Panera Bread's CEO (PNRA) Ron Shaich on Q3 2015 Results - Earnings Call Transcript

Panera Bread Co. (PNRA) Q3 2015 Earnings Call October 28, 2015 8:30 AM ET

Executives

Steve West - VP, IR

Mike Bufano - SVP and CFO

Ron Shaich - Founder, Chairman and CEO

Drew Madsen - President

Analysts

Jeffrey Bernstein - Barclays

Sara Senatore - Bernstein

Keith Siegner - UBS

Jeff Farmer - Wells Fargo

Sharon Zackfia - William Blair

Andrew Charles - Cowen and Company

Jason West - Credit Suisse

Nicole Miller - Piper Jaffray

Matt DiFrisco - Guggenheim Securities

Brian Bittner - Oppenheimer

Karen Short - Deutsche Bank

John Glass - Morgan Stanley

Operator

Good day ladies and gentlemen. Welcome to the Panera Bread Third Quarter 2015 Earnings Call.

At this time, I would like to hand things over to Mr. Steve West, Vice President of Investor Relations. Please go ahead sir.

Steve West

Good morning everyone and welcome to Panera Bread's third quarter earnings call. With me this morning are Ron Shaich, our Founder, Chairman and CEO; Drew Madsen, President; and Mike Bufano, our Senior Vice President and Chief Financial Officer.

As a reminder, we may make forward-looking statements regarding future events, expectations, plans or prospects for the future financial performance of the company. Any such items or remarks constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual events or results may differ materially from those indicated by these forward-looking statements due to a number of risks and uncertainties, including those discussed in the Risk Factors section of our most recent annual report on Form 10-K, which was filed on February 20, 2015.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our view as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views change. These forward-looking statements should not be relied upon as representing our views as of a date subsequent to today.

As an administrative note, for your future scheduling purposes, we are tentatively scheduling to publish our fourth quarter 2015 earnings release after the market close on February 9, 2016 with our subsequent earnings call on February 10 at 8:30 AM Eastern Standard Time.

On the agenda this morning, Mike will lead off a discussion on third quarter financial results, followed by Ron who will provide an update on our strategy to become a better competitive alternative, color commentary on our comps and a brief update on some key initiatives. Drew will then discuss our progress on innovation and food, marketing and operations; and finally Mike will wrap up with an update on our value enhancing initiatives and guidance, before we open it up for Q&A.

I will now turn the call over to Mike.

Mike Bufano

Thank you, Steve, and good morning everyone. Yesterday, after the market closed, we reported adjusted third quarter earnings per share of $1.32, down 4% year-over-year on an adjusted basis and ahead of our guidance.

Our adjusted Q3 2015 EPS, excludes a $1.4 million after-tax one time charge related to our re-franchising initiative. Let me remind you, that our reported third quarter 2014 earnings per share of $1.46, include an $0.08 benefit from a favorable one time tax adjustment.

In Q3, our revenues increased 7% to $665 million. This was primarily the result of opening new company-owned bakery cafes, with a 3.8% comp store sales growth at company-owned cafes.

Now, let me walk you through our margins; our third quarter operating margin, excluding the one time re-franchising charge declined by 120 basis points versus last year, due primarily to pressure on labor.

Digging into the details let's start by discussing food and paper. Food and paper costs delevered by 30 basis points versus prior year. This deleverage was primarily the result of mix shifts in our business. Specifically, breakfast, which has a higher percentage food than the rest of the day, continues to grow faster than lunch and dinner.

In addition, net income Q3, we were celebrating our new salads. Although these salads have a higher penny profit than flat breads, which we were celebrating in Q3 2014, they also have a higher percentage food cost. For the quarter, food inflation was about 1%. We continue to expect food and paper cost inflation to be approximately 1% to 1.5% for the full year.

Continuing down the P&L, labor cost was again the most significant driver of operating margin decline, delevering by 140 basis points in the quarter.

There are three factors contributing to the labor deleverage; first, structurally, our wage rates are higher across the board. We experienced about a 3% wage inflation in the quarter, which accounted for about 60 basis points of deleverage. The biggest driver of this inflation was statutory minimum wage increases. We know that our great associates are a key factor in the guest experience. As a result, we have always paid them higher than the minimum wage. As these statutory minimum wage increases are enacted across the country, wage inflation occurs from top to bottom in our bakery cafes. We believe the structural pressure on labor costs will likely continue for the foreseeable future.

