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Panera Bread Company (NASDAQ:PNRA)

F1Q07 Earnings Call

February 13, 2008 8:30 am ET

Executives

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

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

Analysts

Joseph Buckley – Bear Stearns

Steven Rees – JP Morgan

Rachel Rothman – Merrill Lynch

Jason West – Deutsche Bank Securities

David Tarantino – Robert W. Baird & Co., Inc.

Christopher O’Cull – Suntrust Robinson Humphrey

Operator

Good day everyone and welcome to today’s Panera Bread Company’s year end 2007 earnings release conference call. Today’s call is being recorded. At this time I would like to turn the call over Chief Financial Officer, Mr. Jeff Kip. Please go ahead sir.

Jeffrey W. Kip

Good morning everybody welcome to our fourth quarter and fiscal 2007 earnings call and mini 2008 analyst meeting by way of conference call. We’ve got a lot to cover today so put your seat belts on we think it’s gonna be fun. Let me cover a few regulatory matters; I’d like to note that during our opening remarks and in our responses to your questions certain items may be discussed which are not based on historical facts. Any such items including targeted 2008 results should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially.

Ron’s going to begin our call with a few introductory remarks and then I’ll take you through the fourth quarter results and key metrics. Ron is then going to discuss the challenges that lay in front of us and our plans going forward to address these challenges. I’ll then conclude with our perspective on 2008 and longer term guidance, Ron will offer then a few final thoughts and then we’ll take your questions.

Ronald M. Shaich

Hello everyone and welcome to our quarter four earning conference call analyst call. Let’s begin right away and let’s get right to it. As you know, we’ve had a lot of moving pieces in our business and some of those pieces are things that dragged on our recent performance and some of these things that are positive leading indicators. We’ve been hit by an incredible cross current of commodities inflation and the looming potential of a recession. But let’s be frank, you hear that from everyone and this is the push and pull of life in our industry, thus it’s time to adjust. We have a very clear plan in place to face our challenges and to take advantages of our strengths. We will focus on improving margins, we will focus on holding or growing transactions and we will focus on improving returns and investing capital while continuing to focus on differentiating our concept for medium and long term positioning. We will also look carefully at the appropriate use of cash and debt.

Before I turn it over to Jeff who will guide you through the specifics of Q4, let me state what we all know; there’re a lot of pressure on our business, but there’s also real reasons to be optimistic. We were pleased yesterday to be able to report that we raised prices by 2.5% in Q4 with no transaction fall offs. We believe this augers well for our ability to have a significant positive impact on our business over the next 24 months. We can also see real traction taking hold with our strategic plan. After Jeff reviews quarter four, I would like to provide some perspectives on our initiatives. I will then ask Jeff to provide you with our targets for full year 2008, and our targets for each of the quarters within 2008 as well as the assumptions that underlies those targets. Jeff.

Jeff W. Kep

Alright with that let’s get into the fourth quarter and full year fiscal 2007 results. Consistent with the prior three quarters of fiscal 2007, these results are consolidated and includes the operations of Paradise Bakery & Café. Late last night, and our apologies to those of you who waited and waited for the release, we issued our fourth quarter earnings release for the 13 weeks ending December 25th. Let’s first review the metrics for the quarter. Our comparable bakery-cafe sales increased 2.6% at company-owned locations during the fourth quarter, of this 1.8% was price. Comps increased 1.2% at franchised operated locations and 1.7% overall system wide. We’re very pleased to show solid transaction growth while getting material price increase into our stores during the quarter.

Next, we opened 64 bakery-cafes in the fourth quarter, 39 of which were company-owned and 25 of which were franchised operated, and we closed 2 bakery-cafes in the quarter, both franchised operated. For the full year we opened 169 Bakery Cafés, 89 were company-owned and 80 of which were franchise operated. Average weekly sales for the units opened in fiscal 2007 were $35,092 system wide during the fourth quarter. For fiscal year 2007 in total, average weekly sales for the units were $34,967 system wide. We are again pleased with new unit AWS in the fourth quarter, as the stores opened in that quarter outperformed the stores opened earlier in the year. In total system wide average weekly sales were $39,914 in the fourth quarter, and $38,668 for fiscal 2007 for all the stores in the system.

Moving on to the P&L, our net income for the fourth quarter was $17.8 million, $18.9 million net of two non-recurring charges, and EPS was $0.56 of diluted share, $0.59 net of two non-recurring charges versus net income of $18.9 million and EPS of $0.59 per diluted share in the fourth quarter of the prior year. The two non-recurring charges I just referred to were about a $0.015 per diluted share impact from the write off of Crispani inventory related to purchasing commitments in place when the definite decision was made to shut that product down. An additional $0.02 per diluted share for a write down of cash held in the Columbia Strategic Cash Portfolio, which I will discuss in greater length later. The results are also net of about $0.03 per diluted share impact from unfavorable FIN 48 adjustment to our tax liabilities, related primarily to the state tax law changes. In total these unanticipated events negatively impacted fourth quarter results by $0.06.

Now I’d like move on to the key line items for the fourth quarter versus comparable period a year ago. Starting with total revenue, fourth quarter revenues increased 29% to $328 million in 2007 versus $232.9 million dollars in the comparable period of 2006. The breakdown is as follows: net bakery-cafe sales increased 36%, $255.9 million in 2007 from $188.8 million in 2006, primarily from sales from units opened in the last four quarters and in part by acquisitions over the same period, and increases in comparable bakery-cafe sales. Franchise royalties and fees increased 6% to $17.6 million in the fourth quarter of 2007 from the same quarter in the prior year driven by new franchise operated bakery-cafes opened in the trailing four quarters, partially tempered by the impact of the acquisition of franchise operated bakery-cafes by the company.

Fresh dough sales to franchisees remained fairly flat at $27.3 million in 2007 compared to $27.5 million in 2006. Those sales to franchisees have not grown on pace with franchisee operated sales because of a shift in bakery-cafe menu mix away from bread and bagels we self manufactured in our fresh dough facilities. As a result of the differential growth rates, we continue to experience a shift in total revenue mix as bakery-cafe sales as a percent of total revenues increased to 85.1% in the fourth quarter of 2007 compared to 81.1% in 2006. While over the same periods franchise royalties and fees declined 5.9% from 7.1% and fresh dough sales to franchisees declined to 9.1% from 11.8%. The shift in the mix of revenues has also resulted in the increased number of new company-owned bakery-cafes as a percentage of all new bakery-cafes opened, and the franchise operated bakery-cafes to companies acquired in the last four quarters.

