violation of California Labor Code related to breaks and meal periods. This suite is similar to other suites that other restaurant companies are facing in the same state.

With that, I’d like to turn the call over to Jeff to provide additional details on our performance and on our guidance.

Jeffrey Kip

Thanks, Bill. Let me take you quickly through the detail on our comps, our P&L, and our balance sheet, and then we’ll wrap it up and take questions. So, first, comps.

In terms of the Q4 comps of 5.9% it was about 20 basis points of transaction growth and 5.7% average check growth. the check growth was made up of about 3.75% price. Just note that our retail price was primarily 3.5% and it was averaged up by a higher catering price increase. The rest of which was mix about 2% and about half of that was catering contribution.

For first quarter of 2012, our 7 to 7.5 comp target is about 200 to 250 basis points of transaction growth and about 500 basis points of check growth. Remember, the 200 to 250 basis points of transaction growth has about 200 basis points of favorable weather comparison in it. The check growth is again about 3.75 price and 1.25 mix and the mix growth is really primarily catering sales impact.

So finally the full year 2012 comp target of 4.5 to 5.5 is about 50 to 100 basis points of transaction growth about 3.25% price at the mid point of the range about 1% mix, again primarily catering little retail mix at the middle of that range.

Next margins, our Q4 operating margin appears to be about 160 basis points unfavorably year-over-year, about 100 basis points of that unfavorability is due to the one-time legal reserve, Bill just discussed. And while litigation is definitely a part of life in America, we don’t have any expectation that charges of this magnitude will repeat. Once you adjust for the legal reserve by operating margin for the quarters modestly unfavorable and our full year 2011 adjusted operating margin is modestly favorable to 2010.

We expect our operating margin 2012 to be roughly flat to 2011 overall, it would be favorable that the acquisition always averages our operating margin down a little bit given the flip between royalties and on paper a lower margin bakery-cafe sales. And we expect the first quarter actually to be a little bit favorable to 2011.

Just to get into a little more detail on our P&L margins; in the fourth quarter bakery-cafe margin was 120 basis points unfavorable to prior year, really driven by 130 basis points of food costs unfavorability, and we’ve mentioned this before the fourth quarter was the highest inflation point of the year, at about 4.7%. In Q1 2012, we expect a little more modest unfavorabilities which – and you need to roll through some of the higher inflation items. But really for the year, we believe (inaudible) will be modestly favorable as a lot of items have come down materially from what we thought even six months ago and we’re in the end of getting leverage in that line.

We think our all-in inflation as going to be around 2.75% in 2012. And just to note, we have about three quarters of our needs in terms of all our food ingredients locked for fiscal 2012 and that’s about 90% of what we can lock. I mean, it will be close to 100% soon.

In terms of labor expense, labor expense really provided us a great deal of margin leverage in 2011. You recall that we’re putting controls on starting wage and off-cycle raises and those really produced a greater impact than we could have expected.

We also put in a new medical plan structure with two networks et cetera and that reduced expenses well, and we really saw a significant impact over the first three quarters. You saw that leverage moderate in the fourth quarter as we anniversary the initiatives and we really expect some modest favorability in labor in 2012 on sales leverage and may be some modest benefit, but certainly not at the level we saw this year.

So overall in 2012, we think it will have some modest favorability in bakery-cafe margin that actually can be offset primarily by unfavorability in dough cost of sales for franchisees. I think everybody knows wheat is going to be higher in 2012 than in 2011. So the all-in inflation in our FDF business is going to be 15%, again, driven primarily by the cost of wheat, which will be up two, three bucks overall proportional.

G&A, we expect to be roughly flat year-over-year. Once you net out the impact of the legal reserve, which hits 100% there in Q4 2012. As we continue to invest for the future to support our sales initiatives and also our infrastructure for growth as Bill referenced.

Just finally, balance sheet, we ended the year with $223 million of cash pro forma for the acquisition Bill mentioned, we are about $175 million, we expect about $140 million of free cash flow in 2012 after about $125 million of CapEx is our number of new bakery-cafes increases. as always, we plan to opportunistically deploy our cash, but please note we have zero incremental acquisitions and zero incremental share buyback in our assumptions. As always, we encourage you to refrain from building it in, we think it's just a little bit misleading in terms of what EPS says, because we've gone months and months and even more than a year at a time without having opportunities that meet our return criteria, where a share price that falls into our purchase plan criteria. So be careful.

Now, I’m going to give it back to Bill, for the obligatory departing CFO commentary.

William W. Moreton

Thank you, Jeff. Yeah, the final item we'd like to comment on is Jeff’s departure. as we reported in the press release, Jeff will be leaving Panera on March 15th to join IAC/InterActiveCorp as their Executive Vice President and Chief Financial Officer. Jeff and I, we've enjoyed a great working relationship over the years, and he has been a key strategic partner to Ron and I over the last six years as he served as our CFO and really the nine years that he has been with the company.

Jeff’s really brought a great strategic perspective to our capital deployment model, and has brought financial discipline and rigor to Panera. I mean, we really are very appreciative of all that Jeff has contributed. Really, most appreciative of the great finance and accounting team Jeff build and the processes that he has put in place to those services well and the years to come. I mean, we're going to miss Jeff as he goes to IAC, but he'll always be a member of the Panera family and we wish him well.

