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Panera Bread Co. (NASDAQ:PNRA)

Q2 2012 Earnings Call

July 25, 2012 08:30 am ET

Executives

Michele Harrison - VP, IR

Bill Moreton - President & Co-CEO

Ron Shaich - Chairman & Co-CEO

Analysts

Michael Kelter - Goldman Sachs

Brian Bittner - Oppenheimer & Co.

Jeffrey Bernstein - Barclays

David Tarantino - Robert W. Baird

Joe Buckley - Bank of America

Chris O’Cull - KeyBanc

Matthew Difrisco - Lazard

Peter Saleh - Telsey Advisory Group

John Glass - Morgan Stanley

Keith Siegner - Credit Suisse

Sharon Zackfia - William Blair

Mitch Speiser - Buckingham Research

Alex Slagle - Jefferies

Phillip Juhan - BMO Capital Markets

Operator

Good day everyone and welcome to today's Panera Bread second quarter 2012 earnings conference call. Today's call is being recorded. At this time, I am pleased to turn the conference over to Ms. Michele Harrison. Please go ahead ma'am.

Michele Harrison

Thank you, Dafa. Good morning to everyone, and welcome to Panera Bread's second quarter 2012 earnings call. Here with me on the call this morning are Ron Shaich, our Chairman and Co-CEO; and Bill Moreton, our President and Co-CEO.

Before we begin this morning, let me cover up a few regulatory matters. I'd like to note that during our opening remarks and in our responses, items will be discussed which are not based on historical facts. Any such items, including targeted 2012 results and conditions and details regarding 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 differ actually from or could cause actual results to differ materially from…

With that, I'll turn it over to Bill. Thank you.

Bill Moreton

Thanks Michele. Good morning everyone. I am pleased to announce another strong quarter. There are many clear indications that the investments we are making and the quality of our food, marketing, operations and the overall customer experience continue to pay dividends. We believe that we are making positive strides in our quest to be top of mind for customers when they think about where to go for high-quality soups, salads, sandwiches and frozen drinks.

For the second quarter, we reported EPS of $1.50 per share, which represents 27% growth over last year. This marks the ninth out of the last ten quarters that earnings have grown more than 20%. Breaking down our earnings growth, approximately 21% came from our core operations driven by our strong sales growth and operating leverage and the remaining 6% of earnings growth was generated from the deployment of excess cash.

Looking at our sales result in Q2, company-owned comparable bakery cafe sales were up 7.1%, which results in a two-year comp of 11.5%, which we continue to believe is among the best in the restaurant industry.

The Q2 comps were fueled by the strength of our summer celebration which Ron will discuss in more detail in a minute. I want to note that we introduced our summer celebrations five weeks earlier this year compared to last, as we adjusted our internal calendar to better match the desires of our customers. We believe this timing shift drove approximately 100 basis points of the comp increase in the quarter.

I would also like to note that as of yesterday, the Q3 to date company-owned comparable bakery cafe sales were up 5.9%, demonstrating the continued strength of our concept.

I would now like to talk a little bit about our development activities in the quarter, which have been one of our key earnings drivers. We opened 33 new bakery cafe system wide in the second quarter, 17 company-owned and 16 franchised, bringing our year-to-date openings to 55 new units. We’re well on our way to meeting our target of a 115 to 120 new units in 2012.

We’re not only very pleased with the pace of our development, but even more importantly, we’re pleased with the performance of the new units that we’ve opened. The new company-owned units have average weekly sales of $48,484 year-to-date versus $43,449 last year. These average weekly sales have been positively impacted by the opening of six urban bakery-cafes this year in the Manhattan, Boston and Toronto markets.

I should note that with our urban bakery cafes, our average weekly sales are higher than our suburban units, but so are the rents and the capital costs. So our expectation is that once we’re at steady state, the urban bakery cafes will have a very similar return on investment as our suburban cafes do. Excluding the impact of the urban cafes in both years, our new unit average weekly sales on a year-to-date basis have gone from $40,436 in 2011 up to $43,356 in 2012, which we feel is very good performance, something we’re very pleased with.

Our new franchise bakery-cafes have also performed very well, with average weekly sales of $47,109 year-to-date in 2012, compared to $44,500 year to date last year, again another nice increase.

Another key development initiative relates to drive-throughs. As we’ve discussed in the past, drive-throughs remain a tool that we’re using to increase customer convenience for those people that are tied to a car at certain meal occasions. Development of drive-throughs continues on pace to end the year with 200 units system wide. Our drive-through retrofits have consistently provided a nice return on investment this year. We expect drive-throughs to comprise approximately 40% of the new unit openings that we are going to do in 2012. With that I would now like to turn the call over to Ron to provide color commentary on our key competitive initiatives. Ron?

Ron Shaich

Great. Thank you, Bill. Good morning, everyone. As you know I have most recently been focused on ensuring Panera remains the best competitive alternative in the businesses that we serve. We all know how competitive the restaurant environment has become. Indeed we have seen any number of concepts attempt to copy many of our products and our bakery cafe environments. Our response is to focus on raising the competitive bar. Indeed we believe that a combination of our culinary skills; increased and more powerful marketing activities; expanded operational capabilities; and the smart utilization of our size and scale will allow us to continue to provide a truly differentiated customer experience.

