Michele Harrison - VP, IR
Ron Shaich - Chairman & Co-CEO
Bill Moreton - President & Co-CEO
Michael Kelter - Goldman Sachs
Matthew Difrisco - Lazard
David Tarantino - Robert W. Baird
Jason West - Deutsche Bank
Joe Buckley - Bank of America
Keith Siegner - Credit Suisse
John Glass - Morgan Stanley
Peter Saleh - Telsey Advisory Group
Phillip Juhan - BMO Capital Markets
Mitch Speiser - Buckingham Research
Bart Glenn - D. A. Davidson
Panera Bread Company (PNRA) Q1 2012 Earnings Call April 25, 2012 8:30 AM ET
Good day, everyone and welcome to this Panera Bread First Quarter 2012 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference to Ms. Michele Harrison. Please go ahead.
Thanks, Jake. Good morning to everyone, and welcome to Panera Bread's first quarter 2012 earnings call. Here with me on the call this morning are Ron Shaich, our Chairman and CEO -- Co-Chief Executive Officer; and Bill Moreton, our President and Co-Chief Executive Officer.
Before we begin this morning, let me cover a few regulatory matters. I'd like to note that during our opening remarks and 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 Litigation Security Reform Act of 1995. As such, such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially.
With that, I'll turn it over to Bill. Bill?
Great, thanks, Michele. As Michele mentioned, both Ron and I are on the call this morning. I will take you through our first quarter results and our targets for the second quarter, and the remainder of the year, and then Ron and I will discuss our recent organizational changes and then we will both answer your questions.
We are pleased to announce another strong quarter. We reported earnings per share of $1.40 for the first quarter. This represents a 28% growth over the prior year and marks the eighth out of the last nine quarters that we have been able to grow our earnings at a rate of 20% or greater.
Earnings growth of approximately 23% was driven by core operations, which was above our long-term operating earnings growth target of 12% to 17%, with the remaining 5% of our earnings growth generated from the returns from the deployment of excess cash.
Let me first review our sales results for the first quarter and our expectations for the second quarter and full year with you. In Q1, company-owned comparable bakery-cafe sales increased 7.50%, which results from a two-year comp of 10.8%, which we continue to believe is among the very best in the restaurant industry. We estimate that our first quarter comparable company bakery-cafe sales benefitted by approximately 200 basis points compared to the prior year to mauling over the winter storms of the first quarter of 2011 and the unseasonably mild temperatures in the Mid West and Northeast in Q1 2012. We believe that this benefit was seen in both transactions and in mix.
Our first quarter increase of 7.5% breaks down into 2.1% transaction growth and 5.4% average check growth. Average check growth consists of year-over-year effective price of approximately 3.5%, and a positive mix impact of 1.9%. The impact, mix impact was primarily due to the catering contribution of approximately 100 basis points, and better than expected retail mix, driven by higher salad sales, due to the success of our Salmon Salad and the unseasonably warm weather.
So far in the second quarter to-date, our company-owned bakery-cafe sales have increased by 5.2%. It's always a little hard to read the second quarter sales in April, due to the differences and the timing of the Easter Holiday and different spring breaks across the country. As a result, we are setting our full second quarter comp, company store comp target at 4.5% to 5.5%.
Breaking down the second comp targets, we're targeting transaction growth of approximately flat to 50 basis points positive, and 450 to 500 basis points of check growth.
Transaction growth is expected to be up slightly as we continue to rollover the launch of the loyalty program last year, which generated strong transaction growth.
Check growth is driven by approximately 3% price and 1.5% to 2% of mix. We expect that our second quarter mix will be positively impacted by the plan to earlier start of our summer celebration in 2012, which features the strawberry poppy seed salad, a great lineup of smoothies, and a new roast Turkey and Avocado BLT sandwich that is tested very well.
For the full year, we now expect to be at the high-end of our fiscal year 2012 comp target range of 4.5% to 5.5%, which consists of 50 to 100 basis points transaction growth and 4% to 4.5% check growth, consisting of approximately 3% price and 1% to 1.5% mix.
The five key areas where we are investing to drive these top line sales results. Those are investments and the quality of our food, our increased marketing expenditures, and rollout and refinement of our MyPanera loyalty program, the growth of our catering business, and the quality of our operations and our people.
I'd now like to give you a quick update on each of these investment areas. First, the investment in food. We continue to invest in the quality of our ingredients and strive to produce innovative menu items through the creativity of our culinary group and the craftsmanship of our bakers and associates. The first quarter produced strong results in our signature salads, which were up 16% driven by our Salmon Salad. This high quality cut of Norwegian salmon is a truly differentiated offering from our competitors and our customers have noted.
Additionally, in the first quarter we rolled out our new Mediterranean Egg White Breakfast Sandwich. This health-oriented addition to our already strong lineup drove our breakfast sandwich sales up 19% in the quarter. Since we have launched breakfast sandwiches more than four years ago, this category has grown more than 10% every quarter.
As we look forward to the remainder of the year, we are excited to launch our new Rose Turkey and Avocado BLT in May. This will be followed by our turkey cranberry Panini in the third quarter, and the rollout of our grilled cheese done the Panera way in the fourth quarter. We believe that the best estimate to the strength of our products is that since the third quarter of 2009, our sales and gross profit have grown at each day part in every single quarter.