Jeffrey Kip

Thanks, Bill. Thanks to everybody out there in Investor Land for your patience thoughtfulness over the years. I’ve appreciated, and enjoyed it, and listened in all seriousness. I think, we’ve been able to achieve some great results here over the last several years and we’ve also been able to make a lot of significant investments in the future of the concept in the company. I think the company is really well positioned for the next several years. It’s actually a very difficult decision for me to leave.

I’m really excited to move on to a new chapter in my career with the team that I see very much. So, I also feel extremely fortunate to been able to work Bill, with you, Ron, and really the entire team of nearly 70,000 associates here at Panera over the years. Bill has been a great boss and leader and all jokes aside, I like him and I very much have appreciated working with them. Merry Christmas, you wonderful old Building and Loan (inaudible).

Operator, let’s go to questions, because I think Bill is getting a little messy here.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We go first to Matthew DiFrisco at Lazard.

Matthew DiFrisco – Lazard Capital Markets

Thanks. Can you hear me guys.

Jeffrey Kip

Yeah.

William W. Moreton

Yeah, sure.

Matthew DiFrisco – Lazard Capital Markets

Okay. My question is, I guess, with the stores that you have now little over 200 across the system with the table service, what are you seeing as far as a lift in sales or are you extending the day part of it. I would presume maybe that service also helps you in the later time period, maybe even dinner. Are you seeing a greater traffic growth in that or more acceptance in the later day parts where there might be some more capacity in the store.

William W. Moreton

Yeah, I think Matthew. Again, we’re relatively early on and it’s a very much a test, so we want to be careful to give any specific information.

What I would tell you though, what it’s designed to do is really position us competitively. We think it’s very consistent with the rest of the Panera experience that we’re trying to provide. And you’re right, it does help us certainly some of the customer scores as we look at friendliness and a number of the other metrics and it is designed to help us really in all day parts.

So you’ll see this evolve and unfold more and more as we go through the course of the year into next. As we really tried to continue to evolve the inside the four walls experience for our customers through kind of table service and some of the ordering options that we’re working on (inaudible). So I’m not going to specific, but certainly, you can imagine the ways in which it’s enhancing the customer experience and we do believe that it is that we’re moving towards from a competitive positioning standpoint.

Matthew DiFrisco – Lazard Capital Markets

Thanks, (inaudible)

William W. Moreton

Thank you.

Operator

We’ll go next to John Glass of Morgan Stanley.

John Glass – Morgan Stanley

Thanks very much. And Jeff, in celebration of your new endeavors I’m going to reward myself with two questions maybe. Could you first…

Jeffrey Kip

But John, you always reward (inaudible).

John Glass – Morgan Stanley

We had our own rewards program here. So two questions, one is on traffic. So excluding weather, you’re still fairly conservative on your projections on traffic essentially flat traffic growth, and so, I understand some of that comes from lapping the loyalty program. But can you give us a little more transparency on underlying or excluding that, how you feel about the traffic in the business. A number of your peers has seen fairly strong traffic growth again, excluding weather or so, and when do you expect that inflection point to current traffic? Is it really at the end of the quarter with media or is that come more suddenly over time? So if you could address the traffic issue number one.

And number two, you’ve mentioned the entry into Manhattan and that’s a big deal for you in your success in urban course. What you think or how much of a role is the urban development going to play in the next several years in Panera. Is that the next untapped frontier, or is it simply going to be a couple of year-to-year just given slight availability?

Jeffrey Kip

I'll take the traffic question. I think conservativism is in the eyes of beholder. I think, we have, if you sort of back it out, we kind of have 0 to 50 basis points of positive traffic. If you – again, if you put the weather out. and sure, we could believe there is more, we think it is a reasonable best guess just the yard line projection. we think there is any number of things going on in the business from accelerated development to media coming up under it to some comparisons to a time period where we had pressure on our mix through higher royalty transactions. We think there maybe 25 to 50 basis points of flip over a period of the year in there and we could obviously be more bullish, we just think it's really the right place to land in all wisdom. We think putting a five comp up again this year, on top of a five comp last year and the tremendous comps we had in ’08 is not in considerable when you just look at the history of the industry. and so, I think we think that’s a pretty good way to think about it and set our own internal expectations and then frankly, we’ll give it to you as well.

William W. Moreton

Yeah. And then just on the manufacturing question John, really, first I want to clarify, this isn’t – we’re not doing the corner main in main. We still, as we do urban development at Panera, what we still look for is seven day a week traffic driver. so, we're doing what sometimes we refer to as edge urban or areas where certainly you get retail mix, you get certainly the office pop, but you also get residential and other traffic drivers. So that's really our strategy. as I said, we've been very successful doing it in D.C., Boston, Chicago, and some other cities, so I think you will see it being our mix it’s not going to be a dominant piece of our mix, I think that roughly I don’t know 10% or so of our units in 2012 maybe slightly less 5% to 10% might be that kind of real estate. So it won’t be something that you see some big shift, we do think there is opportunities to grow there, so we’ll continue to do it, but again the type of real estate we’re looking for is seven day a week multiple traffic driver real estate similar to what the Panera model is.

So we’ll see as we go forward, but that’s how we’re holding it right now, so it’s a nice area of growth for us, but it’s not going to be a huge dominant piece of the portfolio anytime soon.

Jeffrey Kip

Yeah, and to be frank it’s really factored. It’s been part of the way we looked at long term unit growth for a while, it’s not some new strategy we have to jump part development pace or anything like that.

John Glass – Morgan Stanley

Thank you.

Operator

We’ll go next to Peter Saleh, Telsey Advisory Group.