Let me spend a few minutes providing you with an update on the four investment areas, we believe will be key competitive differentiators and critical drivers of top line sales growth. They are, investments in ever improving food quality; investments in marketing and our MyPanera Loyalty Program; the growth of our catering business and improving the capabilities of our operating system and our people.

Let me start by discussing the investments we are making in our food. We strive to bring innovation and craftsmanship to our menu items which when combined with the highest quality ingredients result in truly differentiated menu offerings. By the way of example, over the last several years our culinary team and supply chain organization have been able to bring to our menu high-quality new proteins including steak, salmon and turkey, specifically the new roasted turkey now on our menu is similar in quality, taste and consistency to the turkey one gets at a thanksgiving dinner and is all natural and antibiotic free.

Here is my point. These high-quality proteins are one of the driving forces behind our ability to drive competitive differentiation. I think our summer celebration is also illustrative of the impact of our culinary skills combined with the capabilities of our supply chain organization. To our supply chain systems, we have been able to bring fresh avocados into almost 1600 bakery cafes. The addition of this ingredient and the fact that it is fresh has allowed us to introduce our new roasted turkey and Avocado BLT sandwich as well as our new Chicken Cobb with Avocado.

Both products have created customer excitement and both products have driven our mix positively. Here is the data to prove my point. The introduction of the new Chopped Cobb Salad with Avocado along with the return of a long-term summer favorite, the Strawberry Poppyseed Salad drove our signature salad sales of 22% in the second quarter. In fact this makes it 11 out of the last 12 quarters that our signature salads have grown a rate of 10% or greater than the prior year. To us this demonstrates that we have broken through to our customers and we are at or near the top of their list when they contemplate where to go for high quality salad.

Let's now discuss the impact of the fresh Avocado addition and what its impact has been on our sandwich sales. To be specific, our new roasted turkey and avocado BLT sandwich is made with our all- natural antibiotic-free turkey, applewood smoked bacon, vine-ripened tomatoes, fresh lettuce and with slices of fresh avocado on our fresh salad or bread.

And how about its impact on the business, the strength of this sandwich helped propel a 22% increase in our sandwich signature sandwich sales during Q2. Folks you can count on us to continue to use our new turkey in inventive new products. Later this year, we will utilize our new turkey to further build out our Panini line with the introduction of our roasted turkey cranberry Panini, a sandwich we believe will ultimately be one of the most powerful in our portfolio.

And let me conclude our discussion of menu innovation by noting that since the third quarter of 2009, our sales and gross profit have grown year-over-year at each date part in every single quarter. This is a direct result of menu innovation and the application of supply chain capabilities.

The next investment area for us is marketing. As we previously discussed, the effort to build a real marketing function and build up a real marketing strategy has been a multiyear effort for us and it has started to pay dividends.

Let's discuss first the expected evolution in our messaging. Although, we are beginning to crack the code and have to capture the sole of Panera, we feel that we can do so much more. As a result, we announced this quarter that we changed our lead creative agency to Cramer-Krasselt.

We expected a new campaign will roll out next year and it will give ways to what makes Panera special in the eyes of so many guests and as well it will speak to the values that consumers identify with Panera.

We also believe the new campaign we are developing will break through the clutter of other advertising and promote an even deeper affiliation between our customers and Panera. As we noted in our last call, we continue to carefully increase the level of our media spending while simultaneously improving the mix of media by market.

As a reminder, we expect to spend approximately 1.5% of sales in direct media expenses in 2012 when compared to 1.3% last year. Although, this is a relatively minor increase as a percent of sales, this increased level of spending gives us approximately 26% more immediate dollars this year to improve our share voice.

Before I conclude on marketing, I want to reiterate that although we are currently in the middle of our first national cable buy, it is at very low TRPs and its designed specifically as a supplement to our core local marketing efforts. To be clear, our national cable effort is not expected to be a key driver of transaction growth this year. Specifically, we classify the national cable buy as a test that we expect will help us determine the best mix of media as we go forward.

I would now like to update you on our loyalty program. We are very pleased that the MyPanera program now has in excess of 11 million members. As I have said before, this program is designed to increase affiliation with our customers and build deeper relationships. We are clearly developing deeper one-on-one relationships with our customers as we’re presently sending out more than 6 million customized e-mails each quarter.

However, the real power of the royalty program is its ability to capture real-time customer behavior data which is allowing us to more smartly evolve our product offerings and improve our marketing to each individual customer.

Our next area of investment is catering. We continue to believe that there is a great demand to the Panera experience outside of our four walls and we plan to capturing that demand.

Catering continue to positively impact our sales in Q2. In the second quarter, catering sales, net of the impact of acquisitions increased 20%. This is in top of 31% catering sales growth in Q2 2011. In the catering drove comps by approximately 60 basis points in Q2.

For those keeping score, please note, improved catering comps show up as mixed improvements, rather than transaction growth given the very high average check we experienced in our catering business. Let me also note, we continued to invest in growing our catering business. Expect to see a new sales force management system and expect to see the next version of our online catering ordering system later this year.