Next turning to marketing. We continue on our multiyear path of establishing new marketing program designed to increase our quality awareness and to deepen our relationships with our customers. Once again, we expect to cautiously increase our 2012 market expense. We increased our marketing expenditures from 1.3% of sales in 2011 to 1.5% this year. Even though this is a modest increase as a percentage of sales it will result in a 27% increase in spending. I should note that the first quarter represented our smallest planned year-over-year increase in marketing dollars spend for the year.
As we previously reported, we started our first national cable advertising camping at the end of March. However, I need to make it clear that this campaign is at very low rates and is designed as a test that we will read very carefully. This campaign is designed to work in concert with our other advertising efforts and is not intended to be a significant driver of short-term transaction growth.
Our loyalty program continues to grow and now has approximately 10.4 million members. Last month we send out approximately 7 million unique e-mails, each designed to appeal the specific members based under purchasing behaviors. Reutilizing the purchasing information that we are building up on our 10 million members to design and test targeted consumer offers. We expect to start to see the benefit of these sorts of targeted sales initiatives later this year and into 2013.
Catering continues to be a strong driver of comp store sales increases and a key focus area of investment. Our catering sales grew 25% in the first quarter on top of 26% growth in the first quarter of 2011 and 29% growth for the full year last year. We attribute that growth to the increasing awareness of our catering program and the investments that we've made and are continuing to make in our sales force and the tools to support them, our online ordering system and the beginning of targeted marketing efforts.
Finally, the quality of the operations and our people is a constant focus for us. Our first quarter operating metrics in terms of promoter score, speed of service and accuracy have all continued to improve. Our general manager turnover 13% for all of 2011. To the best of our knowledge, this is among the very best in our industry.
We continue to believe that our joint venture, which incents the GMs eligible to participate in the program with a percentage of the store level profit above preset targets. This allowed us to attract and retain some of the premier management talent in restaurant industry. The stability of our bakery café managers is a key element in our success.
I'd now like to take a few minutes to discuss our operating margin performance in the first quarter and our expectations for the remainder of the year. Our operating margin in the first quarter was 90 basis points better than the prior year. That was driven by, first, our bakery café margins, which were 50 basis points favorable to the prior year.
Labor provided a 70 basis points of improvement over the prior year. This was driven by sales leverage and discipline around starting wages. Additionally, there was a spike in last year's labor as a result of inclement weather that did not repeat again this year. As a result, while we expect our full year labor expenses to be modestly better as a percentage than last year, we do not expect the improvement as high moving forward as it was in the first quarter.
Higher food and paper cost drove 30 basis points of unfavorability as our all-in inflation for the first quarter was 3.25%. For the year, we expect all-in food and paper inflation of approximately 2.5%, down from our previous estimate of 2.75% as a result of falling dairy and coffee prices. We expect inflation to be highest for the year in Q1 and then to decrease to approximately 1.5% by the fourth quarter.
We currently have approximately 80% of wheat slack for fiscal 2012. As a reminder, there are certain costs such as dairy and gasoline that cannot be effectively locked in too far in advance. Of the cost that we can lock down, 95% have been locked down for the year.
Next, we saw significant deleverage in the fresh dough cost of sales to the franchise margin of 470 basis points. This was primarily the result of wheat inflation, which had a negative $1.3 million to the FDF P&L in the quarter. This had a 33 basis point negative impact to our overall operating margins. Although the impact will become less pronounced as we go along, we continue to expect margin in the FDF until the back half of the year when our price of wheat begins to moderate.
For the first quarter, we leveraged G&A expenses by 100 basis points over the prior year. Of that 100 basis points improvement approximately 60 basis points was due to one time year-over-year pickups and 40 basis points were due to sales leverage and G&A discipline. The one-time pickups were primarily driven by three factors. First, an adjustment to long-term incentive compensation expense to reflect to just departure; second, the fact that the 2011 bonus paid in the first quarter of 2012 was lower than the 2010 bonus paid in the first quarter of 2011. And then finally, adjustments were gift card breakage assumptions.
Going forward, we expect our G&A to be modestly favorable to prior year excluding or even after factoring out the $5 million legal reserve from the fourth quarter of last year.
I'd next like to talk to you about the results of our capital deployment. We again had a solid unit development in the first quarter and are on track to hit our 2012 development target of 115 to 120 systemwide new units which will represent a third year of our accelerated growth.
We opened 22 new units in the quarter, seven company-owned and 15 franchised bakery-cafes. Our first quarter average weekly sales for company-owned bakery-cafes was $51,331, which is ahead of last year's record pace. The average weekly sales for franchised bakery-cafes opened in the first quarter was $47, 982, which was also ahead of last year's pace.
I'd like to note that on a systemwide basis, our total average weekly sales has increased four years in a row and we're off to another great start in 2012. Our first quarter results included a $0.06 EPS benefit from use of capital which included the Milwaukee acquisition and the repurchase of approximately 877,000 in the back half of 2011.