Peter Saleh – Telsey Advisory Group

Right, thank you. I was hoping you guys talk a little bit more about the drive-through strategy, it sounds like you’re getting a little more positive with more built-ins range ‘12 and the drive-throughs, what kind of returns are you seeing on the drive-throughs.

Jeffrey Kip

The drive-throughs we see better incremental return when we built them as part of the new unit because it’s cheaper than a retrofit sort of like build a new home versus doing an addition. And but both of them return really well, and it’s the way to think about is we get a much higher return necessarily on a new drive-through unit. The way to think about with new units is, it often allows us to do locations we might not have otherwise done. Because they might be a strong from a multiple day part or multiple tributary point of view, but they may have traffic characteristics that now make them a cafe we can do. So in a way, it’s a little bit of development opportunity enhancement. And the remodel program has been very good for us. We think that will modestly slow, because we’ve taken a lot of low hanging fruit, a lot of our older locations are inline locations and you can’t put a drive-through going through the store next door.

William W. Moreton

Yeah, and just adding a little bit, building on a little bit to what Jeff said, is really we look at it as the way to increase frequency a little bit or get that customer visit when they have a need for convenience and drive-through, when the (inaudible) has kids in the back of the car, for whatever reason that you need to have that kind of experience. So we view it as a way to kind of increased frequency or get that incremental visit that we wouldn’t otherwise. And again, we don’t give specifics, but as Jeff said, it’s been a nice return on our capital investment kind of vehicle for us. Thanks, Peter

Peter Saleh – Telsey Advisory Group

Thank you.

Operator

We’ll go next to Michael Kelter at Goldman Sachs.

Michael Kelter – Goldman Sachs

I wanted to return to the traffic question from earlier. I guess, if in fact the year does play out as you’re projecting and there is very modest if any traffic growth outside of the weather compare is that something you would be comfortable and happy with in light of the increase in advertising?

And then, kind of an extension of that question is, maybe you could talk a little bit more about the advertising and as you are tweaking it, some of the things you’ve learned along the way like what works a lot for Panera and maybe what doesn’t works a lot for Panera? Thanks.

William W. Moreton

Yeah, let me take a shot and then Jeff, feel free to add. First of all, we think very much Michael that there is a [stew] that goes into transaction increases. And I think that if on a long-term basis, a company can increase its transaction to 1% a year that’s really a great goal to shoot for. There is certainly times where it’s more times where it’s less. What we’ve tried to say in past calls, we have a couple different levers in which really drive our comps, one being kind of the gross profit for transaction drivers and the other on transactions. And I think at different times, each of those levers has played a part for Panera.

As we go forward, again, as Jeff said, we hope to be able to do better than that, but it’s where we think kind of the 50-yard line guess is. what I would tell you in terms of media, what we're finding is that, we’re learning how to optimize media by market meaning the type of medium that makes it more sense, because we're kind of early on in what a lot of people classically described as the marketing S-curve, we believe we're kind of down towards the bottom of that. What we're finding is that, all mediums are working fairly hard for us, meaning that they’re doing well and they’re giving us a good return. So, we will continue to go up that S-curve cautiously. We’re always looking at the return on investment. I mean, we don't want to get to the place where we’re just spending media to spend it. we think that we have quite a long runway left, and cautiously, increasing that media spending and getting the appropriate return. we are in the early parts of our learning on what medium works the best by individual market. So really, that's how I would characterize it from a global sense. It’s one of several growth levers that we’re using to really try to drive traffic and try to drive comp store sales ultimately, and profitability at the end of the day.

Michael Kelter – Goldman Sachs

So to now early read on what exactly is working best?

William W. Moreton

Well, we have a number of reads. I mean, nothing that we'd be comfortable sharing in any level of detail with you. But, what I would suffice to say is that we believe all the mediums are working very well and obviously, by going to a national cable advertising here at the end of the first quarter, we feel that television is an effective medium for us, as is digital though, where we can tell the story in more depth. so really it's a portfolio of different things that we’re continuing to use, progress and learn on. Thanks.

Jeffrey Kip

And the only thing I'd add to that is, I think you have to remember that we’ll look at everything not as the next quarter or the next year, but we look at multiyear strategy on all of these initiatives and so we’re always looking out three years, not just one or a quarter, and we believe that we’re putting the right layers in place, and if we can comment and we can deliver a five comp year-in and year-out, enhanced our margins, continue delivering the high returns with our new development and grow the business up, we’re really looking at a near 20% a year on our guidance again 18 to 19, we think we’re doing a good job and setting our selves up with a larger system to keep growing at that rate, which we think it’s really our most important job here.

Michael Kelter – Goldman Sachs

Yeah, I think that’s well said. Yeah, well said.

Operator

We’ll go next to Jeffrey Bernstein with Barclays.

Jeffrey Bernstein – Barclays Capital

Great, thank you very much, and Jeff congratulations.

Jeffrey Kip

Thank you.

Jeffrey Bernstein – Barclays Capital

Two questions, one actually just a clarification, but the – on the comp and the pricing versus traffic to-date, I’m just wondering if you could talk a little bit about the pricing side, which is obviously much stronger component of the comp, where do you think there is any pushback on that pricing or do you feel like there is somewhat of a ceiling to the average check, and how you think about pricing versus the impact that has on traffic. And then just more broadly speaking, Bill you’ve mentioned the $400 million spend over the past six quarters in terms of capital deployment. I’m just wondering whether you could talk about other potential usage, whether you would consider a potential dividend or do you prefer share repurchase or might shift then the portfolio beyond the use of the core Panera on the U.S. and whether do you more international, whether you do acquisition of a concept other than kind of a soup side of thing which a chain, thanks.