Okay, let's now turn our focus to operations. We continue to improve the quality of our overall guest experience by investing in the quality of our people and our operating capabilities. We have a number of initiatives underway, focused on lessening the points of friction in our customers' experience, and several ongoing initiatives are focused on improving order accuracy to process an equipment improvement.

Indeed, we are now reviewing our order production food delivery process as an end-to-end system and evaluating where and how it must have bought. Additionally, we are continually working on making the overall Panera experience more convenient and more uplifting for our customers.

Let me now update you on several initiatives on that front. In the second quarter, we rolled out our new to-go packaging. This is designed for both bakery café and catering customers. This new packaging has been in development for a number of years and we think that it is more consistent with the quality of the ingredients in our food. We also believe it will greatly improve the experience of the customer who enjoys Panera outside of our cafes.

Here is yet another initiative we have focused on. As the year progresses, expect that we will roll out a new conversational ordering system which we expect will improve both order accuracy and the guest experience by allowing more natural interactions between our associates and our customers.

Here is the bottom line; we think there is still menu improvement, marketing evolution and operational improvements. We have in place or we have in development will drive continued competitive advantage. With that I would like to turn it back to Bill to provide additional commentary on Q2 and as well our guidance for the remainder of the year and his perspectives on the future of the company. Bill?

Bill Moreton

Great, thanks Ron. Let me now spend a few minutes providing you with some additional detail on our Q2 financial results and our targets for Q3, Q4 and the full year 2012.

Let’s start with sales first; looking at company comp store sales by component our Q2 comps was 7.1% consisted of 90 basis points of transaction growth and 6.2% average check growth. Average check growth consisted of year-over-year effective price of approximately 3% and mix impact of 3.2%.

We are very pleased with the impact of menu mix in the quarter which was primarily driven by three things. First, the strength of the celebration that Ron described. Second as Ron also mentioned, our catering sales increased 20% which positively impacted mix by approximately 60 basis points. And finally our meal upgrade program. And as a reminder, that’s a program where customers can get a bakery treat for $0.99 with the purchase of beverage and it have continued to perform very well.

In the second quarter, the meal upgrade program drove approximately 50 basis points of positive mixed growth. We are setting the Q3 company bakery café comp store sales target at 5% to 6%. As I mentioned earlier, for the first 27 days of the quarter, our company comp store sales increased 5.9%.

Our Q3 target breakdowns into transaction growth of 75 to 125 basis points and 425 to 475 points in check growth. The check growth is comprised of approximately 3% price and one in the quarter to one in three quarter percent mix primarily due to catering growth and the expected continued celebration strength. In the fourth quarter, we are targeting company store comp store sales growth of 4.5% to 5.5%.

This target breaks down into transaction growth of 50 to 100 basis points and 4 to 450 basis points in check growth. The fourth quarter check growth target in turn based on the 2.5% price and 1.5% to 2% mix. Consistent with our philosophy, we expect to take less pricing in Q4 than originally anticipated due to lower commodity cost inflation. Based on the strength of the first half of 2012 and our outlook for the second half we are raising our full year 2012 comp store sales target to 5.5% to 6.5% which we think is excellent performance.

Let's move on now to margin performance. In the second quarter, operating margin was 90 basis points favorable year-over-year and that was driven by bakery café margins which improved by 200 basis points averaging the labor and occupancy expense lines. Additionally, our food cost was 60 basis points better than prior year, primarily due to the leverage we received from some of our many price increases versus cost inflation for certain items primarily in the bakery area.

For the year, we now expect all-in food and paper cost inflation of approximately 3% and this includes the impact of our new packaging program that Ron described. In line with our philosophy, this increase is essentially offset by our year-over-year price increase. We currently have approximately 95% of our food and paper needs locked for 2012.

Labor in the second quarter provided us with 90 basis points of year-over-year margin favorability. This was primarily the result of sales leverage as well as continued discipline on starting wage and off cycle pay increases. We continue to target improved bakery café margins for the remainder of the year although at a rate of improvement that is more in line with the 50 basis points favorability in Q1 than the 200 basis points of Q2.

In the second quarter, we saw significant deleverage in the fresh dough cost of sales to franchisee margin of 350 basis points. This was primarily caused by two items: First, the effect of wheat inflation, which was up almost 50% compared to the second quarter of prior year. This had a negative 24 basis point impact on our overall operating margins.

The second factor in the decrease of our FDF margins was the increase in the sales of our produce to franchisees due to our strong salad sales. As a reminder, we passed among lettuce and other produce items to our franchisees at cost, meaning our cost is essentially equal to a 100% of the sales price.

This results in lower FDF margins, but we think it’s a good thing as we’re trying to control the quality through our process and not generate additional income from our franchisees. We continue to expect that FDF margins will sequentially improve in the third and fourth quarters with the impact of higher wheat cost moderated throughout the year.

For the second quarter, G&A increased as a percentage of sales by 30 basis points over last year. The G&A increase reflects continued investment in our information systems and our other growth initiatives. Additionally, we recorded increased incentive compensation expenses associated with our strong second quarter performance.