I'd also like to note that on the last day of the first quarter of this year we funded to $48 million to complete the acquisition of Raleigh-Durham and Chapel Hill market from one of our franchises in the Carolinas. Including the funding of the North Carolina acquisition, we ended the quarter with $221 million of cash on the balance sheet and no debt.
In the first quarter, we generated approximately $78 million of cash flow. We spent $30 million on capital expenditures and $48 million on the North Carolina acquisition, leaving us essentially with the same cash balance we had at the end of last year.
As always, we plan to opportunistically deploy our cash and have no incremental acquisitions or share buy back assumptions in our guidance. And we encourage all our analysts to refrain from building any assumptions on use of cash and year estimates given that we can go months without either an acquisition opportunity that needs a return criteria or share price that meets our repurchase plan criteria.
Now, let me just quickly summarize our guidance for the second quarter. Our second quarter EPS target is a $1.40 to $1.43, which represents 19% to 21% earnings growth from Q2 2011. We expect company comp store sales to increase in the range of 4.5% to 5.5%. And we expect our operating margins to be 25 to 50 basis points better in Q2 this year compared to last.
For the full year 2012, given our strong Q1 results for the increased comp expectation for the full year, we are raising our full year EPS target from $5.50 to $5.55 per share up to $5.58 to $5.63 per share, which represents a 23% to 24% growth rate versus 2011. We expect to be at the high-end of our previous full-year comp store sales target range of 4.5% to 5.5%.
We expect our operating margins to increase by 25 to 75 basis points for the full year, compared to the 2011. And we expect a North Carolina acquisition to be $0.02 to $0.03 accretive after deal and transition cost in 2012 and an incremental $0.03 to $0.04 secretive in 2013.
And as I previously stated, we expect development to be a 115 to 120 new units this year, the mix of it slightly waited towards company development. And we are also maintaining our target for company new store average weekly sales of 40,000 to 42,000.
Ron and I would now like to take the opportunity to talk to you about our recent management changes and to address some questions that we heard. I will start with sharing some perspectives and then Ron will share his perspectives.
As you know, Jeff Kip our CFO left in March to become the CFO of IAC Interactive Corp. And John Maguire our Chief Operating Officer announced that he will be leaving Panera at the end of May, to become the CEO of Friendly's Ice Cream Corporation.
Both John and Jeff did a great job for Panera while they were here. Jeff has been our CFO for the last six years, and John has been with Panera for 19 years, serving as our Chief Operating Officer for the last four years. We feel both unique circumstances and we do not believe represents the trend. Jeff had an opportunity to be the CFO at a Holding Company level in a very fast growing Internet company, with more than 50 discrete brands. This was an opportunity for him to apply the skills that he learned at both Panera and Goldman Sachs in a completely different operating environment. For John, joining Friendly's is a chance to stretch himself and become the Chief Executive Officer of the company that he has grown up with. He has the opportunity to utilize his leadership and operating skills to lead an organization. Most of these opportunities allowed Jeff and John to continue on the desired career paths. We value and appreciate the contributions they made while they were at Panera. We treasured -- we treasure their past and continued friendship, and we wish them well with their new opportunities.
One of the great strengths of Panera is our deep and talented management team. In the case of John's departure, we were able to fill our Chief Operating Officer position internally by promoting Chuck Chapman. Chuck first became part of Panera when he joined our Board of Directors in January 2008. Chuck then joined our management team late last year, when he left his position as Chief Operating Officer at International Dairy Queen. Chuck has over 20 years experience in the restaurant industry, including serving operating management roles at Bruegger's Bagels and Darden Restaurant Group. We are pleased to have Chuck stepping into the role of our Chief Operating Officer and knows that he would do an excellent job.
I think John Maguire put his best during an internal call announcing his departure and Chuck's promotion, when he said this a win for Panera and it's a win for him. Ron and I feel the same way.
In the case of Jeff departure, we have a talented finance and accounting group, but we didn't think we had anyone internally ready to fill that position right now. Though we would have some good candidates in a few years. As a result we began a search for a permanent replacement and hired an Interim CFO, Pat Kelly. Pat has served as an Interim CFO for Corporation for Hawker Beechcraft Corporation, a global manufacturer of aircraft. He has been the Interim CEO of Express Jet Airlines or Regional Airlines and CFO of Wynette Corporation, a hi-tech company. We believe Pat will serve a valuable role as we continue to search for a permanent CFO. We expect the search to be completed in the next four to five months.
Finally, in terms of Ron and I becoming Co-CEO's, we've got a number of questions and frankly heard a few rumors. Ron and I would like to address some as directly as we possibly can. To me this is simply formalizing the partnership that Ron and I have had over the last 12 months in running Panera.
Ron has being focused on revision for how Panera best competes both now and in the future. He brings his 30 years of experience in founding and running our company and his innate sense of the consumer and consumer trends to making sure that Panera keeps upfront of our competition. At the same time I've been focused on running the day-to-day business of Panera and caring for our three key stakeholder groups; our associates, our franchisees, and our investors.
One of the things that we are hearing is that Ron can't let go, that he is pushing me out, well, then I don't want him here. All I can say is that couldn't be further from the truth, I want Ron here. It is a blessing to both me personally and to Panera. It is great to have someone who has been my friend and mentor for 15 years share the responsibility for running our great company.