Moving on to margin analysis, restaurant margins in total were lower by approximately 260 basis points in the fourth quarter of 2007 versus the same quarter in 2006. Let’s go through this bakery-cafe expense by component now. First, cost of food and paper products price increased by 100 basis points year-over-year. The fourth quarter margin average was a result of high ingredient cost pressures versus the prior year including wheat and coupled with lower sales of items we self manufactured in our fresh dough facilities. We are however, really happy with the sequential improvement we experienced in this line item from 200 basis points year-over-year of degradation in quarter two and quarter three down to 100 basis points year-over-year in quarter four driven by most importantly our fourth quarter pricing and category management initiatives.

Labor as a percent of restaurant sales rose 120 basis points in the fourth quarter versus the comparable period in the prior year. Approximately half of this increase is a result of the year-over-year addition of the expeditor position at lunch to drive ease of use for our customers. Our key operating metrics in our transactions have continued to perform well since the addition of this role, we’re pleased with the investment. The other half is driven by normal wage increases outpacing our existing price increases as well as inefficiencies experienced with the 50% increase in new openings, company owned bakery-cafes in the quarter compared to the prior year. Occupancy cost in the fourth quarter increased 50 basis points versus the prior year to 7.8% of restaurant sales based upon somewhat higher average per square foot cost in immature stores, outpacing the growth in sales during the fourth quarter of 2007 as compared to 2006. Other operating expenses in the fourth quarter of the current and prior year remained fairly consistent at 13.1% and 13.3% of restaurant sales respectively.

Moving on from restaurant margins, fresh dough cost of sales to franchisees as a percent of fresh dough sales to franchisees increased 160 basis points over the prior year. This deleverage resulted from higher input and distribution costs versus the prior year. Depreciation cost in the fourth quarter remains consistent at 5.2% of total revenues in both the fourth quarters of 2007 and 2006. General and administrative expense as a percent of total revenues improved 70 basis points given leverage from sales growth and a minimal bonus payout as compared to the prior year given company performance versus its plan. In addition, there were 25% basis points of Crispani write off included in G&A in the fourth quarter of 2007, as previously noted. Pre-opening expenses in both the fourth quarters of 2007 and 2006 remain consistent at 1.2% and 1% of total revenue respectively.

Now let’s turn our attention to other income and expense which increased to $1.1 million of expense or .4% of total revenue in the fourth quarter of 2007 compared to $0.6 million of expense for .3% of total revenue in the same period 2006. Included in the 2007 results is the $1 million write down of the Columbia Strategic Cash Portfolio which I will now elaborate on after touching base generally on the balance sheet. At year end, prior to completion of our share repurchase program, we had $72.2 million in cash, $23.2 million of investments in the Columbia Strategic Cash Portfolio, and a net asset value of $0.96 on the dollar, and $75 million of debt. This compares to $52.1 million in cash $20 million in investments and zero debt at the end of the comparable period 2006. As background , since 2004 Panera has held an operating level of cash approximately $10 to 15 million in a cash reserves fund, a traditional money market fund through Bank of American, our primary cash management relationship, and held amounts above that in the Columbia Strategic Cash Portfolio in enhanced money market fund, also through Bank of America. This operational process was set up previously consistent with our policies and approval processes.

In late November 2007 we became concerned about the Columbia Portfolio when we had approximately $26.5 million in the fund. At that time we asked to remove the funds but were not allowed to do so. Shortly, Bank of American and Columbia announced that the fund was frozen. Since then we’ve received approximately $8.2 million in distributions from that fund, approximately $0.987 on the dollar. As of yesterday we had approximately $18.2 million in the Columbia Strategic Cash Portfolio and approximately $25 million in our traditional money market fund. As noted previously, Panera valued its investment in the Columbia Strategic Cash Portfolio at December 25, 2007 at $0.96 on the dollar. This valuation was based upon: one, direct market quotes; two, valuations from Interactive Data Corporation (IDC); and three, current rating agency ratings along with four, an assumptions that all securities in the fund with lower than an A rating from either agency representing approximately 6% of the fund at year end returned only an average of $0.40 on the dollar. We’ve reviewed the data extensively with our external auditors whose national office have reviewed the value of the assets independently and other outside valuation experts and overall feel very comfortable with the current valuation.

Relating to our credit facility and our share repurchase activity, on November 28, 2007 we announced that our board had approved a $75 million share repurchase program and we had entered into a price cap accelerated share repurchase program to repurchase up to that amount. On that day the stock traded over the ASR hedge levels and stayed above those levels for the next two weeks for the entire hedge period so no shares were repurchased pursuant to the ASR. However, we’d also set up a 10B51 program following on to the ASR to potentially repurchase any dollar amount of shares not covered by the ASR. As it happened, we repurchased $27.1 million of shares at a weighted average price of $36.02 by December 25, 2007 and completed the entire repurchase by January 15, 2008. Taking in a total of approximately 2.2 million shares or $75 million at an average price of $34.62 per share, a price we were very pleased with.

In terms of taxes, the effective tax rate for the quarter was 40.2% about 3% higher than we’d anticipated. Included in this rate is $.9 million or 3% of the rate impact from FIN 48 related adjustments related primarily to state tax law changes. We currently expect the 2008 tax rate to be approximately 37.5% running slightly lower at times and marginally higher at other times. In the quarter the company generated $67 million of cash from operations and employee stock option exercises and had capital expenditures of about $38 million. For the full year the company generated $161 million of cash from operations and employee stock option exercises and had capital expenditures of about $124 million, excluding acquisitions. In addition, there were approximately 32.1 million fully diluted shares outstanding on December 25, 2007. Including the impact of 2.1 million in stock options outstanding with an average exercised price of $39.05.

So to sum, we’re very pleased with the quarter where we took price, continued strong transaction growth, improved our cost of sales margins sequentially by driving price and mix, saw AWS where our new units outperformed other stores opened earlier in the year, earned $0.56 per share, $0.59 excluding non-recurring charges with $0.03 of FIN 48 related tax adjustments versus $0.59 for the prior year. And, we were able to complete a substantial share repurchase of $75 million at a very attractive share price. Now I’d like to hand it back to Ron to review our strategic initiatives going forward.