Second, we continue to experience inflation and benefit costs, due primarily to the Affordable Care Act. Benefit costs contributed 50 basis point of labor deleverage in the quarter.

Third and finally, the startup and transition costs associated with our growth initiatives, particularly Panera 2.0 and catering hubs, impact labor costs.

So to summarize on labor, 110 basis points of the 140 basis points deleverage were due to structural factors such as minimum wage and ACA, with the remainder due to the startup and transition of costs associated with our strategic initiatives.

At the corporate level, we continue to balance making smart investments in our strategic growth initiatives, with our commitment to reduce non-strategic costs, primarily in G&A. In Q3, core G&A declined by 4% year-over-year, consistent with our commitment to reduce our core G&A by 5% in 2015. This core G&A savings was offset by investments in our growth initiatives. In total, G&A as a percent of sales increased by 10 basis points year-over-year in Q3.

Finally, our tax rate in the quarter was 36.2%. This tax rate was in line with our expectations for the quarter, and slightly favorable versus our Q3 2014 tax rate of 36.6%, which excludes the favorable tax adjustment in Q3 2014.

Shifting to new unit development; during the quarter, we opened 24 new bakery cafes system-wide. 10 company-owned and 14 franchise operated. These openings bring our system-wide café count to 1,946. Of the 10 company-owned cafes built during the quarter, seven were traditional bakery cafes and three were non-traditional.

The average weekly sales of the 39 company-owned bakery cafes open year-to-date in 2015 was 45,250, so that number again, 45,250, just above the high end of our full year guidance range. This is up versus the approximate 45,185 AWS of our openings in the comparable period of 2014. On the whole, we are pleased with our current year cafes, which continue to meet our sales expectations, and are indicative of the power of our Panera brands.

Let me now turn to deployment of cash in the quarter. We ended the quarter with $275 million in cash on band. During Q3, we repurchased 125 million in shares outstanding. We also deployed about $48 million towards capital expenditures, bringing our year-to-date capital spend to 153 million.

Now, I will turn the call over to Ron and Drew, who will provide you an update on our strategic initiatives. Ron.

Ron Shaich

Yes, good morning everybody and thank you Mike. This morning, Drew and I will quickly update you on our strategic initiatives. Let me just give some voice to what we are focused on.

As you know, our goal is to materially expand earnings growth for many years to come. To that end, we are intensely focused on our long term strategy for transformation, [indiscernible] in becoming a better competitive alternative in our cafes, and on building runways for expanded growth in very large adjacent businesses. We believe the best way to do that is, by improving the guest experience through Panera 2.0, and driving consumer excitement and loyalty through innovation of food, marketing, operations and design. We are also focused on leveraging our brand credibility, and utilizing the technology and operational investments made to-date, to create roadways for growth into several $1 billion plus adjacent businesses, including large order deliver, which we call catering. Small order delivery, which we call delivery, and consumer products, which we call Panera at Home.

So, let me be clear, in our view, all of the leading indicators signal our plan is working as expected, and we feel ever more confident about the future.

Let me provide some perspective on that competence. Let's begin our discussion, by reviewing our comps. As you know, we view comps as a leading indicator of the success of our strategic initiatives. So we are very pleased with our Q3 company comps, which were up 3.8%. Further, I'd like to note that our Q3 comps actually accelerated materially above the one year and two year basis. Indeed, our Q3 comps, were the best comps we have generated in nine quarters on a one year basis, and the best comps we have generated in seven quarters on a two year basis. As well, one can see our comp momentum, by looking at how Panera performed versus the all-industry black box composite. In fact, our comps outperformed the Black Box Composite by 229 basis points in Q3. That's the single biggest gap to the industry we generated in nine quarters.

Now, let's review the makeup of comps and then drill down into each component of comps. To be specific, our comps in Q3 were made up of transaction growth of 1% and check growth of 2.8%.

Let me now provide some color commentary on transaction growth. Let me begin by noting, we view our transaction growth in Q3 as a positive reflection of the impact of our initiatives. In our view, transaction growth means consumers are walking past competitors to eat at Panera.