Ron founded this company. His vision and passion shaped and built Panera. Ron and I have always shared the relationship of complete trust and caring. I couldn't be happier with how our partnership has evolved and I know Panera is better off by having us both -- both of us here to guide Panera's future.
With that let me turn it over to Ron to share some of his perspectives.
Great, great. Thank you very much, Bill. It's nice to again speak with so many old friends. I'd like to take a moment to talk about, Bill and my personal journey over the past two years and help put our recent organizational changes into some perspective.
It goes without saying that this company is something that I had profoundly connected to, profoundly proud of, and profoundly care about deeply. Yet, as you know, in May 2010, I transitioned to executive chair of Panera. At that time my intent was to determine how I could utilize all I had learned in creating and running Panera that impacts the world and as well to learn how I could best utilize my creative juices and get a break from the unrelenting pace of 30 years of running this company and managing all of our constituent relationships.
And while accomplishing those ends was my goal, it was also my intent to stay involved in the company I profoundly loved as an active Executive Chairman, involved in concept evolution and a range of customer facing initiatives.
So let me now share with you what I discovered on my journey. It was incredibly helpful to have the benefit of time and perspective to consider Panera and it's place in the world. And as well, how I could spend my time in a way in which I'm able to help that. As I was able to take a break from Panera, I quickly found myself in gross, in a series of Panera projects, including Panera Care in a range of strategic innovation and technology projects for the company.
Indeed, I found that something that many of you knew, and what I found is that for me Panera was a place in which I was able to truly make an impact. I found that for me and for us Panera was a place that occupied my interest and in fact very quickly occupied most if not all of my time. Indeed, I began to conclude that Panera is the most powerful platform I know of, to make a difference in the world and to utilize my creative juices. In fact, after my short break and with Bill focused on all he does for Panera, I quickly found myself reenergized in ways I hadn't been in many years.
As a result, almost from the beginning of my time as Executive Chairman Bill and I began to have discussions on how best to utilize each of our skills and how to best care for Panera in each other in the process. After 15 years, we knew we shared the same fundamental philosophy and approach to the business and we trust each other implicitly. Indeed, after so many years working together, we found we could finish each other's tenses.
So here is how we evolved in the division of our responsibilities. I found myself spending my time focused on how Panera innovates and how Panera goes to market in an effort to ensure Panera is best prepared to compete today, tomorrow, and well into the future. I found my time focused on the Panera product and the Panera experience. Bill found his time focused on the processes and disciplines that allowed us to operate as a fairly large corporate entity with so many constituents. Some might say that my role eventfully evolved to be the Chief Product Officer or the Chief Competitive Officer or Bills role was as the Chief Corporate Officer.
Bill and I have now been operating in that way for the better part of my time as Executive Chairman. Ultimately, we came to understand that no one inside or outside Panera understood the Executive Chairman title. Indeed it didn't reflect our unique relationship and partnership. Ultimately, we and the Board came to conclude Co-CEO's was the best way to reflect our actual roles. Indeed, the change in titles we executed last month was simply a reflection of that reality. Like Bill, I like to take on the 800 pound gross.
So let me confirm one ugly rumor that I heard some people mention. This is to say; I came back because the Board and I have somehow lost faith in Bill. Let me be clear, this couldn't be further from the truth. The company's performance over the last two years is inductive of Bill's success. Our stock is doubled the time since Bill became CEO and we are confident that Panera is well positioned to continue to uphold his track record of success well into the future and particularly so with Bill at the helm.
Having said that we both recognize Panera and each other are better together. Running a company like Panera, as we both desire to do so, and with a quality we both desire to do so is extraordinarily demanding. Together, we bring talents and a division of responsibilities to the task. Together we bring more than either of us could bring alone to the task.
In our view, and I think we, in the views of the Board, one plus one does equal three for Panera shareholders. Bill and I have a trusting, caring relationship and most of all Bill and I are bound in our shared vision, passion, and commitment to Panera.
I know I speak for both of us when I say that we're confident that Panera will continue to benefit from our partnership and shared leadership.
Let me conclude our formal comments, by noting that I am today more excited about the future of Panera and more confident in that future than I have been in any point in recent memory. Together Bill and I intend to do great things at Panera for our customers, for our associates, and for investors. Indeed Bill and I truly believe you will conclude the same thing when you see the future unfold. Bill.
Right. Thanks Ron. With that we would like to turn it back to the operator now and Ron and I would be happy to answer your questions. Jake?
(Operator Instructions) And we'll take our first question from Michael Kelter with Goldman Sachs.
Michael Kelter - Goldman Sachs
Hi. I wanted to ask about some of the management changes and you talked specifically on about resuming your role and then it just was formalizing some of the roles that already exist. But I guess it's hard to imagine that you wouldn't formalize them unless you wanted to get more involved. So I'd love to hear what specific things or say top three on your to do list and as a related question, you said you wanted to focus on the product or you've been focusing on the product and the experience primarily in the last year or two. How do you want to evolve the Panera brand in the future? Thanks.