Ronald M. Shaich

To be honest, over the past few months many people have asked me, how should they hold 2007? As we’ve indicated, we’re facing some strong headwinds, but we’re also seeing signs of our continued fundamental strengths. So the question now becomes how do we react to this situation? Can we impact the situation or are we simply at the effect of things beyond our control? And what do we do next? And how do we do it in such a way that we regain your confidence? As I said before, nothing changes for us in the medium term. We have to create value with the capital you entrust to us, we have to continue to give people a reason to walk across the street to visit us, and we have to differentiate. At the same time our emphasis needs to be on rebuilding short term credibility, this means margins. This means holding or improving transactions, and this means changing the trajectory on return on invested incremental capital.

Thus, we have in motion a three prong plan of action to strengthen our business over the next 24 months. It’s based obviously on improving margins while holding or growing transactions and changing the trajectory on return invested capital. We will discuss each, but let’s start by discussing margins. Know that we are intently focused on our margins and focus has historically brought us results. We fully expect to materially improve our margins over the next two years through a number of tactics. First, we are announcing today that Crispani is being removed from the Panera system. On our last conference call we made a commitment that 2008 profit would not be hurt by continued losses from the Crispani initiative. As we’ve indicated to you in the past we put intense focus into a number of tests to strengthen Crispani sales and to take advantage of the fixed labor cost that Crispani required. Ultimately, after we reviewed those tests, we concluded that we don’t presently have the confidence that Crispani will be profit neutral in 2008. Thus, we made the decision to pull Crispani from all company stores with the exception of some run out cafes in January. Pulling Crispani did require a modest write off for inventory in period 12 and it does negatively impact transactions by about 1% but also yields about 80 basis points of labor improvement. This is certainly a tradeoff we want to take, and we know it will move us clearly in the direction of materially improving our margins.

Before I move onto other tactics in our margin plan, I would like to share one final comment on Crispani. As with everything, we took great learning from the failure of this program. We know that despite a great product, we simply did not have the marketing muscle or the staying power to engage the customer such that they saw Panera as a place for pizza. As a result, Crispani sales never grew as had so many previous products Panera has rolled out, and though Crispani failed, I’m glad we tried it. We will certainly not finish our engagement with evening, it remains an opportunity for another day. In fact, I would argue that the greatest cost of Crispani would be, if in future years we no longer had the courage to dream big and to take the risk to leverage our business platforms. Secondly, we expect our category management function to continue to help us move the needle on margins. Category management has been focused on effectively using price, on effectively using our menu, and effectively using our associates to increase penny profit per transaction.

Let’s start by discussing our efforts relative to price. As you know in mid November we executed a 2.5% price increase. We’re pleased to say that price increase performed exactly as it did in test. More importantly it took hold without any palpable transaction loss, in our opinion this speaks to the power of our concept and our pricing power. In addition, the structure of that November price increase positively impacted penny profit per transactions. At the end of 2007 we also executed a 5% increase in our dough prices. Based on the success with the Q4 price increase we began in mid January a test in 20 cafes to prepare for another price increase we hope to take in company cafes on or about April 1st. This test includes a 6.2% increase on FDF produced dough products and about 2.6% increase on all other items. To date the data from the test has been positive, but it’s too early to share the definitive results. What we can tell you is that we fully expect to execute this April increase.

Given our expected success with the April price increase, we have begun planning for another increase in late May. This price increase would separate our bagels into cafe and specialty bagels, and allow us to up charge customers $0.20 for a specialty bagel, like our cinnamon crunch and our Asiago cheese, these are certainly well below the existing market prices. We would expect this price increase to raise retail prices an additional third of a point, but more directly it will impact dough prices as specialty bagels are a large part of what we produce in our fresh dough facilities. Finally, in early September we are looking to take an additional 1.5 to 2% increase. Though I don’t want to go into details on this increase now, our category management team believes there are several ways we can take that increase without diminishing our value perception, but will save that to a discussion for another day. Obviously there’s a lot of pricing activity occurring at the retail level. Essentially we go into 2008 with roughly 3% of price and expect to increase that to a run rate of approximately 5%, say 5.5% year-over-year price increases beginning in the in quarter two. These are not insignificant increases, but in the context of what is going on with wheat and given the pricing power our research indicates we have, we believe it is both necessary and we believe it is doable. Also know that our commitment is always to the medium term health of the business and that everything we do with pricing will be thoroughly tested so we are confident our actions don’t create more problems than solutions.

One other note, category management has been focused on using our menu to change customer behavior and to drive sales of our highest profited items. A measure of how successful category management has been to Panera, is that you pick two sales which are among our most profitable items are up 10% year-over-year. Having spoken to the success of category management and our 2008 pricing initiatives, I need to comment on one very significant challenge affecting our margins, wheat. Jeff will review with you specifically the dough price increases that we will execute in 2008, when he reviews the individual quarters of 2008 but I would like to make one comment relative to dough pricing at this time. Some have asked us why we simply cannot take price immediately to reflect escalating wheat contracts. The reason is that by contract and custom we offer our franchisees 45 days notice of a price increase as well as the time needed to reset their menu boards consistent with those increases. With that said there are a number of other tactics being utilized to improve margins and the profitability of our FDF system. We’re looking at a number of process and cost saving changes in the FDF system and beginning in April we will begin testing a redefined bread program. To that end we’re looking at the sizes, the shapes, the crust and the variety of our breads and we’ll make adjustments accordingly. We’re also revising our merchandising and engaging our people in more aggressively selling bread. Let me also note that we are looking at several other ways to improve margins. We have an individual focus on reducing the growth of cafe controllables and another individual focused on reducing the growth of corporate G&A and one of our best operators is focused on the management of costs in new cafes. So there you have our margin improving initiatives.

I ‘d like to move on to discussion our actions relative to transaction growth but before I do let me make two comments, we know that as we grow transactions margins improve naturally. On the flip side we will not be successful in improving margins if transactions fall out of bed. This is a particular concern when you consider an America preoccupied by recessionary fears thus, we’re keenly focused on tactics that will successfully impact transaction growth. First, let me say that despite the economy and our price increases we’re pleased our transactions have held up. Panera has never experienced transaction fall off in difficult economic times with the possible exception of last year’s run up in gas prices. In fact, I’m pleased to be able to share with you the news that through the first six weeks of quarter one and despite the difficult weather in the mid-west company comps are running 2.8% and franchise comps are running around1.2%. Obviously we’re pleased to be able to avoid the transaction fall off so many others in food and retail are experiencing.