We are pleased to note, that this is our sixth straight quarter of positive transaction growth, as well, the strength of our transaction growth can be seen in our continuing outperformance versus the Black Box all industry transaction growth composite. In fact, Panera outperformed the all industry composite on transaction growth by 230 basis points in Q3.

Finally, I should mention that transaction growth was up in every day part in Q3, with transactions in the pre-2011 day part up 1.7% and transactions in the post-2011 time period up 0.7%.

Okay. Let's now turn our attention to the other key driver of comps, check. Check growth was up 2.8% in Q3. Check, can be further disaggregated into price and mix. Price, increased by 2.1% in Q3 and mix, positively impacted check by 0.7% in Q3.

Okay, let's now discuss price. We took a 1.1% retail price increase in August on top of existing price, which brings us to 2.1% run price in the quarter. This price increase is not quite enough to cover structural wage benefit and food inflation in the quarter, but going forward, our plan is to do just that. We believe we can effectively take price to cover inflation, particularly, when competitors are doing the same thing, which is what we are seeing, when we see minimum wage increases. No, we will be tactical in execution, but strategic in our approach.

Let's now turn our attention to mix; mix was up 0.7% in Q3, let's look at what drove mix up. First, in Q3 2015, our product mix was positively impacted, as we celebrated higher price items such as our roasted turkey apple and cheddar sandwich, and our Power Kale Caesar Salad. These items positively compared to lower priced flat breads, celebrated in Q3 2014.

Second, I want to call your attention to the fact that total company catering sales, which carry a very high average ticket, grew 12% in Q3, which also contributed to a positive mix. I will cover the reasons for the strength in catering in just a minute.

Okay. Let's now discuss company comps by period, and in the first month of Q4. In July, they were up 4.4%. In August, they were up 4.8%. In September, they were up 1.9%, and for the first 27 days of October, they were up 3.4%.

Let me see if I can make sense, for you, of what's going on. First, there was a shift in the labor day holiday between August and September, which we believe positively impacted August, and negatively impacted September by 100 basis points. In addition, as we discussed on our Q2 call in July, it was more of [indiscernible] in the first half of the quarter than the second, consistent with the rollout of our Food as It Should Be Campaign.

Okay, enough about linear comps. We also think its important to look at comps on a two year basis. Let's step back; in Q3, our two year comps were 5.9%. We are pleased to note that our Q3 two year comps were the highest two year comps we have delivered in seven quarters. I will also note this, while many others in the industry have noticed a marked slowdown in October, we continued to see comp momentum.

Two year comps in the first 27 days of October, are up approximately 6.7%. In fact, in October, we saw an expansion in the gap between our comps in the industries, as measured, by the Black Box All Industry Composite. To us, both of these facts mean that our goal of being a better competitive alternative is taking form in reality.

Okay. To understand what's driving comps at Panera, we must discuss Panera 2.0. Let's do that now. As you know, Panera 2.0 is about improving the guest experience and reducing friction. Panera 2.0 consists of two elements, first, digital access to mobile, web and kiosk. Digital access in turn, enables a significantly better to go and eating experience, and digital access will be the foundation, that enables rapid growth in catering and rapid growth in delivery in the future.

Second, Panera 2.0, is built on a foundation of operational integrity, which is about ensuring we have the production capabilities needed to accommodate the growing number of digital orders we experience, and to deliver the high level of customer satisfaction and customization the Panerca customer demands.

While a next scheduled update on Panera 2.0 is planned for our Q4 earnings call, I did want to comment today on some of what we have seen most recently with Panera 2.0. Here is what we feel confident in Panera 2.0. Each week, we compare 2.0 and 1.0 comps and I can tell you affirmatively, each week that 2.0 comps materially exceed 1.0 comps, each week we see it, and each week we acknowledge it. I will also note, we are seeing increased frequency in Panera 2.0 stores, especially among those converted for a year or more, simply put, we are very pleased with Panera 2.0s continued sales momentum and the postivie impact is having on our business.

Now let's update you on our progress relative to converting our cafes to Panera 2.0. In Q3, we hit a record 108 conversions and we are pleased to say, we now have 280 Panera 2.0s in our company's system, with about 100 more Panera 2.0 conversions expected in Q4, that is to say, more than one each day.