Yeah I guess there is two questions there. And the question is asked, why would we do it? I think it's -- it was not something we want, we were doing. It was a reflection of what was actually in place. And so it was simply to callout and find a mechanism to communicate to all of our constituents what was actually the reality. And I would say relative to what I spend my time on and what that is. I think that as a rule it is very much around the things that make Panera a better competitive alternative. And so it is all the ways in which we touch consumers and the ways in which we utilize the resources of Panera to actually touch consumers.
Relative to specific projects or what we're working on in that, I think Bill has spoken to that as you -- he was talking about our food initiatives. You heard Bill talking about our marketing initiatives and beyond that, beyond what we're saying, in our public statements and what we are indicating relative to commitments we're making, I think would be inappropriate to speak beyond that. And by that I mean that Panera has dozens of projects going on, dozens of innovation efforts are going on to drive a better competitive experience. And we found it better serves you, our analysts and all of our shareholders to refrain from really speaking to any of those future driven, to creating that future until we actually have committed to either an actual rollout or have something that has got real results that we could speak to. Hope that was helpful.
Michael Kelter - Goldman Sachs
In fact, may.
Yeah just adding one thing to what Ron mentioned. I think there is this talk that Ron left in May 2010 and he came back a year or few months ago. That isn't the case at all. We've been working together the whole time and so this is just a formalization or an announcement of what he has actually been doing now for the last over a year so. I think that's great.
Michael Kelter - Goldman Sachs
Maybe I can rephrase a little bit and just ask you know kind of maybe a way to ask it would be, what's in the top Ron of your to do list versus what's different and what's on Bill your to do list?
Yeah, I mean Michael I think that Ron took a shot at answering that, which was specific, programs and things we're working on regarding development. We don't think it's appropriate to talk about and we're not ready to do that yet. And I'm at the top of my to do list, just as I said really, as Ron called us a Corporate CEO taking care of our constituencies and executing against our business plans. So with that I would love to go to the next question if we could. I would like to stabilize discipline operator of and everybody of asking one question and we will answer that and then go to the next person in the queue, and we will stay on as long as we can and certainly we're available afterwards.
I understand. Now moving to Matthew Difrisco with Lazard.
Matthew Difrisco - Lazard
Thank you. To get to the same-store sales, I was just looking at your 5.2% beginning. You had a 5.3% year ago, you're laughing over the same period. So I guess, I'm wondering is how much level of conservativeness is in that 4.50% to 5.50% I think Bill you touched on it, April the tough month to read, but I'm curious, did that 5.2% have the price out of it already to get you to 3%, because you were 3.50% in the last quarter or is that to come and then I'm just curious as far as the comp. I might have missed, but did you make some comments on how you're doing with the speed initiative, was that a major driver as far as the comp coming from your high peak volume times, where you're seeing a large contribution to the same-store sales in the last quarter from that?
Yeah, yeah well let me take a shot. Really is, it goes to the first part of what you mentioned. As we look at Q2, Q2 is just and this is the start for us. I mean it's every year. It's a little bit of a tougher one to read after the first 27 days, in that, various difference in timing and the Easter holidays and people spring breaks, which you might not think would affect things but they actually do very much on a regional basis. So we're kind of keeping with our guidance of 4.50% to 5.50%, which is really our guidance for the year.
In terms of the second part of your question, in terms of the price, we do think that for the full year the guidance we gave, we saw the price would be about 3%. And with a 3.50% in the first quarter we do expect it to moderate hence we go forward. Again our overall philosophy on price is to try to match all-in inflation. And as I mentioned in the call, our all-in inflation we believe was at the high point in Q1 and we think it moderates through the rest of the year, and by the end of the year, we expect it to be somewhere around 1.5% or so.
So price will come down a little bit as we go through the year. So that's -- that's the reason for maintaining the same guidance in Q2. It's just kind of early to read. We feel very good about where we're at with the business but it's a little difficult. So thank you.
Now, we'll move to David Tarantino with Robert W. Baird.
David Tarantino - Robert W. Baird
Hi, its David Tarantino and I welcome back Ron. I guess you have been back, but welcome back to the call.
David Tarantino - Robert W. Baird
The question really related to transaction trend and in the last couple of quarters it looks like transactions have been just slightly positive excluding the impact from weather. And I was just wondering how you are viewing that trend and perhaps if you could talk about what the impact of cycling last year's rollout of the royalty program has been on the traffic trends and when you might expect to see that drag go away and may be tie in some of the programs you have to drive traffic for the balance of the year? Thanks.
Yes, David, let me talk to it in general terms again try not to be too specific. What I would tell you is, we think the positive transaction is a very good thing. So we feel very good about where we are at and so being positive transactions over long-term is really what our goal is, and concepts that can be 1% positive transaction growth over an extended period. I don’t know that there are already candidly would have done that consistently and that that certainly our aim.
In terms of rolling over you, you point out one of the things that it is kind of having a difficult impact on this year-over-year as we rolled out the loyalty in Q4 for 2010 and then really we are operationalizing it and gaining speed and traction with it in the beginning parts of 2011, that did generate a fair bit of transaction growth. So we are on a little bit of a tougher compare.
To your point, David, that starts to moderate in the back half of the year and all then we gave the transaction guidance of 50 to 100 basis point improvement year-over-year. So we feel very good about our initiatives that are designed to do that.