Before you ask me, let me share with you this news, we have seen transaction fall off in just a few regions of the country. The expected regions include Arizona, Southern California, Florida and Michigan. But this transaction degradation in those markets has been offset by greater strength in other existing and new markets. The key for us to long term transaction growth is concept differentiation and this remains our goal. Despite the margin pressures we feel, all of us at Panera are committed to increasing our differentiation at a time when all in our industry are under pressure. This is what our circle of warmth initiatives are all about. It includes increasing lust through product development and concept evolution. It also includes building trust by communicating Panera’s genuine points of difference and it includes strengthening relationships with guests through our associates and improved ease of use for our customers.

Beyond the projects that root our longer term objectives for differentiation I know many of you are interested in understanding what we’re doing to build transactions right now in a difficult year like 2008. First, we expect to see our new breakfast sandwich program have a real impact on transactions in 2008. This project is differentiated, it reinforces our concept and it drives incremental sales on beverages in our cafes. As Starbucks pulls their breakfast sandwiches we will be placing ours in 90% of our system by April 1st. Why? Because we believe these sandwiches belong in Panera. We believe they’re worthy of our baker’s time. We crack fresh eggs in the cafe and we add other complimentary high quality ingredients like Vermont White Cheddar cheese, all natural sausage and apple wood smoked bacon. We then serve our breakfast sandwiches on freshly baked Panera Ciabatta bread and we do all this without any incremental fixed labor. Our year and a half long testing of breakfast sandwiches has shown us that customers love our product. I strongly encourage you to taste it. It’s presently in over 150 of our cafes and people are voting at the registers with meaningful sales increases most of which are incremental. We are confident this trend will continue following our system wide roll out at the end of quarter one.

Second, we are expanding our media trials. We’ve been working in this initiative for over three years. Remember we are a $2.5 billion brand yet we are among the least advertising intensive of any of the top 20 concepts in the country. As fiscally responsible people we believe advertising must deliver an appropriate return within 12 months. As a result we spend a great deal of time researching and testing our media initiatives. As you remember 2006 was the year we spent considerable money and energy on research. In 2007 we brought radio and out of house media trials to five markets including St. Louis, Denver, Chicago, Greenville, South Carolina and Jackson, Florida. On average we are on target to deliver in excess of a 100% pay back within 12 months in those markets. More importantly the media appears to be driving a lasting sales lift. In fact we’re still seeing the impact of the advertising on comps in those markets. So in May 2008 you will see us implement our media program, predominantly radio and billboards in 60% of our market. Please note we expect a neutral deposit of economic impact from this initiative in fiscal 2008.

Third, our food development team is working to strengthen both the transaction building and penny profit building impact of our upcoming celebration. Together with our category management team the food development team is increasingly focused on doing fewer products that are more differentiated in the market place. They’re also keenly focused on simplifying procedures for operators. Expect to see several new soups, several new salads and several new sandwiches as well as product upgrades in 2008.

Fourth, as always we’re focused on quality of operations to build transactions. Operations is not sexy but it is what matters. Our operators continue to focus on speed, to focus on accuracy and to focus on improved customer experience. We evaluate our performance monthly to understand our success in improving our speed accuracy and customer service. All three metrics have improved this year. We believe this translates into transaction growth in the future and we know it is a key to differentiation. So there you have our transaction building initiatives breakfast sandwiches, our media trials, our food and concept initiatives and continued high quality operations.

Let’s now turn our discussion to return on incremental invested capital. Simply put we’ve gone from good to great on a return on invested capital. The challenge for us is that the trajectory is headed the wrong way. Our goal now becomes changing the direction of our ROIC. To do that we must understand what is creating the falling ROIC. Margins of all our cafes are down so new cafes which deliver their projected sales hurdles are under delivering on their returns. In addition, the increase proportion of new cafes as a percent of our mix of cafes has also reduced return on invested capital. So what do we do now? We begin by raising our sales hurdles for new cafes to adjust to the existing margin reality. This means tightening up our real estate decision making process. Using our modeling all stores are rated on a scale of one to five. A one or two means we believe we have a better than average or very high probability of hitting our new ROIC goals. A three means that on average we have a 50/50 probability of hitting our new ROIC goals. Based on that analysis we’ve determined that we will only build stores that are rated one, two or three and can deliver a 70% or greater probability against our revised ROIC goals.

Further, what this means is that we no longer have the patience to take on Greenfield Cafes that we might have in the past and that we know will take 24 to 36 months to reach mature volumes and therefore mature returns. As a result of this elevation in real estate hurl standards we are cutting our 2008 unit growth to 40 company cafes and 60 franchise cafes and we are cutting our 2009 unit growth to 40 to 50 company cafes and 60 to 70 franchise cafes. Further, it is now our expectation that the AWS in new cafes will improve in the latter half of 2008 and into 2009. Implicitly this means that you should reset your expectations on our future unit growth at 8% to 10% per year. However if and when margins improve and the trajectory of our ROIC improves you can also expect we will once again consider expanding development as appropriate. This concludes my comments on our strategic plan. Jeff will now take you through the implications of these initiatives on our full year 2008 target on each of the quarters of the year.

Jeffrey W. Kip

Just a brief correction Ron, I think you when you said we’ve gone from good to great on our ROIC, I think you meant to say we’ve gone from great to merely good. Right?

Ronald M. Shaich

Well you’re the CFO Jeff. Thank you.

Jeffrey W. Kip

I just wanted to make sure the transcript had it correctly and I didn’t get any phone calls later on that one. So anyway, thanks a lot. No, I’m going to follow on Ron’s review of our business and POI and I’d like to lay out for you our financial outlook and targets. Starting with the key assumptions underlying our 2008 targets for the full year and for each quarter and then I’d like to provide some perspective on 2009 margin expectations and uses of our capital.

Let’s begin with our targeted 2008 financial performance. For fiscal 2008 we expect earnings growth of 12 to 18% over the $1.79 we enter in 2007, to $2.00 to $2.11 per diluted share for the year 2008. Now let’s look at the key assumptions for 2008. Let’s begin with sales. We’re assuming 2008 overall comps of 2.5 to 3.5%. We also assume, as Ron mentioned, weighted average of approximately 5% price increase for the full year 2008. We think that given our projected price increases and consumer sentiment that conservatively targeting negative transaction growth of 1.5 to 2.5% is appropriate. But as Ron mentioned, it’s certainly not what we’re shooting for.