After netting out the impact of the Q4 2011 one-time legal settlement charges, so we’re looking apples-to-apples, we’re targeting G&A to be essentially flat year-over-year in 2012 as a percentage of sales, as we continue to invest in both the support for our sales initiatives and our infrastructure for growth.

We think these investments are critical to achieving our long-term goals. We expect year-over-year Q3 and Q4 G&A spend as a percent of sales to be roughly in line with what we experienced in Q2 and it could vary a little depending on the timing of spending on certain projects.

In sum, we continue to expect operating margin improvement of 25 to 75 basis points for the full-year, with Q3 being flat to slightly positive versus last year and Q4 improving 25 to 75 basis points.

Turning to EPS, given our strong Q2 results and the increased comp expectation for the full-year, we’re today raising our full-year EPS target from $5.58 to $5.63 per share up to $5.72 to $5.78 per share which would represent a 26% to 27% growth rate versus 2011. When you adjust that to exclude the one-time $5 million legal expense in Q4 last year, our targeted earnings growth would be 23% to 24% for the year.

We’re also today issuing our Q3 EPS target at $1.16 to $1.18, which represents 20% to 22% earnings growth from Q3 of last year. And finally, our Q4 EPS target we’re setting it at a $1.66 to $1.70 per share which represents 27% to 30% earnings growth from Q4 2011. When you adjust that to exclude the one-time $5 million legal expense in the fourth quarter of 2011, our targeted EPS growth rate in Q4 would be 17% to 20%.

Let me now talk briefly about capital deployment in the second quarter. The Q2 results included a $0.03 benefit from the Milwaukee and Raleigh franchisee acquisitions and additionally Q2 results included a $0.04 benefit from previously completed share buybacks.

During the second quarter, we repurchased 34,600 shares of our stock for approximately $5 million, which had a nominal impact to the Q2 results. Generally, we generated approximately $38 million of free cash flow in the quarter after spending approximately $35 million on CapEx. So in terms of the balance sheet, we ended the quarter with $256 million of cash.

As we have discussed before, we plan to opportunistically deploy our cash, but we have no incremental acquisitions or share buyback assumptions in our guidance which would encourage you to do the same as well.

Now finally, I would like to update you on our organization before we begin Q&A. First, related to our CFO search. As I mentioned last call, we retained DHR International in late March to help us find our next CFO. We have been very pleased with the flow and the quality of potential candidates. We have begun interviewing potential candidates and would anticipate that we will be in a position to make a decision in the next few months.

In the interim, we feel very fortunate to continue to have Pat Kelly on board as our CFO, Interim CFO. As a reminder, Pat’s been the CFO and senior executive at a number of other companies. Pat’s been with us since early April and has made a solid contribution to the team.

One of the great strengths of Panera is the depth of our leadership team and the quality and consistency of our strategic vision of how we best compete. Between Ron and I we have more than 38 years of Panera experience and our 12 other senior executives -- members of executive management, our executive vice presidents and our senior vice presidents in the organization average more than nine years of Panera experience. We are fortunate to have such a deep and talented team.

Although we fully recognize how competitive the restaurant industry is today, Ron and I are feeling very positive about Panera’s ability to continue to provide a differentiated and special experience for our customers as we strive to be the best competitive alternative in the breakfast, lunch, daytime chill, dinner and catering businesses that we serve.

With that, I would like to turn it back to Jennifer, our operator, for your questions. Jennifer?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from Michael Kelter with Goldman Sachs.

Michael Kelter - Goldman Sachs

Yeah, I wanted to ask you about the success you referenced in the new urban locations and maybe you could talk a little more about what you have learned about where Panera can go versus what you thought before and what it means for your future expansion potential both here and maybe even outside the US?

Bill Moreton

Yeah sure Michael, this is Bill. What I would tell you again, we have been very pleased so far; like everything even if it’s a learning; when we say urban really what we are still looking for the same traffic drivers as we do in our suburban cafés meaning a combination of residential business and retail traffic drivers. So we still very much have the same.

What I would tell you is that we are learning about the characteristics of how people take food to go and versus eat in the urban areas and how we process such high levels of volume, so we feel very good about how we started. We actually had some experience with this now for the last several years in Boston and in Chicago and some of our other markets as we continue our learning.

We think that it does open up some additional location opportunities for us you know without giving specific numbers, but so, we’re feeling very good about it. It's clearly resonating with that customer base and it's a continuing learning itineration for us as we move forward. Ron, I don't know if you would like to add some perspectives, but…

Ron Shaich

I would say, Michael and Bill, the thing that we are always, we continue to be positively surprised by, that's the right word, amazed by is the relevancy that this concept seems to have for people everywhere. I mean we just look at those opening volumes across the entire range of stores that we open, both suburban and urban and continue to be in profound respect of the volumes that are generated and the reaction of people have.

Bill Moreton

And I guess Michael to the last part of the question on International, what I would say to you is our first international second market is Canada and we've been very pleased and in fact we have an urban location in Toronto and we've been very pleased with our growth there and that really is where we are focusing on at this time.

Operator

Next we will hear from Brian Bittner with Oppenheimer & Co.

Brian Bittner - Oppenheimer & Co.