We now expect to have converted about 25% of our company cafes in the second half of 2015, think about that. 25% of the system, converted in six months. Certainly, this level of conversion, brings with it significant startup and transition costs, but we are pleased to share with you the news that a record setting pace of conversion went smoothly and met our expectations on all fronts. Indeed, I should also note, we are on pace in every way to end 2015 with 400 company-owned Panera 2.0 cafes or about 50% of the system completed -- of the company's system, completed by the end of this year.

Let me note this, our franchisees are also excited to begin the Panera 2.0 conversion process. We are beginning to move resources in their direction. The first franchise cafes we will convert in Q4 with most of our franchise groups expected to have 2.0C café, up in 2016.

Okay. Let me now comment on the rate of digital utilization which is a byproduct of the technology that enables Panera 2.0. Digital utilization not only offers the potential to build guest sales, but allows some more efficient labor utilization, all else being equal. Digital utilization, which is to say orders that are both digitally placed and digitally paid in our Panera company cafes has now grown from 10% of sales at the end of Q2, to 12% of sales at the end of Q3. I will add that digital utilization now accounts for 22% of sales in Panera 2.0 cafes. Indeed to our knowledge, this is the highest digital utilization percentage of any public restaurant company in the industry, exclusive of the pizza guys.

As we conclude our discussion of Panera 2.0, I'd like to comment on our plans relative to reporting specific iteration-by-iteration 2.0 data in 2016. As we said previously, we intend to share our full Panera 2.0 data deck on our Q4 earnings call, but we will provide only color commentary on 2.0 beyond that call in 2016. We are announcing this policy today, because of the difficulties we expect to experience in 2016, in generating stable data for Panera 2.0 units, given our refranchising efforts and because more than half of our company stores are expected to be on 2.0 by the year end of fiscal 2015, which in turn, materially limits our ability to get a clean control.

In just a few minutes, Drew will comment on our initiative to create a better competitive alternative, by driving innovation in food, marketing and operation. But before he does, I'd like to provide an update on the efforts our runways for growth. These efforts are focused on utilizing our brand credibility and the technology capability of those we have built, to enable us to vacuum as many high ROI sales dollars as we can from a given zip code. The adjacent business we are focused on are large order delivery, which we call catering. Small order delivery, which we call delivery, and the sale of Panera branded products through other retail channels, which we call Panera at Home.

Let's start with a quick comment on catering; we continue to believe we can consolidate market share in the fragmented catering space and grow this into $1 billion business or greater over time. Central to our strategy to grow sales in catering are delivery ops, which serve multiple stores. Let me report, that our delivery ops are doing just what we had hoped they would do.

As I noted a few minutes ago, we are very pleased with the accelerating sales growth we are seeing in catering. In fact, company-wide catering sales grew 12% in Q3, and we think that's directly tied to the hubs. Indeed, this is the strongest rate of catering sales growth we have seen in seven quarters, as well, the fact that our hubs generated sales growth at a rate of 150% the rate of growth of our cafes. That is to say 1.5 times the rate of growth in the hubs, when compared to the rate of growth in our cafés offering catering, we believe, is indicative of the strength of our hub thesis and the impact professional marketing and professional sales management is having on catering growth.

Okay, let me now turn my attention to delivery and provide a few comments on that effort. Our delivery initiative, is meant to meet the needs of small groups of coworkers or families, that want to quick launch their dinner in their own facilities or their homes. Delivery was part of the original 2.0 vision, and is something we have been working on, indeed prototyping and testing for several years now. Today, we have several different test of delivery operatings in four different markets. Well we don't typically comment on tests for all the obvious reasons. There are several things we are learning from our testings, that I think are helpful to share with you today.

For us, delivery provides an additional dimension to our business. Let me add, that here at Panera, delivery is not seen as a play for those few customers seeking the ultimate in convenience without regard to price. Rather, at Panera, we have come to view delivery as a powerful opportunity for real and significant long term sales and earning growth, not just as a modest comp driver. As well, we view it as having modest startup expenses.

Our confidence, comes from the significant buyers we are seeing in our test markets, and the expected sales and profits that can be expected as awareness of Panera as the delivery alternative grows. Further, we are increasingly confident in the potential of delivery, to positively impact Panera, based on a number of factors. First, sales of salads and sandwiches, because they are generally not heated, are perfect through our delivery channels, especially at lunch. As well, sandwiches and salads are the preferred food choice for so many small gatherings.