One of the things I wanted to make really clear on this call, I think some people may be misinterpreted on our national cable buy, I mean it really its little weights. We are doing what we always do at Panera. We are iterating and we are learning and we are doing it in constant with all our other initiatives so that come together in the totality of what it is we are trying to drive. So that's just one piece of it and it is not designed to push short-term big transaction increases. We are going to read that fast and see where we go and go from there on that.
So what we feel is we feel good with transactions, we are rolling over a difficult time and it eases a little bit as we go through the course of the year. This is how I would answer that. Thank you, David.
Now moving to Jason West with Deutsche Bank.
Jason West - Deutsche Bank
Just going back to the TV advertising, I know you touched on that, but can you talk a little a bit about sort of what you guys have seen looking at some of the data and whether it is something that you are pretty happy and may want to expand in the future or is it too early to say and maybe if you talk about how many weeks you were on TV in March and did that continue in April?
Yeah, I guess it is fair to say that this whole discussion of cable TV as if it were some new initiative or an inflexion point, I think may lead to misunderstanding. As Bill said, very moderate levels and again just a iteration in what Panera did. So I think that our cable TV program, we saw no noticeable distinctive outcome from it. It is part of the still of what we are doing and particularly so given that we are talking about communicating the values of the brand and our sense is that will have significant long term benefit as people connect with the Panera brand as suppose to an individual product.
So I think that trying to parse out, which week it hit, what impact, we can do with here and we would be advising you improperly if we suggest it to you specifically that that was occurring in certain way.
Now moving to Joe Buckley with Bank of America. Go ahead.
Joe Buckley - Bank of America
Thank you. Just another question on sales. (inaudible) the mention of Easter and spring break, it sounds like using a good sales (inaudible) or do things stand to moderate during that timeframe historically?
Yeah, it tends to moderate Joe, when you know what would happens is they are staggered at different times all over the country. So there is different effects regionally. But I think generally how we view it is we come out of April and then really we get into May and June and we gets it far more of our steady run rate of where we expect to be.
And Keith Siegner with Credit Suisse has the next question.
Keith Siegner - Credit Suisse
Most of my questions have actually been answered, but I just want to ask one and Bill may be you can help me think about this one. When I look at the full year guidance, you know look at the comps guidance at the high end of the range and the operating margin guidance now for just slightly favorable even with the accusations and then I look at the EPS guidance, it feels a little bit of a disconnect. Is there anything below the operating margin line of them that stands out that may, may be temper look at otherwise be, you know or otherwise seem to be a slightly higher EPS growth given the comps and out margin guidance?
Well, Keith there is nothing specific. I think it is you know, we are doing what we are always doing. We are trying to give you all the best look we can in terms of our thinking and where we think kind of the 50 yard line is with some level of specificity almost driven by line item, and then we go out and we do our level best to try to beat it, but there is no big fact or anything other, below the ops margin or anything else that it is, that would be anything that would move the year one way or the other.
So I think what we are trying to reflect is that we think our sales, we are at the high end of where we thought we might be that was true in the first quarter and it is true throughout the year. We think our operating margin will expand for the full year, but we do have couple of headwinds. We have the headwind of inflation that moderates towards the back of the year, we have the headwind of wheat that is part of inflation and it hits that FDF line and that again moderates toward the back part of the year. So that is really what we are trying to reflect in the full year guidance, but that there is nothing otherwise different.
Now moving to John Glass, Morgan Stanley.
John Glass - Morgan Stanley
I have a comment and then a question. The comment is that I think we are trying to understand there is a loyalty and the outspending all have dollar costs, and so investors trying to understand and it is fair to understand the real return on this, particularly in the context of while comp has been positive it does lag a number of piers over a period of time. It just a comment, you don’t have to respond to it, I think that's the context people really struggling with.
The question is more specifically on drive-throughs, which I think you have talked about a couple of quarters now and now it is an initiative for 2012, you didn’t talk about it last quarter I think specifically, but what do you think the reasonable amount of sales lift you should expect from drive-throughs? What is the experience of speed of service which I think is another question people have? I think it is interesting but probably just some clarification on what your experiences so far you expectations are would be helpful.
Yeah, let me give you some thoughts, John, on drive-throughs without being too specific. As we said, it is plenty of drive-throughs where another thing just like marketing and loyalty and a number of things we are talking about that we are a number of years in the making at Panera. And we've really have gotten to the place now where we think it is concept appropriate that the drive-through experience is not hurting inside the four walls dining experience. So first let me just give you a couple of numbers. We ended the year with 119 drive-throughs and systemwide, and this year we expect roughly 80. So we will get very close to 200 drive-throughs by the end of the year.
So again still relatively small part of a portfolio, but what we do believe that it does, John, is that it does bring, it increases frequency and we have a chance to get that consumer visit that we might not otherwise when they really have to be tied to their car, because they are the kids or et cetera, et cetera.
In terms of the speed, we've been able to do very well with that. So you obviously we're not like the burger guys where it's a minute in and out but it's a very short period of time. We designed the cafes such that generally there is a dedicated sandwich line and beverage station to the drive-through and so we haven't found from a customer standpoint that there is any issue with the speed. So we feel very good about that that we continue to work on it.