Let’s now discuss the margins for 2008 and the most important element of that which is wheat. As Ron’s already mentioned the historic rise of the wheat markets has provided a serious headwind for us on margins. I say it’s been a headwind in 2007 actually for 2008 it’s become a bit of a category five hurricane. As Ron noted we’re now fully covered in 2008 for essentially all our wheat needs at an all in cost of $14.00 a bushel. That’s about 75% wheat future costs and 25% basis costs and it’s $3.00 under the current market, versus a total all in cost of $5.80 in 2007 for each bushel. Just to make the point, given that $1.00 at year-over-year wheat costs per bushel is worth $3.25 million of expense to Panera in 2008, we could sell our position that we have in wheat futures in basis today for a $10 million profit. More concretely the $8.20 increase per bushel that we’re seeing from 2007 to 2008 is going to drive a total of approximately $27 million in expense year-over-year to Panera. We’re going to absorb a little over 40% of this cost or $12 million in our retail cost of sales. Dough price increases to our franchisees of about 16% would be required to neutralize the 2008 inflation in the cost of wheat or the $15 million of incremental costs of our sales on our sales to franchises that will hit our FDFs.

Please note that we executed our 5% increase on our dough prices at the beginning of the fiscal year. We expect to take another increase of approximately 6.8% in April and then approximately 4% mid-year. Taken together for the entire year these dough price increases represent an average 11% increase. We’ll absorb the difference between the 16% needed and the 11% taken worth approximately $5 million in expense to our FDF, all in the first half of the year. With our price increases we’re going to be neutral to wheat cost increases overall in our sales to franchisees for the second half of the year.

The total hit to the P&L from wheat in 2008 versus 2007 will thus be approximately $17 million or $0.34 a share. At the operating margin line we think wheat cost increases net of go price increases will be about 130 basis points of total unfavorability in 2008 as the wheat hits us in retail costs of sales and it also hits our FDFs. As an offset in the retail costs of sales line however, we do expect to see favorability of perhaps 50 to 80 basis points driven by our 5% retail price increase and our category management initiatives.

Our next margin improvement tactic removal of Crispani will eliminate approximately $400 worth of labor costs per cafe per week or approximately 100 basis points of labor margin on a run rate basis. We’ll only enjoy the full benefit of the removal for 50 to 60% of the first quarter and then the remaining three quarters, but our labor line should pick up overall on a weighted average for the year the full 80 basis points year-over-year that Ron referenced. This is going to be offset by about 25 basis points of incremental expense at the expeditor appears in the first two quarters of this year versus not being present in the first two quarters of last year for a net pick-up of about 50 basis points overall in the labor line, give or take.

Overall for 2008 we expect both restaurant and operating margins to be flattish to somewhat down for the year, better at the higher end of our EPS range and lower at the lower end. But improving more year-over-year as 2008 progresses as we implement further retail and dough price increases. There’s a few other times that I want to touch base on that’ll impact margins in 2008 versus the prior year. First, the implementation of the media program Ron described earlier will cost all in 30 to 50 basis points at the operating margin line. Secondly we’re going to pick up approximately 50 to 70 basis points in leverage on G&A and lower pre-operating costs below the restaurant margin line. Finally, the optics of mix shift between franchise and company stores in the first half of the year will deleverage the operating margin overall for the year by approximately 40 to 50 basis points reflecting the annulization of the acquisition of 32 franchise operated bakery-cafes by the company in the middle of fiscal 2007.

We say this is optics because the result of purchasing these franchise stores at five times or so EBITDA after royalty and overhead which provides an excellent return on our capital but it shifts P&L margin because royalties are 100% income. So it’s a great use of our capital but it makes our operating margins look worse. Again, overall margins will be flat to somewhat down year-over-year in 2008. Down in the first quarter, down modestly in the second, up modestly in the third and up approximately 150 to 200 basis points in the fourth quarter leading into 2009, and these guidance’s we’re giving are really tied to kind of the middle of our EPS range.

Let me give you two other 2008 targets. First, as I previously mentioned we expect our tax rate for 2008 and going forward to approximate 37.5% give or take a few tenths quarter-to-quarter. Second, for 2008 we’re targeting capital expenditures of approximately $100 million. $50 million of this is for new units, $15 million is for 2007 new unit carry over, i.e. capital that will send cash out for stores that were built late in 2007. The next $20 million is for bakery-cafe maintenance and remodels, $5 million is FDF capital and there’s $10 million of infrastructure and G&A capital. So if you actually remove the 2007 stores it’s a total of $85 million of capital, down from about $124 million the prior year. Approximately 18% of this capital is pure maintenance and is assumed as part of our free cash flow business model. 88% of the remainder is ROI capital and new store capital with a minimum long term free cash flow return of 15% or more, 12% is non-return infra-structure and corporate capital. I’ll talk more about this when I hit ROIC later.

Let me now go into the quarterization of the earnings. Our earnings for 2008 quite frankly will be back end loaded. Let me walk you through the EPS targets for the quarters first to illustrate. For the first quarter were currently targeting earnings of $0.36 to $0.42 per share, down 10% to 20% from the prior year. For the second $0.37 to $0.43 per share, down 5% to up 10% from the prior year, and for the third and fourth quarters together $1.22 to $1.32 per share up 31% to 42% over the prior year. Just a note, by the way, the low ends of our quarterly ranges do not add up to the low end of our years range, we’re conscience of that, nor do the high ends add, our view is that programs and expenses can shift between the quarters and will land within both our quarterly and our full year ranges. We’ve not attempted to tie them perfectly.

So why is EPS down versus the prior year in Q1, flat to up slightly in Q2 and then up significantly in quarters three and four? The answer is in the timing of the retail and dough price increases throughout the year versus wheat cost increases by quarter. Let’s walk through the assumptions for each quarter. Key assumptions for the first quarter are, retail comp store sales of 2.5 to 3% based on price of approximately 3% and flat to modestly negative transactions. All in cost of wheat $13.00 per bushel versus $5.80 in the prior year, implying a breakeven dough price increase of 14% with an actual dough price increase of 5%. Which in turn, means that we will have an approximately $5 million unfavorable impact on the quarters P&L overall. Finally, the removal of Crispani approximately one period into the quarter will benefit labor margins 60 basis points or so, but will be offset by the addition of the expeditor and new opening in efficiencies for a net flattish impact year-over-year.