Jeffrey Kip

Let me say some about price, I’m actually glad you asked that question in light of Michael and John’s earlier questions. We do consider pricing to be a drag on whether it’s transaction or mix growth, we do think you’re growing on peoples check, how much, how material? I think, most people have been around the restaurant industry a long time factor is that there is some number of basis points you trade. It’s always positive ROI and if you think you’re hitting a tipping point with the customers you back down. We don’t think we’re anywhere near the tipping point.

Our price value scores remain 90%, very good in grades. They’ve been in that way since before we actually took our first significant price increase at the end of ’07, and we track it pretty very carefully. So, yeah, we do when we look at the whole mix of how we grow our comps, we do believe there is a modest drag, but we also think that’s natural and it’s normal. We think that any restaurant company that tells you it’s not there, it’s probably not been fully analytical there.

We do pay careful attention to it. We settled a lot of our price increase in motion in a much more inflationary environments. We’re going to get little benefit this year, and I think we’re going to look – I actually won’t be Bill, (inaudible) but I think we’re going to look a little more carefully of what we do as we go into the end of the year depending on the inflationary environment et cetera, which is why we’re rolling into the year [3 and 3.75] and we’re looking it at full-year three in a quarter. So I think it’s a good question. It’s somewhat very thoughtful about, it is some we consider and place in and let me give it back to Bill.

William W. Moreton

Yeah, just to add a couple of things just right on. I mean it is Jeff, something that we look at very closely. As Jeff said, we look at our value proposition very closely and I think the people – as you all realize the value in the eyes of the consumer is far more than just price, it’s a total experience.

And the philosophy that we’ve had now for a number of years that we continue to bring forward is that we try to make price equal our all-in inflation in our P&L. So that includes labor and everything else, so that we don’t have to degradate our margins or degradate the customer experience.

So, I mean, that very much is the balance that we try to strike and as Jeff said, we do any number of consumer studies from individual product price elasticity to total check to all sorts of other different pieces of consumer research. and today, we really think that we've struck that balance properly and that we have room to continue to do that as we go forward. So that's really how we think about price. So take it, that we're very thoughtful about it, but today, we think that we're in balance and our consumers are telling us so.

In terms of the $400 million, it really goes back to really my guess, all the thing about how we think of utilizing our capital, right. We think that at the right price, our Board looks every quarter at our share repurchase program and we’ve set the appropriate levels to think in one, three and 10 year kind of returns. so we think that's a great way to return money to our shareholders. and then, franchise acquisitions opportunistically we've done and they have been very good returns of investments and we think very accretive to shareholder value.

so those would continue to be our primary uses of excess capital, in addition to growing our new units as quickly as we can. we've always thought that's the best use, but we're doing that within discipline, and I think you continue to see that as we accelerate our unit growth and yet we’re growing our new unit opening volumes to record levels. So, given that we have 1,500 bakery-café is to still have our new units growing at record levels. We think really it resonates – you’ve got to [touched] to how it resonates with the customer and our ability to penetrate our existing markets more deeply. So we're going to continue to do that as the first and highest use and then, share repurchase and customer and franchise acquisition in the next bucket.

At this point in time, it is not our intention to look outside of our industry for potential or outside of our segment for potential acquisition. you never know what comes, but we think that really by deploying $400 million over the last six quarters, we feel very good that we've been able to do it in the way that is most accretive to our shareholders and more less risk candidly. So we feel very good about that.

Jeffrey Bernstein – Barclays Capital

Thank you.

William W. Moreton

Thank you.

Operator

We’ll go next to Jason West of Deutsche Bank.

Jason West – Deutsche Bank

Yeah thanks guys. Just sort of broad questions around the franchises, just one of you talk a little bit about the franchise comps only come in at 3% in the quarter. It felt like it would be a little bit better than that particularly given the weather, does anything specific there that drove that or any thoughts there, and then if you can give anymore color around the RDU acquisition in terms of the multiple, it look like the costs for the units, it’s a little bit higher than some of the other deals. You guys have done lately and kind of why that franchise will be selling, just talk about that. Thanks.

William W. Moreton

Jeff will talk about RDU in a second. I’m going to address the first part, the franchise comps because it’s interesting Jason, what do you often have with us, first of all the fourth quarter and some people have talked about this or written about it, absolutely we did not see a great weather impact one way or the other in the fourth quarter of ’11, we’re certainly seeing a positive impact in the first quarter of ’12, which we reported, but we didn’t seen much weather impact one way or the other in the fourth quarter of ’11.

In terms of company and franchise comps, it’s interesting now having watched them over 15 years at Panera and longer in our industry, and what you see is they tend to move fairly together and then at times widen out, in this instance I think it’s an indicator that some of the initiatives that we’ve rolled a little bit ahead of our franchises, and so we think it’s our obligation as a franchise in order to test them out, but operationally it’s an idea, and then it’s an economic return, so we tend to some of well, most of our initiatives kind of do the proof of concept, testing the proof of ops and the proof of economics our selves. And then, we start to roll it and then our franchisees adopted and follow a little bit behind. So, I think that what you’ll see over any multiple year period is, our two year comps are fairly similar at times, either the company or the franchisees gets a little out ahead, but over time they come back together.

So I mean that’s what again we would expect as we go through the rest of this year. I think that you’ll see those two year comps come back together and it has as much as anything to do with the timing of rollout of initiatives. So that really is very consistent with what we’ve seen now over quite a number of years.