In terms of the sales slip, we don't give specifics. But what I would tell you is when we look at the incremental sales left in the profit we make on it, we think it is a very good return on our investment, and so we continue to be pleased that it does lift sales in the those bakery-cafes and it more than offsets the additional small capital costs that we spend to do it. So we're looking at it both as a retrofit vehicle where we go back to existing cafes where it could work and we look at it on our new bakery-cafes. That's one of the factors that we look at for any new site.
If you look at our new sites this year, I don't know 20% to 30% of them will likely be drive-through. So it isn't the fact that they have to be there but opportunistically what it can be, we think it adds to our customer convenience factor and that it's been a positive thing for us on an overall basis.
But when you look at the numbers, I wouldn't get too carried away. Again by the end of the year we're talking about 200 units suggest a base of over 1600. So it's still relatively small, but we think a nice add and a great return on capital when we can do it.
John Glass - Morgan Stanley
And Bill if I could just add a little color commentary, John, relative to your comments on sort of marketing and what we can expect. I think we would say we're playing for long-term transaction growth. It's very easy to have a couple of years where you have transactions as well. It's very easy to have one year where you've transactions up or to be the pump it or to have a couple of years.
Well we're after is transaction growth over a decade or more and I think that if you take it out over those time periods, almost everybody has had flat to negative transaction growth. It's sort of the grim reaper of competition. It's what happens with some trifocal force and basically I think the starting position is somewhere around negative two and many people with a lot of initiatives, if they're lucky can get to zero over the long-term. Having said that, for us, marketing is not a switch that we turn on and off. Marketing isn't simply advertising. It's a now five, six year effort of which we're simply in the half life of building marketing as a powerful function within Panera. And so when you think about it, our loyalty effort it isn't something we turned on and off, its something that we really took two years to get up, it's taken us a year to really move into a position where we have the 10 million people and we're beginning to really utilize the information and the data to begin to make a difference with customized tracks.
You think about the advertising effort, same thing. We've seen so many companies come, turn on the table or turn on the national advertising, and then three months later pull it. For us it's never been about that. It started with a very disciplined segmentation scheme, a very disciplined strategy. It started with stamping up and building the team. We've been involved in increasing weights and now, really bringing much more power to the message and I think that the way to think about all of these things is to know that we're very disciplined. We would do nothing that we aren't quite clear at least for itself and delivers a return on investment well in excess of what we're spending. I would also say that you want to think about all this in terms of a half decade long effort to continue to drive transaction growth for the long-term.
And Peter Saleh, Telsey Advisory Group will have the next question.
Peter Saleh - Telsey Advisory Group
Great. Thanks. Just wanted to ask if I heard you talk about the summer salad celebrations starting a little bit earlier, Bill maybe you could just tell us how much earlier that's going to start, is that going to run longer than traditionally and then can you just remind us last year I think it started a little bit later in the summer. Can you just remind us how that compares to last year that would be great?
Yeah, Peter, what as you know we divide up our calendar into five celebrations each year and what we get is we ended last year and went into this year, we really looked at how those celebrations aligned with consumers' behavior. We kind of had five celebrations and it seemed that we weren't starting the summer one soon enough to where people's mindset shifts and their activity shift et cetera. So the summer excuse me, summer celebration, tongue twist in there, is going to start a couple of weeks earlier this year than next, than last, where that's helpful, salads are very high margin item for us, so it does very well for us for the summer season it's very good. So that's helpful. It will go a little bit longer and what we've done is kind of we've broken the celebration in two pieces. So it will end about the same time as it did last year but it will start a little earlier and we're going to have two focuses during the course of the celebration. There'll be a different focus midway through to get a kind of new news or at least something for the consumers to pickup differently and excite them in a new way, midway through. So neck and neck it starts a little earlier, that's helpful to us primarily on a mixed basis, and so we feel now the important thing is we have our celebration calendar aligned to consumers' behavior more directly, so it will be a positive move for us this year.
And now Phillip Juhan with BMO Capital Markets has a question.
Phillip Juhan - BMO Capital Markets
Thanks guys. Given your underlying food inflation and pricing trends, it seems that you're experiencing less of a negative impact to cost of sales from other factors such as mix, fuel surcharges, credit card fees, etc. is that a fair characterization for (inaudible) and so is that a safe assumption going forward?
Yeah, well, let me give you the pieces of it again. What we've said is inflation is about 3.25% Q1 and for the full year we're saying around 2.5% and it moderates as we go down. The two big drivers though are wheat, as we mentioned, and again that was a $2.6 million hit to us in the first quarter. Half of that shows up on the FDF line item, FDF cost of sales to franchisees and the other half shows up in our retail P&L in our food cost. That’s the cost of wheat because of how we've lettered in is fairly well locked in -- well, is locked in for the year. And so, what we see Q2 to Q1 and then it starts to improve in Q3 and Q4 where we get to essentially flat year-over-year pricing. So, that's something that we expect to go down.