Moving on to key assumptions for the second quarter. We assume retail comp store sales of 2.5 to 4.5% based on an average price increase as Ron referenced earlier of 5.5% and conservatively targeted transaction comps of -1 to -3%. All in cost of wheat at $17.25 per bushel versus $5.80 in the prior year, implying a dough price increase to breakeven of 22%. The costs in this quarter are higher than in other quarters because the basis component of the all in wheat costs spiked during the second quarter period. Our actual weighted average dough price increase will be 13% in the quarter so the total wheat impact will be $6.5 million to P&L within the quarter. Finally, we will see about 50 basis points of improvement in labor margins based on the 400 basis point pick up from Crispani removal less the 50 basis points of unfavorability from the expeditor year-over-year. Lastly, the key assumptions for the third and fourth quarters together. We can expect retail comps of 2.5 to 4.5% based on the same 5.5% price and conservative transaction assumptions in the second quarter. All in cost of wheat at $13.00 per bushel versus $5.80 in the prior year, with dough prices, as Ron noted earlier raised to breakeven, so the wheat impact will only hit retail cost of sales for approximately $2.25 million per quarter and Crispani removal should yield the full 100 basis point improvement in labor margin year-over-year, in the back half of the year.

So let’s come back to what you might call the EPS hockey stick we noted earlier. A different way to look at the year would be to normalize for a couple of key assumptions.

Retail price and net wheat impact are the two big ones. Normalizing retail price would bring the first quarter to 5.5% of price notionally from 3% an increased to 2.5% or approximately $6.5 million dollars of earnings worth $0.13 based on Q1 sales. Adding back net wheat impact would notionally hypothetically, add $5 million dollars or $0.10 to the first quarter, $ 6.5 million or $0.13 to the second quarter and $4.5 million or $0.09 total in quarters three and four. If you hypothetically adjusted these assumptions, growth rates at the middle of the range would again hypothetically move from -15%, 3% and 37% under the guidance we have given you today for these three periods, to approximately, and again hypothetically, 35%, 36% and 46% would lead to assumptions normalized. Not such a hockey stick. So keep also in mind, that we have taken a very conservative approach to transaction growth in quarters two through four, -1% to -3% to adjust for potential negative consumer impact from our price increases, the largest being at the beginning of the second quarter.

Getting back to margins, as I mentioned above, we are also expecting operating margins year over year to move like EPS growth. Driven by the same assumptions for retail price and net impact, starting down year-over-year but with Q4 reaching 150 to 200 basis points of year-over-year favorability in the operating margin. Heading into 2009 based on what we’ll accomplish with our initiatives in 2008 we’re targeting 150 to 200 basis points from improvement versus the 2007 to 2008 level because we’ll carry the improvement realized in the fourth quarter through 2009 and have the opportunity potentially for more improvement in the year. We based the 2009, 150 to 200 basis point improvement target over the 2007 2008 level, again remember these are going to be approximately equivalent operating margins on the following assumptions about 2009: flat transactions, price taken to offset cost, wheat stable with our fourth quarter cost neutral position, modest leverage below restaurant margin, new units of 40 to 50 company and 60 to 70 franchise and no material shift in the company franchise unit mix.

I’d like to wrap up by talking about ROIC and uses of capital. First in 2008 we’re targeting approximately 40 new company units and 60 new franchise operated units. Probably 10 of each in the first quarter and the rest slightly back end loaded throughout the year and for 2009 we currently project about 40 to 50 company-owned units and 60 to 70 franchise operated units. As Ron mentioned these lower unit growth rates are the result of a disciplined review process with higher sales hurdles for new stores in order to drive incremental ROIC. In 2008 we’re also targeting improved new unit AWS of 36 to 38 k per week levels at which out stores will deliver our 15% plus long term cash flow returns on capital. Overall, for the year at the middle of our EPS range we expect our ROIC to be stable but show strong incremental improvement throughout the year as we drive our initiatives and as a result improvement in our restaurant and operating margins. In truth, today the most powerful thing we could for ROIC is to improve our margins.

The discussion of ROIC brings me to a discussion on the uses of capital. As Ron stated, our firm commitment is to spend our shareholders capital only on high return uses. 15% plus long term cash flow returns on ROI projects, or we’ll return our cash to our shareholders as we did in December and January through a buy back or potentially even through dividends. We still believe that the best use of our capital is a new store which meets or beats its hurdles providing that great long term return. Our new unit reduction is not because we don’t believe that any more, rather it’s because with our margins down there’s fewer stores that can meet the hurdle and we’re asking our development teams and operator stores Ron noted, 70% plus confidence that the new unit will meet or beat the hurtle before we agree to spend the capital. Further, we limit non-return capital to a maximum of 15% of our total capital insuring a baseline minimum total return of 13% plus in any given year. By following this process we’ll drive ROIC and put our shareholders capital to its best use.

In terms of other uses of capital although our bias is modestly towards reducing our company’s percentage of units, we’ll also continue to execute occasionally and strategically on franchise or strategic acquisitions which deliver superior long term cash flow returns, again 15% plus. Further, every quarter our board of directors discusses uses of capital and the potential return of cash to shareholders either from free cash or from modest debt capacity as we showed with our recent buyback. We’ll buy back shares at prices the board deems appropriate and provide it to provide superior long term returns rather than simply near term accretion. Frankly, we’ve seen many of our peers over the last couple of year execute significant buybacks with modest near term accretion only to see their share prices fall 50% or more; not a strategy we want to follow. Our board will also consider a dividend if the stock price is at a price they don’t think appropriate for repurchase and excess cash is available. We will be reviewing our capital structure and uses of capital as we do every quarter in the immediate term at our next board meeting. We’ll review this topic with our investors at our annual meeting in May. Now, let me turn it back to Ron for a few concluding comments.

Ronald M. Shaich

Thanks Jeff, just a minute or two and we’ll get to your questions. Before we open this call up for those questions, I’d like to make several closing operations. Panera, is an extraordinary concept. In fact, just yesterday [Sanloom] & Associates released their 2007 survey which ranked 138 food service concepts. Their survey is considered the definitive measure of customer satisfaction and concept acceptance in our industry. 84,000 customers in 70 major markets across the United States were polled. I’d like to note that Panera ranked number two among all 138 concepts. In fact, 57% of our customers polled ranked us excellent on their last visit. That’s essentially three out of five ranking us excellent on their last visit. Though, we all know customer satisfaction as indicated on the [Sanloom] survey is a key indicator of our future success and our ability for expanded earnings, we also know it is not enough. 2008 is a year of critical importance to Panera. The industry is under intense pressure and Panera certainly feels it. We know our ability to execute our plans for margin improvement, our plans for transaction growth and our plans for improved ROIC, even in the face of extraordinary inflation in wheat is key to our continued creditability and creditability is the fuel that allows us to make the medium term commitments that is necessary to finish one or two on the [Sanloom] Survey in future years.