Delivery, also makes great sense for Panera, because it uses our production capacity without straining our lunch time seats, which are already at or near capacity in so many locations. And further, the digital ordering, payment and production systems we put in place, to enable Panera 2.0 can be uniquely leveraged to support a delivery business. In fact, given our existing technology, delivery appears through our café managers, that's just another to [indiscernible]. Indeed, the only thing standing in the way of Panera entering the delivery business on a mass scale, is finalizing how best to execute the final mile from the café to the customer. That is to say, how best to get the food from the café to the home or the office.

To that end, we are currently testing internal drivers and several external delivery organizations. We are delivery agnostic, with our criteria being that whatever approach we choose, must offer the greatest probability of a differentiated experience for the guest, and ultimately the best lifecycle, economics for shareholders. As well, we are focused on an alternative that minimizes startup costs.

Let me conclude with one last perspective on delivery. As you can tell, we have come to believe deliveries are real mass market opportunity for Panera and one that offers significant potential for sales and earnings growth. Note, we are hard at work determining how best to take advantage of that opportunity.

Okay. Allow me to now comment on our Panera at Home business before I hand the mike over to Drew. AS you know, Panera at home is about selling Panera branded products to other retailers. I have a few facts to share with you about the power of this opportunity.

First, the Panera brand has the highest market share in the country in refrigerated soups other than house brands, and research indicates Panera has significant brand equity in a number of other categories. Panera at Home is growing sales at a 60% growth rate year-over-year for the last four years. You hear me? 60% growth for the last four years. Today, the Panera at Home business is sizeable in its own right. Indeed, Panera at Home is now projected to be $175 million business at retail by year end 2015. I don't think any other commentary is necessary for you to see why we are clearly excited about this business opportunity.

Okay, I'd like to now hand the call over to Drew, so he can talk about the innovations, food, marketing and operations that he is overseeing, as part of our efforts to ensure we become an ever better competitive alternative. Mike will then provide guidance and I will return for a quick closing comment. Drew?

Drew Madsen

Thanks Ron and good morning everyone. It has certainly been an exciting few months for me since our last earnings call. I have continued to learn more about the Panera business and get more actively involved in our efforts create a café experience as a better competitive alternative for our customers through innovation in food, marketing and operations.

One of my most exciting discoveries since joining Panera, has been how well positioned the brand is for future growth, and how clearly articulated the Northstar is for guiding the innovation necessary to further strengthen brand relevance and drive customer demand.

As we have noted before, after significant customer research and industry analysis over the last 18 months, we have developed a view that there is a long term secular shift by consumers to both eat healthier food and eat food that they crave. For these reasons, we are playing for what we see as the biggest meat steak [ph] in the restaurant space. The intersection between food that is good for you and food that is simply good. And its important to note, that this is what Panera has always stood for, so we are building on our historic credibility, as we evolve our café experience.

Now to win in this space, to be a better competitive alternative, we are deeply committed to the Northstar idea of craveable wellness, and in elevated experience, that is our brand promise. We believe firmly in this reimagined brand promise called Concept Essence 2015 and believe it provides a unifying strategic vision for all of our innovation in marketing, food and operations.

Now let's start with a brief update on marketing innovation. Our new Food As It Should Be campaign is a powerful communication platform for Panera going forward. It genuinely captures the warmth and humanity that has coursed the Panera brand, makes a clear and unequivocal statement about what we stand for regarding food, and also helps generate customer excitement.

So more specifically, it gives voice to the way food should be sourced, the way food should be prepared, the way food should taste and the way food should make you feel, when you eat it. We believe this campaign will help build our brand reputation, category credibility and excitement among customers, all contributing to sustained sales growth now and into the future.

Our initial campaign creator, which aired back in June and July, tested well on key measures like Panera serves food I can trust and purchase intent, and we believe contributed to a meaningful increase in sales growth. The second round of creators, which aired in September and in October, tested just as well and also contributed to an increase in sales growth.

The Food As It Should Be campaign combined with our No No List announcement in May, plus an extensive outreach effort to key influences has created tremendously positive social media buzz and earn media coverage. Panera has clearly become a reference brand for clean food in our industry.