Jeff, why don’t you comment on Raleigh-Durham?

Jeffrey Kip

Yeah, I think Raleigh-Durham is – we’re hoping to close it by the end of the first quarter. I think you always have to make sure you do it right. It is a pretty high-volume market, and so we have 16 stores that are generating. It’s actually it’s roughly the acquisition price and the cash flow is roughly right between our Milwaukee and our New Jersey calculations – our acquisitions in the attrition calculates about right between the two of those on a run rate basis.

So, we’re excited about it. It’s a great market. It’s been run well, high-quality franchisees. Franchisee wants to go on a cruise and move on to the next stage in it life and it’s a pretty common scenario for us and now we’re really happy to have it.

Jason West – Deutsche Bank

Okay.

Operator

We’ll go next to Joe Buckley at Bank of America Merrill Lynch.

Joseph Buckley – Bank of America/Merrill Lynch

Thank you. I have a couple of numbers questions, Jeff it looked like in the quarter G&A if you back up the $5 million one-time charge is actually down a little bit year-over-year. And then, conversely going the other way, the other operating expense line, which really (inaudible) round quarter-on-quarter, but was up as a percent of sales. Could you talk about those two, is there anything unusual going on in either line?

Jeffrey Kip

Joe, I have stopped taking numbers questions. In G&A, we enjoyed pretty good leverage as we came out at the end of the year. Last year, I think we had a better year relative to our long-term and short-term incentive goal and we had some kind of catch-up accruals there in the fourth quarter as we closed out the year well last year. And this year, we've done a better job so to bring in the year at the core level in tight. So there is nothing really that unusual going on there. we expected leverage and it bounces around the little quarter-to-quarter depending on what's going on. and as I said, I think we expect that number to be flattish year-over-year going into next year, as we again work on sort of building for the future with discipline. In terms of your operating...

Joseph Buckley – Bank of America/Merrill Lynch

We didn’t talk about...

Jeffrey Kip

Yeah.

Joseph Buckley – Bank of America/Merrill Lynch

When you tell they’re flattish you mean in dollars or as a percent of...

Jeffrey Kip

Percent of sales.

William W. Moreton

Percent of sales.

Joseph Buckley – Bank of America/Merrill Lynch

Thanks, okay.

Jeffrey Kip

So, then in terms of your other operating question, its a few things. One is, as a percentage, we had – it's not the way we necessarily want it, but it worked out that we had a lot of openings in the fourth quarter, which put pressure on other controllable items training et cetera, some of the field management expense categories that hit there, that's where our media increase hits. we saw a pretty good comp in the fourth quarter, we think it’s up under our first quarter number as well. And then we had some seasonal R&M that spiked a little bit as our agents moves quarter-to-quarter in any given year. So it's actually, there’s now real unusual items in there.

Joseph Buckley – Bank of America/Merrill Lynch

Okay. That's helpful, thank you.

William W. Moreton

Great. and I'd just like to add, it’s only tangentially related to the question, but it relates to an early one as well and really how Jeff answered. What often shows up in G&A is investments that we're making today that will affect multiple years from now in terms of some of the initiatives that we’re driving to try to improve the consumer experience, and as Jeff mentioned earlier to an earlier question, we’re never trying to simply optimize one individual quarter. We always try to look at in medium and longer term basis, so that’s why occasionally we’re asked why is that your G&A leveraging a little bit and getting a little more efficient as a percentage and it actually is, the core G&A, the delta is additional investments that we’re making for the medium and long term, which we think clearly is the right thing to do to run a business, and I think it served us well now over multiple, multiple years.

Joseph Buckley – Bank of America/Merrill Lynch

So thanks Joe for (inaudible) mentioned that as well.

Jeffrey Kip

Okay operator.

Operator

We’ll go next to David Tarantino of Robert W. Baird.

David Tarantino – Robert W. Baird

Hi, good morning and first congratulations Jeff on your new opportunity.

Jeffrey Kip

Thanks.

David Tarantino – Robert W. Baird

Bill just a question on the unit growth outlook, it seems like the momentum on the development side is picking up and with that being probably your best use of capital, what are your thoughts on being able to drive that even higher and increase the rate of growth going forward, and maybe secondly if you could comment on, as you accelerate the pace of opening, how do you continue to stay disciplined in terms of site collection and operating those units, thanks.

William W. Moreton

All right, thanks David. That’s what really goes together right that’s the equation. At this point as we set now for a while, we’d opened as many quality new units as we could, so it really is the best use of our capital. So I think where we are today, we feel comfortable. We gave some guidance a while ago and that 100 to 115 or 120 units a year for the next several years. We’ve given specific guidance this year 115 to 120 units, our hope David is that that can ramp up, but we think that’s really the prudent place to give right now as we think about it. And what it will be constrained by is the disciplines that we brought to bear. As we’ve mentioned now and number of times, we honestly believe that we have gotten far more sophisticated in terms of evaluating trade areas and then, within the trade area specific site attributes based on really our learnings from the 1,500 bakery-cafes that we have opened today.

And I would clearly point to that discipline as a primary reason for the new unit – average unit openings that record highs. So what we’ll continue to do is apply our discipline and open as many as we can. We feel very comfortable in the range that we’re in this year for the next few years. And we’re continuing to try a number of things to see how we can accelerate it, but we won’t do that at the expense of the discipline. So the one thing that you should know is that will always come first and if we’re able to ramp up development within those disciplines, we will. Otherwise, we’re saying that we think we’re in kind of the spend as we sit today. It’s really a trade off. So I think you pointed to both ends of it. It’s our desire to accelerate yet within the disciplines we’ve established and so, that’s where we sit today, David. Thank you.