You know early on in the year you were pretty cautious on Panera’s ability to generate traffic comp growth, but as the year has progressed your system is clearly generating solidly positive traffic, while at the same time the operating environment has arguably become probably a little bit tougher than you had expected. So I would love to hear what has surprised you on the traffic side in your view and maybe what you believe has been the largest internal driver of kind of deposit traffic growth here?

Bill Moreton

Let me start and then Ron will add. Just to give you some numbers, so that you have a little bit of a background. I mean you are right Brian and in terms of I think that we have to realize what we are going over, year-over-year, right. We often look at two-year statistics because you have some level of comparison year-over-year. What we are rolling over in the first part of the year was the rollout of our Loyalty Program in Q4 of 2010 and then really momentum in Q1 and Q2 of 2011 that really got started going and it's still going strong.

But so we were rolling over transaction growth of 1.7% in Q1 last year and 2.9% in Q2. So what you are looking are two-year transaction growth, we are exceedingly pleased with how it is and as you said in the face of a very competitive marketplace and some uncertain economic times, I will give you just a quick perspective, then Ron will add to it, really in terms of -- I think it has a lot to do with the strength of our menu and just how the concept resonates with our customers. But Ron why don't you add please?

Ron Shaich

I would simply start and share again why we are cautious and what our context is, which is we recognize and I think many of you do that building traffic over multiple years over the long term, over decades as we have is really difficult and in a highly competitive environment with low -- with everybody copying each other, probably the starting place is somewhere around negative 2%. And so we wanted to be very upfront in saying to people how difficult it is over the long term to do what we have done and what we continue to intend to do which is drive traffic growth. If you ask for the single thing I think it's very difficult.

I think it’s still and I think we keep saying to you these many things come together and ultimately if you come down to one thing and one thing alone, I would it's the relevancy of the concept. This concept touches people. That’s what we keep seeing when we open stores, that’s what we keep seeing when we continue to looking at the multi-decade long transaction growth.

There is something that goes on there and in many ways all of our initiatives are meant at continuing to find ways to make it easier for guests, to continuing to find ways to deliver what guests expect of us so that we end up with a deeper relationship with those guests.

Operator

Next we will hear from Jeffrey Bernstein with Barclays.

Jeffrey Bernstein - Barclays

Ron, you mentioned on the call and I think it's evident for those looking at the industry that the competitive landscape and how you guys are focused on raising the bar. I was just wondering whether you can give some context behind that whether first and foremost, I don’t know whether you’re seeing increased discount in your advertising or what not? What do you think perhaps has been the biggest intrusion of maybe people looking to take share from Panera?

And then certainly I am just wondering how you assess the market share that perhaps you guys have, market share that you have in the category versus perhaps the category growth just to kind of size up your pace of growth relative to however you look at it, whether being soup, salad and sandwich or however else you might think about the category?

Ron Shaich

I mean, first off, I think is, as many of you know we don’t think there is such a thing as a fast-casual category. We don’t compete in that versus the QSR. We think that, there is basically a continued battle for a share of stomach and that battle occurs not at the level of a format. It occurs at the level of individual consumer solutions. So we compete with all alternatives for breakfast, the baked good and the beverage. We compete as the best alternative for a soup salad and sandwich within a physical space, a distance. We compete in a gathering place or chill out business is the best alternative, to come and sit and talk and we also compete in the take home bread business and potentially the light evening business.

I think that in each set of those, there is different competitors. What I think is happening is people actually get what we have been talking about for 15 or 20 years that there is a very large niche of customers that care about something more than simply how lower the price is and how much food you get. They care about the positive energy, the self esteem, how they feel about if they took quality of the experience.

Some might say that’s part of the fast-casual paradigm that we share with others. And I think that in the context of that understanding and the success over a very long time of Panera, I think that you see as I think we all do that you have increasingly chef-driven restaurants in Suburbia on one side, you have better fast food and I don’t even mean the classic fast food guys, but some might say that the limited menu fast-casual players are really in essence chef-driven, higher-quality food. And then you have QSR itself which is increasingly redeveloping and understands that environments matter in a profound way and the totality of the experience matters.

And so I think you have all those things playing out, not in a given quarter but over many, many, many years and I think for us who have been at this for a long time, I think the action is continuing to own our space and continuing to do a better job than others do at what we have to do.

Operator

We'll take a question from David Tarantino with Robert W. Baird.

David Tarantino - Robert W. Baird

I wanted to get more perspective on Ron's commentary about the strength and some of the higher price signature items and specifically I was wondering if you could talk about any customer feedback you have on Panera’s value proposition today and perhaps give us a sense for how much more room you think you have in driving further penetration of some of these higher-quality, higher-price point offerings.

Ron Shaich

Let me start and just share with you our view that our research continues to show no material change in our value perceptions. We continue to be in a place we have been in for several years which is very high scores on connection with the brand and reasonable value scores and that is not true for all the competitors we see in our research.

Bill Moreton

I want to make a very specific point to what you said though David. You know many people confuse price with mix. We have not taken significant price, certainly not significant price beyond what inflation is which is what we gauge our pricing to. What we have seen and what we have done is we've continued to offer people products that they get to choose and that they believe are worth the money we charge for that. The result is they tend to leave us a little bit more behind. And so in many ways Panera has been able to drive its not true pricing but true making it desirable to choose products that are attractive to Panera from a profit perspective and ultimately show up in our mix.