We release that the first few quarters of 2008 are going to be difficult but we continue to be optimistic about the year as a whole. Overall, we’re feeling challenges but challenges have always brought out the best in us. We’ve been here before and we’ll be here again in the future. Having said that, we all are aware the only thing that really matters is whether we deliver the goods and we intend to do just that. We understand that we’ve been on for essentially an hour, we’d now like to open it up to your questions. We will stay on for a full 30 minutes for questions as a courtesy to you. We would ask that you ask one question at a time and we’ll do our best to enforce that, that way we have time for everyone and then we’ll be prepared to go around for another round up until 10 o’clock. Operator, we’re open to questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from [Jeffrey Bernstein].

[Jeffrey Bernstein]

Just a pick picture question in terms of obviously the pricing that you’re taking. It sounds that contractually you’re allowed to push 11% increase on the dough to franchisees but it sounds like presumably you will need more than that. I’m just wondering if you can talk about one, obviously the health of the franchise system but the flow process [inaudible] franchisees might revert to promoting non-bakery or outsource product that will again hurt margins? And then, whether or not you think the company-owned stores will only end up taking 5% pricing or might it flow much through the incremental dough price hit on to their customers.

Ronald M. Shaich

Let me say it this way, I think we all understand we’re in a rapidly inflationary time. The issue for us is not passing on all of the costs, the issue is the timing on the passing on of all the costs. Simply put, given our contractual needs to provide 45 days written notice to our franchisees to allow them to determine their prices and then adequate time to physically execute menu prices changes. It’s not a question of how much, it’s a question of the timing and operating in a way of integrity with them. Relative to the dough prices, here’s a simple way to think of it. As we calculated, and I think our franchisees will operate exactly as the company does, we need about eight tenths of a percent roughly, maybe a percent, but about eight tenths of a percent to 1 % across the total retail mix, we need about 1% of price to cover the wheat costs. The remaining four percent of projected price for 2008 is real increases against inflation that is equal to or less than on non-dough products. I don’t think that 1% one way or another is going to materially in any kind of medium turn affect anybody’s actions and I think that given the core of Panera is its bread, the core of what has made this one of the most successful concepts in our industry and certainly one of the most successful stocks over the last decade has been our bread integrity. We all remain committed to that despite this unbelievable environment in which we operate.

Operator

We will now go to our next question from Joe Buckley.

Joseph Buckley – Bear Stearns

With respect to [inaudible] as you narrow down the tax of the [inaudible] open, can you just go through the way the investment costs to open the units, maybe on a cash basis and also on a fully capitalized basis?

Ronald M. Shaich

So, our stores are going to be net capital of approximately $950,000 this year after landlord allowance. We actually don’t have the fully lease adjusted number in front of us. That’s something we can catch up on off line.

Operator

Mr. Steven Rees has our next question.

Steven Rees – JP Morgan

I wanted to talk about sort of your longer term margin forecast. We can appreciate that this year you’re focusing attention on margins through increase pricing and new mix modifications but, as you think about 2009, assuming pricing reverts back to normalized trends and you lapse some of these mini initiatives, what other initiatives can you point to drive margins to recoup some of the degradation we’ve seen over the last three or four years.

Ronald M. Shaich

Well I think Steve, we outlined about 150 to 200 basis points pick up and we outlined the basic assumptions that are behind that. Do you want me to go through that again?

Steven Rees – JP Morgan

Well, just in terms of like we’ve seen margins decline even when the commodity situation was a lot more favorable a few years back, so just kind of how are you thinking about margins longer term.

Ronald M. Shaich

I think it starts with really three things which we try to delineate in our plan and our effectiveness in that. The first thing is quite frankly, gross profit per transaction, penny profit per transaction, call it what you will. How much does each customer leave? With the addition of this category management function, the focus that we’re trying to bring to it, we are intending to increase that measure at a rate faster frankly than the growth of all of our costs below gross profit; that’s number one. Number two, and directly correlating with that, they work together, they’re not independent, we have to keep transaction growth moving forward flat to positive. Medium term that’s about differentiation, there’s a number of initiatives already in place that we’re working on here for 2009 and 2010; that’s number two. Then number three, our initiatives relative to development and the mix of immature stores all have a direct impact on the margins at any given point. So, you take those three metrics: gross profit per transaction, transaction growth and mix and return on new cafes and you can very easily get to where your margins come out.

Steven Rees – JP Morgan

Okay. So, the 150 to 200 is sort of a base case conservative approach for now.

Ronald M. Shaich

I don’t think we’d say that. I think we’d say ever. We’re trying to give you some guidance to where we think we can get to as we move into 2009, a goal for the next 24 months. I can tell you we’ve been at this for 15 years and there’s always new things that we’re working on to drive those three things. You tell me how the transactions play over the next 24 months, I’ll tell you what the margin is. I do think with the additional of our intensity around category management that controlling the margin itself is actually the relatively easy part. The question is always transactions and then the sales in new stores.

Operator

We’ll go now to Rachel Rothman with our next question.

Rachel Rothman – Merrill Lynch

I just wanted to ask, I know you guys talked about a greater return discipline in higher sales hurdles. Can you talk about why, if we should expect higher sales hurdles, you’re actually lowering your average weekly sales growth target for 08? And, why you’re expecting average weekly sales growth to decline year-over-year.

Ronald M. Shaich

Let me just give you the data as I understand it Rachel.

Jeffrey W. Kip

Rachel, let me ask you a question before we do that.

Rachel Rothman – Merrill Lynch

Sure.

Jeffrey W. Kip

Where do you get that we’re –

Ronald M. Shaich

Let me give the data.

Jeffrey W. Kip

Okay. Go ahead.

Ronald M. Shaich

We’re projecting, we’re targeting $36 to $38,000 for new stores in the class of 2008. Our number for last year was what, $34,500 roughly?

Jeffrey W. Kip

Almost $35.

Ronald M. Shaich

Almost $35. So, we are targeting an increase in the AWS of new stores. That’s where you see it.

Rachel Rothman – Merrill Lynch

Okay. So the $36 to $38 is just for new stores? It isn’t your system wide average weekly sales?