David Tarantino – Robert W. Baird

Okay, thank you.

Operator

We'll go next to Nicole Miller at Piper Jaffray.

Nicole Miller Regan – Piper Jaffray

Thank you, good morning. On the marketing, can you talk about the cable TV networks marketing? I’m curious though is that going to be nationwide and is it like a 15, 30 or 45 second spot? Is it the commercial that you’ve tested or something different? And then, I really appreciated the comment about in terms of all the marketing dollar spend you believe you have a good return on those dollar spent. Can you walk us through how you measure that? Thank you.

William W. Moreton

Sure, I’ll start off Nicole and then Jeff just jump in. But as it relates to the – it’s a national cable program [buy]. So I apologize if I didn't say that clearly before, that’s – it’s our first national cable [buy], and we think we’re at the sizing scale where that makes economic sense for us now. the commercials we’re going to run are the ones that we've tested already the spots that you likely have seen in terms of our baker who gets up and he comes to work and he is very passionate and talks about the fresh dough everyday and how we bake our products by an expert baker. That one is resonated very well with consumers and the second spot that Ron does on kind of our concept values and concept dozens and our overriding philosophy on Panera and what we try to do and what really he is trying to guide us through now for a couple of decades, which also has tested very well with consumers and resonates with them. We think that really aligns the authenticity of that spot specifically, aligns with our consumers on how they think and what concepts they want to attach and affiliate themselves with. So there will be those spots, I think there is a combination of 30s and the minutes, I’m not sure about that, but I believe that to be the case. those will be the two commercials and it absolutely is national cable, so our first really national advertising program. So it's around the make today better campaign under those two commercials.

In terms of the returns, I'll just make a couple of points and then Jeff can certainly supplement. What we do, I think that we look at it in the more stringent way you can. We look at it over a 12-month period and whether it pays back the sales lift, pays back more than the all in cost of direct media, based on our flow-throughs et cetera, Jeff wants to get more exact, he can do that, but that's the rough way we do it. And again, we look at it over 12 months to call in, and what really I think we all know the reality to it is that marketing campaigns in the advertising, it builds on itself.

If really the ultimate aim is to increase quality awareness of our points of differentiation, you don’t measure that in a quarter or two quarters or 12 months for that matter. It really builds on itself, but we are trying to hold ourselves to a return standard where we see the return in the 12 month period.

So I think, because we think we’re early on, believe we’re early on in that S-curve, we are seeing the returns in a relatively short period of time and so we feel very comfortable with where we are at, and there is quite along run way to go. But again, under the theme of not trying to just play for one quarter, we are not going to jump our spending dramatically in any particular year. We'll continue to edge up that S-curve kind of cautiously and continue to measure the returns on, I think about is conservative away as anybody would measure. So, I don’t know if you would add to that Jeff.

Jeffrey Kip

No. What he’s telling is right.

Nicole Miller Regan – Piper Jaffray

Thank you.

William W. Moreton

Thank you.

Operator

We will go next to Mitch Speiser of Buckingham Research.

Mitch Speiser – Buckingham Research

Great, thanks very much. And my first question is on the loyalty program, it sounds like you’re really beginning to drill down and start doing one to one marketing. Bill can you give us a sense of when that actually started and what the experience is so far maybe in terms of the customers that you have really drilled down to on one-to-one basis. Has it brought them in more, has it driven the average check. When we think about your traffic guidance for 2012, does it they gain a successful one-to-one marketing initiative in year one or do you think there will definitely be some learning curve experience before you really get the desired effect.

William W. Moreton

Yeah, Mitch thanks. What I would tell you again globally as we think, almost everything. The truth of it is and we tried to talk about it a lot in Panera and you all see it in all the companies you are associated with. The big initiatives, the things that really matter they take multiple years to play out and I think loyalties media candidly and marketing is a great example of it. The question before, we’ve been really going at it for four or five years in (inaudible) and we’re just getting to the points where we are today.

On loyalty, I would say really it is important to know. It really rolled out in 2010 and most of the system rolled out in the fourth quarter 2010 or big slag of it. This year in 2011, really was about operationalizing it. And what that means is, trying to get some of the reward structures right and really trying to work how it works with our operators and get the consumers used to using the program et cetera and really gathering data.

So what I would tell you Mitch is 2012 is the beginning of the next phase. And what we’re looking at is, we’re just starting to do this today. So what we’re starting to gather the data I mean, again, we’ve been in the program really for about a year now. So we’re starting to get some really good data for our customers. And what I would tell you, it will be a multi-year effort Mitch, in terms of how we mine that data, try to do any number of test and experiments at any point in time. Michael Simon, who is our Chief Marketing Officer and his group and Ron is working very closely with them as well. They have any number of different tests in place about soft rewards, hard rewards and just in terms of communication vehicles with the customers to see what really moves and changes behavior.

So we’re very much focused on frequency and we are seeing some of our heaviest users comes a little more often so far already. That said, I would tell you we’re kind of in the beginning stages of this. There is nothing specific built into our guidance on one-to-one marketing, because we’re really just getting into it and learning from it. So I would tell you it will be a multiyear built, Mitch to be honest with you. So that’s how we think about.

So we’re excited about the possibility. We see small glimpses in test, but this is really about the year about how we take some of that data and really see how we can move customer behavior and it’s all focused on how we increase frequency, that's really the game here.