And I think secondly as we try to suggest on the call today, a substance apart of that is catering. Catering is a perfect example of a product that's growing at outside's rate for Panera and one that it shows up entirely as mix and some might confuse that with price.

All we are doing is getting people to buy a product that has an average check close to a $125. You add one of those a day and you are materially change your mix which again shows up but its really building the business through consumer choice, it's not through driving price that is unattainable or unsustainable.

Operator

And now we will hear from Joe Buckley from Bank of America.

Joe Buckley - Bank of America

Thank you, could you elaborate on the conversational order system, what it is and what would you achieve as you implement it?

Ron Shaich

Sure, again we are continuing to look at the entire order process, from order input all the way through production and ultimately to deliver to the customer and we are trying to look for ways in which we either can expand capacity or reduce friction for the guest or improve accuracy all of which are the key considerations.

One of the pieces to that, we’re rolling out is in fact conversational ordering. What conversational ordering allows is a less structured process for our associates and what is it 70 million a week that we go through transaction, in those 70 million transactions the way we existed, they had to get the information in a way in which lot of input structure that. We have evolved that so that it’s much looser and the associate can bring the order in as the customers speaking it and that maybe very different between one customer and another. And again these very small operational details which could appear small are actually quite powerful when you think about the number of transactions that occur and its impact on both the customer experience and the accuracy that we ultimately deliver.

Operator

We will take a question from Chris O’Cull with KeyBanc.

Chris O’Cull - KeyBanc

Ron, would you help us understand what you’re measuring or evaluating, just tell me whether the national cable is generating a good return?

Ron Shaich

I guess I would say to you that all of our media, we run multiple different analysis, we run testing control, we run a kind of metric model that is quite extensive that is done by outside of kind of metric analytics for us and you know, it’s obviously very hard to pull apart individual pieces of media.

So what we look at is whatever media programs we are actually bringing to bear in a given quarter in a given market. So what we ultimately try to do when we look at it, is try to get some sense in markets in which we have a given program versus market that we don’t have a given program, what is the ultimate impact. I would say to you, because cable is applied across the entire country, the way in which we can see this in markets where we had very little or no television advertising, and we can then compare that to what it was in a pre-state and get some sense.

Bill Moreton

And as Ron said, I think it’s important just to remember again. You know, the national cable, it is a very little chirpy and we’re viewing it as one of a combined set of media plans with radio, with digital, with out-of-house, with local spot TV and we’re looking at it in its totality as Ron said to try to test the mix of media as we go forward.

Operator

We will now hear from Matthew Difrisco with Lazard.

Matthew Difrisco - Lazard

Thank you. I just had questions and some clarifications. Bill, you spoke about G&A. I was confused, was that flat in relations to 2Q dollars or relative spend number and then I just had a question on the same store sales front. I wondered if you can give us some greater detail as far as particular day parts that you saw some of the traffic gains, it was any sort of outlier or disproportionate during a period or was the catering during a different period just because sort of talk about times in a day. Thank you.

Bill Moreton

Sure. Matthew, first question on G&A, we are staying flat in terms of a percentage of sales. So when you would typically see what our sales increasing is leveraging and that coming down as a percentage of sales and what we are saying to is that that’s happening and we are reinvesting in initiatives and infrastructure from growth. We think a big mistake a lot of companies make is not make sure that the infrastructure is set up to support the technologies set up to support your growth initiatives as you go forward. So we are experiencing leverage and then we are reinvesting back in the business and we are forecasting essentially flat G&A as a percent of sales.

Matthew Difrisco - Lazard

To Q2?

Bill Moreton

Yes to Q2.

Matthew Difrisco - Lazard

Thank you.

Bill Moreton

For the remainder of the year. And then on the same store sales as Ron indicated, we have seen now for several quarters that everyday part continues to grow. As we have mentioned in the past, we see breakfast and the evening growing a little quicker than the other day parts that show and the lunch that that’s said they are all growing. So we feel really good about that and certainly caterings growth to 20% this quarter on top of 31 a year before we are very pleased with catering which we kind of pull out and think of it as a separate business, a separate consumer solution.

So you see breakfast a little quicker and the evening a little quicker but everything is growing which is what we really feel good about. We are not like some concepts that have been driven simply by one day part. It’s really the totality of the day and the totality in the experience.

Matthew Difrisco - Lazard

Catering growing during dinner?

Bill Moreton

Yeah, we haven’t broken out the different pieces of catering whether it would be morning, lunch or dinner. So we just talk about catering in its totality.

Operator

Next we will take a question from Peter Saleh with Telsey Advisory Group.

Peter Saleh - Telsey Advisory Group

I just wanted to ask about the brand and how you are leveraging it, it seems as if you are doing a little bit more in the CPG segment with a couple of more skews on in the grocery stores. So I was also hoping you would talk about that test and where you think that might be headed?