The final marketing program that I wanted to briefly discuss this morning is our My Panera program. As you know, My Panera now has more than 20 million members and about 50% of company transactions are done on My Panera cards. So this is a very significant strategic asset for us going forward.

Now we have historically used My Panera to help drive awareness and trial of new growth opportunities like rapid pickup and kiosks. Provided targeted day part or product offers, to help generate trail and profitable transaction growth, and help identify areas of opportunity, to improve our café experience, and all of those activities continued during our third quarter, at levels comparable to last year.

Going forward, we have an opportunity to more effectively leverage our customer data and analytics, to deliver personalized one-to-one content that is more relevant to customers based on their individual preferences and where they are in their Panera lifecycle, and we intend to do just that.

So in summary, we are very pleased with the positive impact of our new advertising campaign, our own media efforts and the My Panera program. We also believe that all three areas can be further strengthened in the future.

Now let's discuss food innovation, and specifically how we are bringing the promise of craveable wellness to life in our cafes. So first, we are innovating to further ensure that Panera is an ally for wellness for our customers. A brand they can trust, to help them eat the way they want to eat, and not just in words, but in the food and transparency that we provide.

As I mentioned earlier, the No No List we unveiled in may is a clear line in the sand, that assures consumers they can count on Panera for food, free of all artificial flavors, colors, preservatives and sweeteners. We have already removed artificial ingredients from 90% of our food items, and expect to reach 100% by the end of 2016.

Second, we are also working hard to delight our customers with craveable food. Food that's so good, it's worth going out of your way to get. A great example is our new roasted turkey apple and cheddar sandwich, introduced in September and featured in our most recent advertising. Made with real roasted turkey, nothing artificially, simply seasoned [indiscernible] and served on our new cranberry walnut bread. This sandwich has generated a lot of customer excitement, and has become one of our top sellers. A second new dish that has been very popular with customers is our Ancient Grain, Arugula & Chicken Salad, also featuring our new apple slosh [ph].

We recently also brought back several popular seasonal favorites, including roasted turkey cranberry flatbread, vegetarian autumn squash soup, all natural turkey chilly, and a clean pumpkin spice latte, which is always being made with real pumpkin. In addition, all of our flatbreads have been redesigned to include 15 grams of whole grain in each serving, qualifying them as whole grain offerings.

Break food is always differentiated at Panera, and it will be central to our success in the future. I won't go into details now, but expect to see increased food innovation in 2016, as we bring to market an increasingly seasonal lineup of clean soups, salads and sandwiches.

Operations innovation is the final area I would like to review this morning. Generating increased customer demand and excitement through innovation in food and marketing is certainly essential. But equally important, is making sure that we are prepared to meet the demand and capture incremental sales, and delight every customer that visits our café with an experience that exceeds our expectations and build royalty over time.

To that end, our operations teams are very focused on two key initiatives; increasing peak hour throughput and further improving customer satisfaction, especially in our opportunity cafes.

Throughput between the peak 12 to 1 hour improved materially in the third quarter compared to the second quarter. And this improvement has been driven by the implementation of auto load balancing and also our café team's better utilized available production capacity, salad crispers that helps us stay and stock more consistently, and certainly the continued expansion of Panera 2.0.

Customer satisfaction, as measured by our proprietary café health tool, also continued to improve during the third quarter. Our top box [ph] satisfaction score, which has the greatest linkage to comp growth increased markedly year-over-year, and customer satisfaction in the bottom 25% of cafes, which we have specifically targeted for improvement, increased at a rate more than twice as fast as the rest of the company.

This improvement clearly indicates removing the needle on what matters the most to our customer, which is great food, delivered with great customer service and delivered quickly. And given the direct correlation we have seen between improving customer satisfaction and higher comps, this is a positive indicator for sustained future sales growth as well.

So in summary, let me close by saying, that I believe our strategy to create a better competitive alternative is rigorous, its grounded and what our customers are telling us they want today, as well as our view of where the customer is going in the future, and its working. Innovation in food, marketing and operations to-date is clearly making a positive difference, and there is more innovation ahead in each area.

Now let me turn the call back over to Mike, who will cover our value enhancing initiatives, and our forward guidance.