Mitch Speiser – Buckingham Research

Great, thanks Bill. If I could maybe, just slip in one other, just in celebration of Jeff leaving, congratulations Jeff. On 2013 lead, can you give us a sense, are you laddering it in at this point and would it be favorable given where weak features are standing today?

Jeffrey Kip

Yes. We've always been laddering, we're still laddering, mostly we’re almost 100% done with the year and it's in over $11 with basis as opposed to over $9 and I assume they're going to keep laddering after I leave, but I’ll make a couple of promises

William W. Moreton

We will continue laddering, so we are actually starting the very beginnings of ‘13, I think just the smallest piece.

Jeffrey Kip

And you know Mitch, you had more credibility if you started your questions with the celebration of Jeff leaving and using it in a way to slip into second question.

William W. Moreton

But still yeah, the philosophy we’ll continue Jeff, our image. And so we already are starting to ladder 12 months out. So again, this is the year where we – isn’t drag on us, but as you point out I mean the features are lower, so as we start to buy end of ‘13, that’s sort of favorable comparison. We’ll all have to see where the markets go. Again, we don't think we’re any smarter than anybody else. So we just will average it out by laddering as we always have. Thanks.

Mitch Speiser – Buckingham Research

Thank you.

Operator

We'll go next to Alex Slagle at Jefferies.

Alexander Slagle – Jefferies

Thanks. To follow-up on the decision to increase your development outlook obviously the strong volumes and returns in the new units are considerations, but it’s something changed your view of the real estate environment beyond what you saw back in October and with more drive-through sites available and knowing your target and could this translate into a larger pipeline to for ‘13 also?

William W. Moreton

Yeah. What I would tell you just generally Alex, what we would say and I think we’ve thought this way for the last nine months or so. We do think or maybe even 12 months, some of the dislocation that we saw in 2009, ‘10 and for the first part of ’11 between the difficulty – between the landlords and lenders and tenants, it has started to sort its way out a little bit I mean you've seen some pretty big companies close their doors, declared bankruptcy like blockbuster that certainly has made available on a number of sites that we've taken advantage of.

So I think that we're starting to see a little bit of a more orderly market if you will, for a lack of a better way to describe it. So I think there are a number of opportunities and we’re just going to continue to apply our disciplines. So I think the increased pace of development isn’t so much that there’s more opportunities, I think we’ve gotten just really sharper on our disciplines and how we look at it. And we’re out there as aggressively as we can; it’s truth that really what I would tell you. So that's high for that, it's just – I think there’s always good opportunities. So we're just being selective in doing all of those that we see is good possibilities for us, and it will give us the returns we’re looking for. Thank you, Alex.

Alexander Slagle – Jefferies

Thanks.

Operator

We'll go next to Robert Derrington at Morgan, Keegan.

Robert M. Derrington – Morgan, Keegan & Company, Inc.

Thank you. Hey, Jeff. Could you give us a little bit of color on, I think you mentioned that your inflation outlook for this year is around 2.5%. can you sort of give us a little bit of color on directionally how that will flow through the course of 2012?

Jeffrey Kip

Yeah, higher in the first quarter and lower as the year progresses.

Robert M. Derrington – Morgan, Keegan & Company, Inc.

Okay. That's pretty simple. Obviously, with lead year-over-year, there is obviously some benefit coming in within that food pipeline, any kind of color you can provide us there?

Jeffrey Kip

I mean a couple of things I'd point out to you are that we kind of tilted up it’s started around eight, probably with the basis in this year and finish the year up around ‘11 with the basis in there, and it’s going to go in the opposite direction really when you look at the quarter comparison. So that's going to be the biggest driver in how the all the inflation numbers play out and how the dough cost of sales numbers play out and otherwise, it’s a little smooth that we're obviously coming off for seven. so we’ll roll it in closer to four than we are two and then we'll roll down as the year goes on would be weekly in the biggest factor.

Robert M. Derrington – Morgan, Keegan & Company, Inc.

Got it, all right. Very good, thank you.

Jeffrey Kip

Yep.

Operator

We'll go next to the Nick Setyan of Wedbush Securities.

Nick Setyan – Wedbush Securities Inc.

Hi, thanks. With system sales accelerating with increasing returns on new units and with – I believe there are already two franchisees now in the system. Can you give us some insights to or what factors we should consider when China think about potential franchise acquisition in 2012 and even beyond 2012. And also if you could just remind us what the average check on a dollar size of (inaudible) transaction is? Thanks.

William W. Moreton

I'll talk about the first and then Jeff, I think the second is on average check. So the first was on franchisees. And let me give you some overall philosophies and then Jeff will chip in. You're right, this post the North Carolina acquisition, albeit 32 franchisees in the system, which again, I just think it’s a huge benefit to Panera that we really don’t talk as much about as we could. Again, we’re able to all get in a room, there’s really 33 owners of bakery-cafes of Panera that company representing what we call the biggest franchise ourselves and then the 32 other owners and we’re able to move very much in lockstep and agree on the concept going forward and how we’re executing it. So we feel that that's a great thing for us. In terms of the acquisitions they’re opportunistic, we don't have any plan, strategy to go in and try to acquire X number or Y number in any particular year. It’s different people have found themselves in different life cycles and what they’re thinking about in doing with their life. So as they opportunistically come up, we will absolutely look at, I mean we've established a fairly clear range in which we look to try to make acquisitions of franchisees. and so long, it's in that range, we'll continue to do it.