Bill Moreton

What I would tell you Peter is, we do have, we have done some work on the CPG side and kind of targets some of the super stores and some of the grocery stores primarily around soup and what we have seen its opportunistic, where we have it we have developed a very high quality soup that can be served and in that way bought in those things, and what we found is we are first a little worried that it might cannibalize the bakery cafes and in fact we found that it is enhanced the soup sales in the bakery cafes. So it's just one more way of as Ron talked about a lot of what we think about is consumer solutions and how we try to make Panera convenient to our customers, when they want it? How they want it? And that's kind of an example of that. So we continue to look at CPG but at this stage it's really limited to what we just described. So we are pleased with it, that’s kind of work at this moment.

Operator

Once again question from John Glass with Morgan Stanley.

John Glass - Morgan Stanley

Could you just I don’t think I've heard you guys talking a while about what your average check actually is and I am thinking about excluding that catering business since its start of it. And if you are willing to talk about it on a depart basis that will be very, very helpful. Secondarily, thanks for the detail on moving the calendar shift and you know why you got the benefit or some benefit in this quarter. Is there any other planned calendar shifts like that this year specifically around holidays, is there an opportunity to move up the holidays if you will as well? Thanks.

Bill Moreton

I will take the last one first on the calendar shifts, remember we kind of break our year into five what we call celebrations which are different times to focus on different products both through our [POP] in the bakery-cafés and our marketing message etcetera. The key things new and different for our customers, the other celebrations line up very closely date wise. The one that was really out of whack between how our customers, their behavior and I think you know the way they feel and the season they are in, so we started a little earlier then it's essentially the same time.

So all that we were trying to do is really align ourselves with our customers’ behavior and really how they are filling up summer, fall, winter and spring, but there's no other calendar shifts this year and the mix up would simply the celebration items of the signature salads and the BLTA, the roasted turkey, bacons along with tomato and other cut off sandwich was just a mix up versus the Cuban Panini that we celebrated in [C2]. So no other changed the calendar shifts there. In terms of your average check question we are not very specific. We are not specific by data, what I will tell you is without catering the average check is a little bit below $10 and obviously lower in the morning, higher in the lunch and dinner-date parts but we don't get anymore specific than that.

Operator

We will take a question from Keith Siegner with Credit Suisse.

Keith Siegner - Credit Suisse

Just a quick question on mix, obviously this has been impressively consistent and strong and you talked in the call a little bit about how the proteins particularly turkey and avocado have been contributing, one thing that didn't come up was the pasta extensions and I was just wondering if you talk a little bit about what your thoughts are about that roll out maybe how that plays into your expectations for mix for the back half and maybe how positive you might have an impact on margins if at all? Thanks.

Bill Moreton

Yeah. Well, just first of all pasta is a product in test, its not in wide distribution in the system right now. So it’s a product in test that we are evaluating and potentially thinking about next year. So it doesn't have candidly a material impact on our results this year at all.

So we are actually just at the stage where we are trying to learn what it is; what space it occupies in the customer’s mind and how it might play in Panera menu. So there is really is no impact Keith this year of any material substance in pasta. Its just in a couple of markets in test and really our policy is that we don't talk about things that are in test, because we are not sure yet how they are going to perform or what we are going to do with them, so that's really how we would like to leave it.

Operator

And next we will hear from Sharon Zackfia with William Blair.

Sharon Zackfia - William Blair

Most of my questions have been answered, but I was just hoping you can update us on what your wheat cost is for this year on a per bushel basis and where you are locked in so far for the first half of next year and just given where grains are; can you give us any rule of thumb for us to think about you know like a $1 change in per bushel wheat, what that does to your food cost next year?

Ron Shaich

Yeah sure, we've given some of this in the past, so we are happy to give it now. First, the rule of thumb is $1 change in wheat is approximately equal to $3 million for us, just under $3 million. So if you think of it like that and we are continuing our program that we've done now for a few years with wheat and that is meaning laddering it in, so we are buying wheat out 12 months in advance with the aim again that we are not trying to play the market, we are just trying to be consistent with what we are buying.

And just to give you some general things, because we try not to get too specific, but wheat cost this year, in Q2 it’s actually Q2 ’12 compared to ’11, we are at the height now of the year-over-year difference as I mentioned it’s 50% higher in Q2 of ’12 versus Q2 of ’11. Again, how we bought it a year in advance, not the spot market and then what we see is in Q3 it goes down a fair bit and by Q4, we’re slightly favorable in 2012 versus ’11 and that now continues into ’13, where the first quarter of 2013 which is locked in is favorable to 2012.

So what we would say is the numbers that we gave before is still holding, but the year, wheat is going to be 2012, about $6 million higher for us in ’12 versus ’11, the majority of that is to happen in the first and second quarter. In the second quarter, wheat was approximately $2.5 million higher year-over-year and you see that at about half of the expense goes to the retail field now and the other half is on that FDF margin line.

So that’s kind of where we are at in some of the rules of thumb. So it gets better in Q3, it’s flat to slightly positive in Q4 and then as we start into next year, we start positive, but obviously the wheat markets starting to pick up. So we’ll see where we go as we go through the year.

Operator

And next we’ll hear from Mitch Speiser with Buckingham Research.