Mike Bufano

Thank you, Drew. Earlier this year, we announced several value enhancing initiatives, meant to mitigate the pressure that arises from investments we are making in being a better competitive alternative with run rates for expanded growth.

Specifically, in February 2015, we said we would increase the capital return to shareholders through share repurchases. of all of our capital structure to increase leverage, refranchise 50 to 150 low profit bakery cafes and cut 5% of our G&A. Through three quarters of the year, that's exactly what we have done.

I will now provide an update on some of these initiatives, starting with share repurchases. While going through this period of investment, we have meaningfully accelerated the pace of our share repurchases. During the quarter, we repurchased $125 million of shares at an average price of $183 per share. This brings our year-to-date purchases to $275 million at an average share price of about $181 per share, totaling about 1.5 million shares outstanding retired. We remain on track to achieve our previously stated objective of repurchasing $500 million in shares by the end of Q1 2016.

Now, let me update you on our progress towards our refranchising target of 50 to 150 cafes. On October 7th, we completed the sale of 45 company-owned bakery cafes in the San Francisco, Sacramento, and Seattle markets, to a new franchisee for approximately $27 million. The bakery café level of profit in the market was below our system average. As a result, this deal is accretive to ongoing earnings before the use of proceeds. I would also like to note that the transaction did include seven Panera 2.0 cafes in the Seattle and San Francisco markets.

Some of you are probably familiar with our newest franchisee, the Flynn Restaurant Group. They are one of the largest restaurant operators in the U.S., operating 729 units, generating $1.6 billion in annual sales across their Panera, Applebees and Taco Bell systems.

Greg Flynn is someone, who has long sought an opportunity to become a Panera franchisee. We are very excited to have Greg and the whole team at Flynn Restaurants as part of the Panera family.

With the completion of this deal, we have now refranchised 75 cafes. This is within our previously communicated refranchising target of 50 to 150 cafes. While we are now within our targeted range for this initiative, we continue to evaluate a limited number of additional refranchising opportunities, but we will refranchise only when it makes economic sense for the business, and only when we project the transaction to be accretive to EPS on an ongoing basis.

Finally, I would like to touch on our initiative to reduce G&A. Based on our own internal analysis, as well as independent external benchmarking and analysis, we hold our G&A, whether measured as a percent of company revenue, a percent of system sales or on a per café basis, as amongst the very lowest in the restaurant industry. However, we continue to take very seriously our desire to control costs even further. As I said earlier, our core G&A was down 4% during the quarter, and we remain on track to meet our full year target of reducing core G&A by 5% versus prior year. In summary, we are very pleased with our progress on our value enhancing initiatives.

Let me now transition to a discussion of our full year and fourth quarter targets. Given the transformational nature of our strategy, we know there will likely be pressure and volatility associated with the startup and transition costs that come with rolling out our strategic initiatives. To that end, I'd like to give voice to the nature of the cost pressures we are experiencing.

First, startup costs, the nature of these investments requires us to incur upfront costs for startup, training, and digitalization [ph] before we start realizing benefits.

Second, transition costs; the time needed to see benefits from some of these investments can take three quarters or more. This is typically the inefficiencies while we stabilize our team, as well as the time needed for the guest to notice the changes and evolve their behavior. With all the startup and transition costs and the price we pay to bring into service, initiatives that generate significant IRRs over time.

Third, the cumulative impact of layering on these initiatives; we are a large organization with nearly 2,000 cafes. We cannot roll out some of these initiatives in all of our cafes at once. We have been layering some of these initiatives and over multiple quarters, and expect to continue doing so. Thus the cost pressure can extend over several quarters.

The back half of 2015 is a good illustration of such a phenomenon. We anticipate converting over 200 Panera 2.0 bakery cafes in the third and fourth quarters combined. As Ron said, we are converting almost 25% of our company-owned bakery cafes in six months. That's at a rate of more than one per day. Bringing these many cafes into services, brings with it cost pressure and volatility.

This perspective then forms our targets for the fourth quarter. Excluding one time gains and losses, we expect Q4 2015 EPS to be down mid-single digits versus our Q4 2014 adjusted EPS of $1.87. Say it another way, we continue to expect relatively better year-over-year earnings performance in the fourth quarter when compared to the first half of the year, even with the increased pressure and volatility associated with the startup and transition costs.