On gas, as you point out, let me just give some rough rules of thumb. For us every dime increase in the gallon of diesel costs us about $0.5 million all in, again split through the P&L to the FDF and the retail system. It seems -- now, we use the Department of Energy forecast. So, on year-over-year basis, in the first quarter we're up $0.33 or so in terms of the cost of diesel. So that hits us -- that was a $1.5 hit to us in the first quarter. That we think again which should stay fairly steady to moderating based on the best estimates that Department of Energy has right now. So, the good news is it doesn’t seem we're going to hit that $5 a gallon gas price that people have talked about and then its moderating in the high 3s, low 4s. So, that’s our forecast going forward. That’s all built in to those overall inflation though.
So what I would tell you is if you take out wheat, you take out diesel we have a fairly benign inflation impact this year on our other commodity cost and other cost of broad ingredients so that’s all factored in in terms where we are at.
Now with Buckingham Research we have Mitch Speiser.
Mitch Speiser - Buckingham Research
Great, thanks very much. And to just revisit loyalty and marketing, and just to put in perspective I know some of the pushbacks that I get is that you do have double the number of loyalty members year-over-year. You do have a 26% increase in media this year yet you are expecting traffic to be somewhat flattish. So my question is may be as we look to 2013, what would be a traffic driver because lot of us I guess some of the skeptics believes that with all this fire power to not drive better traffic and it is a potential concern, if you can maybe address that these issues are not perspective that would be helpful? Thank you.
Yeah. And I think the way to think of it is not that there is so much fire power that's been focused on a single goal which is driving traffic this particular quarter, but rather a relatively slow growth in these areas and which has been something we've done overtime. I think you can look at any number of competitors who have actually had much more dramatic step ups in their advertising or any number of things. And so, I think that the issue and the way I would answer that that you're hearing is first a recognition that the stocking place isn't zero but somewhere around negative two left to it's own devices. And if you're running 1%, your 2% comps and you deflate that you're getting down to sort of negative on transactions and negative two and I think that is probably a base case, if you do nothing. Then these efforts have enabled us to deliver overtime going backwards and we would hope going forward positive transaction growth. Obviously, we're working we would love to see more than that, but obviously we think it's silly to suggest to you that that's what you can expect this is what it takes to continue to compete.
Mitch Speiser - Buckingham Research
And I think you can expect to see us continue to do that as we go forward.
Right. And then just to add a little bit a couple other perspectives data thereon. When you think about it and we've tried to say this as you look at marketing for instance, we're still this year expecting to spend 1.5% of sales. When you look at it in the totality and as Ron said it's primarily brand driven, we're really trying to put that imprint in consumers minds about what Panera is and we're in the point of establishing our voice. So, I mean really we're putting as Ron said for the medium and long-term, so I would like you we would like you to hold it that way.
And then, if it relates to loyalty, as we said the value of this program really is the data that we get out of it, right. We now have the real purchasing data 10, more than 10 million customers and so our ability to read that data, understand their behavior and then start to influence their behavior, we think that's coming, we're just building it now and we think that we'll see the benefits of that later in the year and further out into '13, '14, and beyond. So these are initiatives that play out over long-terms. We really have seen the things that make a difference in Panera and really any company in this industry takes several years to play out and that's really where we're at and what we try to do is give you a clearer look inside our heads on where we're going so that you've some sense of how we think about it and how we're going forward with that.
And just to add to it, one of the questions you asked is what can you expect in future years. And I think we would say to you, you can expect more and better of what we're doing as we continue to get smarter out of it and get more skilled. In addition and it gets to some of what, what I spend my time on. One of the questions that I began asking two years ago when I had some free time was how would we compete with ourselves if we weren't Panera. And much of what we're playing with and thinking about is how we might evolve Panera, how we might continue to be a better competitor of alternatives in terms of moving forward.
So I think you can expect to see from Panera the very thing that you have seen now over several decades, which is continuing to stay in the leadership position relative to being a better competitive alternative and then utilizing the very strong skills we have built to be able to touch target customers in a way which we're able to both bring them in and get them to experience Panera and maybe more importantly build deeper relationships with those consumers.
Mitch Speiser - Buckingham Research
Operator, I think we have time for one more question.
And our question will come from Bart Glenn with D. A. Davidson.
Bart Glenn - D. A. Davidson
I was just curious do you provide any color in terms of which day parts may have been the strongest during the quarter? Thank you.
Yeah, what I would say Bart is well, one of the greatest things that we've experienced and now this goes back I mentioned since 2009, is it every single day part for us, every quarter since 2009, has grown both in terms of sales and gross profit. So I think that's a great thing and I think it's one of the great advantages of Panera's business model well we're breakfast, lunch, chilled, dinner, and catering. So we've multiple lines of business. That said, what I would tell you the quickest growing business over the last couple of years for us has been breakfast. Although again we've experienced growth in every one of the day part but breakfast driven by our strong, breakfast sandwich program has been a great and solid performer now for last several years. So, we feel good our product lineup candidly at every day part and the initiatives that we're doing to drive them off forward. So, we expect the success we've seen since the last several years in every day part to continue. Thank you.
Bart Glenn - D. A. Davidson
And with that we would, well, with that operator, I think that we would like to close up and obviously Michele and I are available for calls at any time as is Ron. So, we will go from there. So, thank you.
And with that, that will conclude today's conference. We do thank you for your participation.
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