In terms of an overall philosophy, it's interesting; this will bring us almost a 50/50. I guess 51/49 franchise to company post the North Carolina acquisition. We like that very much, we like that mix. We think our franchisees have been hugely valuable and learning from and talking to and pushing us, it’s the best mirror that we have honestly as we come up with initiatives and think for elements start to concept as them. So when we start to include our franchisees when we go to a stage, we call proof of operations of any initiatives, it is – they’re all exceptional organizations with great operators and very strong balance sheet. so they’re really in a position to help push and pull with us and really think through the initiatives.

So we very much like that dynamic. So I don't believe you’ll ever see Panera in the near term certainly or even in the medium-term be, an 80% company, 20% kind of franchise organization, we kind of like that mix 50/50, 60/40 one way or another. but we'd like to stay in there. we think it's really part of the core formula of our success is with our franchisees and how they helped us. So I think through the key business initiatives and pushed on us to be honest with you. So that’s the kind of dynamic that will keep and opportunistically, we’ll look at them as it goes forward. And then Jeff, I think, what’s this second question I think on the average check. Wasn’t it?

Nick Setyan – Wedbush Securities Inc.

Yeah. Just average check on a catering transaction.

Jeffrey Kip

Catering transactions are 125 bucks-ish.

Nick Setyan – Wedbush Securities Inc.

Thank you.

Jeffrey Kip

But obviously there is a much wider range that tend to be 50 to I think be over a 1,000.

Nick Setyan – Wedbush Securities Inc.

Right.

William W. Moreton

That’s what when we talk about our sales breakdown, our growth in catering really isn’t driving transactions very much. But it certainly is driving mix, right because of the size of the transaction.

Nick Setyan – Wedbush Securities Inc.

Thanks.

Operator

We’ll go next to Bart Glenn at D.A. Davidson.

Bart Glenn – D.A. Davidson & Co.

Thank you. Could you talk about opportunities in terms of refine in labor scheduling and as you make that reinvestment back into improving service if there is an opportunity to improve service speeds? Thank you.

William W. Moreton

We think there’s always opportunity to improve everything. We look at labor scheduling not as a margin initiative, but as a customer facing initiative, where we just want to give our managers better tools to staff the right people at the right hours of the today. So we give our customers the best service.

We also want to make sure that as we innovate our food products, we understand the labor that goes into a different food products and we don’t count a sandwiches with a piece of cheese in it and that’s it the same as much more complicated Panini. So that we again, if we do them the same way, because the same price you end up shortchanging the customer experience, because you pull your labor towards making the sandwich. So again, it’s not an optimization tool. And what was the other question?

Bart Glenn – D.A. Davidson & Co.

Just as you reinvest back in the business if there is an opportunity to improve speed of service a little bit?

William W. Moreton

Well, I would say, our constant goal is to improve speed of service. So, we think there is always opportunity and so, yes, I mean, we’re looking at how our back – how it’s flows. We’re looking at how our customer experience flows. We have material projects looking at both how the stories built and constructed, and how we work behind the counter. We as Bill mentioned, we’re playing with table service and how that works for people and potentially different ordering systems going forward. So yes, yes, yes.

Bart Glenn – D.A. Davidson & Co.

Thank you.

Jeffrey Kip

Yeah. We’re absolutely looking at all of Bart. But it’s an interesting thing, I often think of it is the plates spinning on top of rods or whatever and you have to keep them all in balance and all spinning and that’s very much what we do with all of our metrics. But it’s interesting I’d just mention to you, by far in a way, the biggest driver of the customer experience is around the quality of the food. Then it’s friendliness than the accuracy and speed of service all kind of play together.

So I mean we’re very much focused on all those things that drive the customer experience and we have initiatives against all of them. But we think our customers are telling us, we’re in a pretty nice place with in terms of the balance of the spinning plates today, but we try to lift all of those. So we actually have initiatives in plate to try to attack every one of them. So I think you’ll see all those play out over the next 12 to 24, 36 months. Thank you.

Operator

And we’ll go next to Bryan Elliott at Raymond James.

Bryan Elliott – Raymond James

Thank you. Good morning. Just a couple of clarifications really, did I hear correctly, Jeff you said that Raleigh acquisition in 16 stores?

Jeffrey Kip

Yes sir.

Bryan Elliott – Raymond James

Okay. And the development split, should we continue to look for a little more franchise versus company on an absolute basis here in ’12?

William W. Moreton

No. I think you should continue to look at what we’ve been doing, which is a little more company.

Bryan Elliott – Raymond James

I’m sorry, have been spoke, so, no change there. And I guess the question on the cable, are we going to kind of be on for a couple weeks and off for a few weeks or is it going to be pretty steady?

William W. Moreton

Yeah, I think and again, but we are going to experiment some with it, but one of the underlying philosophies that we have is, that study is better than on intensely and then off for a sustained period of time.

Bryan Elliott – Raymond James

Okay

William W. Moreton

So it’s an overriding philosophy, I think we believe that in all of our media.

Bryan Elliott – Raymond James

Great. Thanks so much.

William W. Moreton

Sure.

Operator

And that does conclude today’s question-and-answer session. At this time, I’ll turn the conference back over to management for any closing remarks.

Jeffrey Kip

All right. Thank you all very much. As always Jeff for awhile, I am sure I’m [not] here to answer any of your questions and thank you.

William W. Moreton

Bye.

Operator

And that does conclude today’s conference. Again, thank you for your participation.

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