Ronald M. Shaich

You’re pointing to a very important change in our metrics and we want to thank you. We thought that for greater transparency it was far better to talk about current year AWS and not talk about systems AWS because essentially any store that’s in the comp base is essentially reflected in the comps anyways.

Jeffrey W. Kip

Right.

Rachel Rothman – Merrill Lynch

Correct. So the guidance that you had given back in October for a system average weekly sales growth of $38,400 to $39,600 is the blended amount and now this new target is just for the new stores which is actually up over the class of 2007 stores?

Jeffrey W. Kip

That’s right.

Ronald M. Shaich

Rachel, you’ve got it.

Operator

Jason West has our next question.

Jason West – Deutsche Bank Securities

Just one question to bigger picture as you think about the unit growth 8 to 10, where do you see your longer term earnings growth for the business? I know it’s tough with all the volatility on the commodity side but, historically you talked about a 25% earnings growth. I’m just wondering where you guys see that over the next three to five years?

Jeffrey W. Kip

Jason, we’re not right now giving guidance on a long term earnings growth rate. We’re not even, I think, issuing formal guidance beyond a couple years on our new units. I think one of the things we’ve said is if we see margins return and new unit performance return, we left the door open to increase our growth rate again because that would be a great use of capital and that’s what we want to do. In general, we think we can growth comps modestly in a given year and realize some operating leverage through our business and so build off of our unit growth rate. So, that’s one way to think about it but, we don’t have a specific number out there right now.

Ronald M. Shaich

I would just add to that, for everyone’s sake, I think our real focus is in delivering over the next 12 to 24. Any guidance that goes beyond that will be completely defined by what happens over the next 12 to 24 months. So, we think that’s where the action is and that’s how we best serve you.

Operator

Now we will go to David Tarantino for our next question.

David Tarantino – Robert W. Baird & Co., Inc.

I just wanted to clarify my understanding of your traffic assumptions related to price. Are you seeing something in your tests that would cause you any concern about traffic? Or, is your guidance simply a decision to be conservative as you look out for the balance of the year?

Ronald M. Shaich

We have seen no traffic fall off to be concerned about in the 2008 results to date. We have seen nothing in our tests tied to our April price increase that would indicate that transactions are going to fall off. So, the comment is that, at the highest level, we’re feeling pretty good about transaction growth. Having said that, with the amount of price we’re taking, the difficult consumer environment that we’re living within, everything that’s going on out there we thought it would be, shall I say fool hearty to target anything other than a transaction fall off. But, I guarantee you that’s not what our hope and expectation is.

David Tarantino – Robert W. Baird & Co., Inc.

Okay. Thank you. Just a follow up if I may, what does your research tell you about the pricing power that you might have beyond what you’re planning for 08?

Ronald M. Shaich

I’d say it to you this way, we actually go through a regular process in our attitude and usage and tracking studies and we run it against a whole range of changes, other concepts and how people perceive our prices relative to a reasonable value. We ask a series of questions relative to how they would feel if the prices were adjusted. We do that for the cost as a whole and then for individual products. Over the last year, certainly the last six months we’ve continued to be, shall I say it, in the 75th percentile relative to those chains. The 75th percentile being pricing power. That is to say we appear to have greater pricing power, greater ability to be able to change prices and still be a reasonable value, greater pricing value than three out of four of the chains in our comparable universe.

Operator

Chris O’Cull has our next question.

Christopher O’Cull – Suntrust Robinson Humphrey

My question relates to labor expense. Given that labor cost trends over the last couple of quarters have been up I guess 100 to 120 basis points with 50 basis points increase to the expediter, do you think operators have partially adjusted for the lower Crispani sales already?

Jeffrey W. Kip

Actually, we don’t. I think, as we’ve stated, the 100 basis pointish number is probably 50 basis points of expediter, probably 50 basis points of low price versus wage increase and then probably half that amount in the third quarter, half that amount in the fourth and some inefficiency in fourth quarter. So, it actually all ties out pretty cleanly and I think based on our test, we tested taking the labor out of Crispani in several markets and we discovered there’s labor to take out and we successfully did it and that fed the decision we made. So, the answer is now.

Christopher O’Cull – Suntrust Robinson Humphrey

Okay. Then, do you assume that the Crispani, the impact pull on Crispani will have on traffic will be offset by the breakfast sandwich?

Jeffrey W. Kip

We didn’t really think about it that way Chris. I think we see that there is some impact to traffic from Crispani, maybe as much as a point, maybe less, not more. But, we felt that the difference we were able to make in the store P&L from removing Crispani was worth it and we don’t think about offsetting it with the breakfast sandwich, we think about them as two different actions. If we kept Crispani we would have actually rolled the breakfast sandwich anyway because it’s a great product which has had very strong test results of its’ own over the year and a half we’ve been testing it.

Operator

(Operator Instructions) [Sharon Vixia] has our next question.

[Sharon Vixia]

I think you guys talked a lot about what you expect for company-owned comps this year but, maybe I missed it, I didn’t hear what you expect for the progression of franchise comps. I guess I’m wondering if some of the initiatives you had success with on the company owned side will be rolled out to the franchise operations.

Ronald M. Shaich

We didn’t comment on it I think essentially because we have so many pieces, things are moving so quickly that we didn’t feel the level of certainty we want in order to be able to provide targets to you. So, we provided targets on the things that most directly impact our own P&L and that is the numbers you are analyzing and following. Having said that, I just came off two weeks ago a series of meetings like these where we present and meet with our franchisees, people are feeling good, people are in a headset very consistent with ours, they’re ready to deal with the wheat costs, they’re ready to adjust their prices. Some of them maybe slightly higher priced than us but certainly ready to take on a lot of our category management initiatives. They are excited about the breakfast sandwich roll out, almost the entire system is rolling it out. At the same time I think there is one market in the entire company that is trailing that. They are ready to go and I think ultimately, if you look at our numbers, company and franchise over 24 months tend to revert to the mean.

Operator

(Operator Instructions) Mr. Kip, it appears we have no further questions.

Jeffrey W. Kip

Thanks everybody for your time this morning and we look forward to talking to you soon.

Ronald M. Shaich

Yes and I suppose this concludes our 2008 analyst phone call. Thank you.

Jeffrey W. Kip

Take care.

Ronald M. Shaich

Bye-bye.

Operator

Ladies and gentlemen that does conclude our conference. We appreciate your attendance and please have a wonderful day.

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