Mitch Speiser - Buckingham Research

Can you give us a little broader perspective on the urban store strategy just in general how many stores you do have in urban markets, how many urban markets you think you can go into over time and as we think about your unit openings perhaps what percent do you think will be allocated to urban stores? Thank you.

Bill Moreton

Yeah Mitch, again, we try not to go into very specifics about different types of development and things. What we would tell you is we think urban is opportunistic for us, we think there is a half dozen markets or so across the country that really provide the characteristics that work with Panera where you can still find all the sales drivers right as I mentioned before business, retail, residential it’s still the same drivers. So we think of it as kind of edge urban. We don’t want to be main and main downtown five days a week that isn’t our current strategy in development.

So what we would tell you its opportunistic; we don’t think its huge numbers of stores; it is not a big part of the portfolio in terms of new openings going forward. We have been very pleased with what we have done and we continue to learn and we will see as we go forward. So that’s kind of how we think about it. And the important thing I think is that we expect to get the same return on investment in the urban store that we do in a suburban store.

As I said, the sales are higher, but some of the capital costs because its difficult working in those environments is well obviously, is the rent. So we think it’s a good thing to do opportunistically, but it isn’t a big driving piece of the strategy.

Ron Shaich

I might add to what Bill said, which is something we have been talking about and I think many of you know for a very long time. We sit down on a regular basis and we look out three years and I think we feel comfortable that the development exists, the opportunities exists, our capabilities exists to build out our development plans and maintain our growth plans over that period of time and we look forward every quarter or so that three year period.

Having said that, we are continually looking at and testing a range of opportunities that could create further development opportunity down the road and so what you’re seeing much like you see as in terms of our relationship with our customer and you see us playing with and looking at and learning about how we can do a better job with our guest and then putting it into our system, the same applies in development.

So we have any number of things going on, any number of test, not that we are going to comment on them, but all meant to continue to provide opportunities for the company; I think what we want to say to you again is rest assured we are very comfortable for the foreseeable future and the opportunities for growth of this company and as it plays out beyond that we’ll inform you as we learn more.

Operator

We will now take a question from Alex Slagle with Jefferies.

Alex Slagle - Jefferies

A question for Bill, you mentioned that 2012 plans for drive throughs; I wonder if you could provide some thought on the outlook for 2013 drive throughs and maybe what kind of volumes you are seeing in those cafés?

Bill Moreton

Yeah Alex, we’re not yet giving any 2013 guidance; what I would tell you is I think what you can take as some indicator, what we found drive throughs to be is a very effective use of capital as a retrofit; you know we have told you before that we have certain capital hurdles that we try to meet on any investment and seeing 15% in order just we’ve talk about before.

And with the retrofit drive throughs we have done meet those criteria; you know 40% of our new units this year being drive through is an indication that we believe that’s a viable strategy and it is one of the active filters that we look at when we look at real estate sites, but I can’t really project forward you know what it will be going forward.

But I would tell you at 200 units at the end of the year, we are approaching 1600 units, so this is a huge piece of the portfolio, but it is certainly something that we in the typical Panera way we've experimented with over a number of years, we think we've got it to where it doesn't affect the consumer experience inside the four walls and it is additive; in it we are reaching certain customer occasions that we couldn’t get otherwise, you know with the Soccer Mom and the kids are in the back or the family that's going to an event and they have to stop through quickly and we are able to do it in a pretty quick way with the quality of food that we’ll provide at Panera, you know the Panera experience, so it finally does a very good thing, but I can't be more specific than that going forward. And operator we have time for one more question I think.

Operator

Okay, sir. Our next question and last question then will come from Phillip Juhan with BMO Capital Markets.

Phillip Juhan - BMO Capital Markets

A couple of quick questions, one, Bill, it looks like that you guys have stepped down or actually increased your cost of sales inflation expectations for the full year to 3% prior guidance called for an average of 2.5%, jumping down to 1.5% by the fourth quarter, is the change there primarily due to the packaging that's now included sort of in that guidance or is there something else driving that?

Bill Moreton

Yeah, Phillip very perceptive; it’s completely due to that actually. The commodity environment has gotten even a little more favorable from where it was before, but the packaging is in that, and I want to mention something, Ron mentioned it a little bit and I just want to expand on that.

Again, we often make investments in the concept, the core look, feel and experience the customers have and I think packaging is a great example of that. As Ron talked about we feel that we have opportunity outside of the four walls and to do that we needed a packaging program that was consistent with the quality of everything we do at Panera and candidly we are going from the old plastic clamp shows that you might see any number of places hard to go sell into really a high designed functional box that really is more reflective of Panera, so you are quite right, nothing’s changed the outlook, what's added now is the packaging. So that is exactly the difference.

Phillip Juhan - BMO Capital Markets

Thanks Bill and one more quick one if I may, you said the $10 average check slightly below, is that per transaction, so that per person check would be slightly less from as we think about it?

Bill Moreton

Yes, that's how we look at it.

Phillip Juhan - BMO Capital Markets

Thank you so much.

Bill Moreton

So you know with that, that would be the last quarter, but certainly Michele and I are around as is Ron to answer any questions that you all may have at any time. Thank you.

Operator

Thank you, sir. That does conclude today's teleconference. We do thank you all for your participation.

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