Consistent with this earnings target, we are targeting Q4 same store sales on a one year basis to be in the middle of the full year range of 2% to 3.5%. I should note that this means one year comps are anticipated to decelerate modestly from the first 27 day trends, due primarily to the timing of media spend, as well as a tougher compare in the later months of the quarter.

Inclusive of this Q4 target, we remain confident in the full year 2015 target we have maintained all year. Specifically, we continue to expect adjusted full year EPS growth of flat to down and mid to high single digits versus our 2014 adjusted EPS of $6.53, excluding one time gains and losses.

We are also reaffirming the key assumptions that support this target, including same store sales growth of 2% to 3.5%, operating margin contraction of 100 to 175 basis points. Within operating margin, we continue to expect G&A as a percent of sales to be roughly flat for the full year. 100 to 150 new bakery café eats system-wide, with an average weekly net sales now expected to be at the high end of our previously stated range of $43,000 and $45,000; and finally, we continue to expect an effective tax rate of about 37%. Let me just say, we are pleased we remain on track for full year 2015 performance, consistent with the target we have maintained all year.

Finally, I would like to take a moment to address 2016 guidance. Internally, we are still finalizing our planning for 2016. Given the many moving pieces, the pressure and volatility I mentioned earlier and the new information arriving almost daily, we believe it is prudent to wait until our Q4 2015 earnings call in February, to provide our 2016 EPS targets.

With that, I will now turn the call back over to Ron, for a quick closing comment.

Ron Shaich

Great. Thank you, Mike, and thank you everybody. Let me conclude with this; I am proud to note, that we recognize the power of an on-the-channel experience four years ago. Indeed, several years ago, we came to understand, based on our testing, that the customer wants to engage differently with restaurant brands today, and indeed all of retail and we set out to meet that need. Today, its becoming ever more clear, they strategy we laid out back then, abusing technology to enable a materially better guest experience was the right one.

Recently, Chipotle announced it is ramping up its commitment its technology, to drive its To Go business, and Starbucks said its accelerating the national roll-out of its rapid pickup program. In addition, recently, both Walmart and Whole Foods announced major commitments to technology, and acknowledge the necessities, we will invest heavily in technology, with year-over-year compression in P&Ls [ph] ahead of them, in order to create an omnichannel experience for their guests.

While many other companies are just realizing the need to build these capabilities, we are well down the investment curve, and most importantly, have the ability today, to leverage our technology infrastructure in several adjacent businesses, like catering and delivering. Given our lead, we expect to see the benefits long before others.

In conclusion, let me reiterate our deals. Our strategic plan to generate increased shareholder value, by making Panera a better competitive alternative with runways for expanded growth is, simply put, working. Leading sales indicators are showing just that. In addition, our initiatives to expand to several billion dollar plus adjacent businesses, including catering, delivery and consumer packaged goods, are also gaining traction. Despite the pressure on near term earnings related to startup and transition costs associated with our strategic initiatives, the progress we are seeing, gives us increased confidence in our strategic plan and its ability to drive expanded earnings growth.

With that operator, we are going to begin question and answer. As is normally our policy, one question basically per analyst, unless you have been covering us for a quarter of a century here. Okay, and then you get 1.5. All right. We are open as you like.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. First up, we will hear from Jeffrey Bernstein, Barclays.

Jeffrey Bernstein

Great. Thank you very much. I haven't been covering you for 25 years, so I will stick to one question. Just qualitatively as we think about the success you have had with the 2.0 rollout and what not in 2015. Just as we think directionally towards 2016, actually a two part question; just one, wondering whether what --

Ron Shaich

Its not one, it’s a two part.

Jeffrey Bernstein

First part being the -- seems like you have been able to sustain kind of 100 units a quarter conversion? I don't know whether that's a reasonable assumption to think about at least directionally for 2016. Again, it seems like you have been very pleased with it thus far. And I would guess here, the majority of the company operated system by the end of 2016, and that kind of just leaves me into my broader question on 2016, which again I know you are not giving guidance on earnings until next quarter. But it seemed like you commented on the press release about high level of pressure on the near term earnings growth, maybe, I get the impression that was meant to temper 2016 expectations? I am just wondering -- to say it another way, I mean is it feasible for EPS growth in 2016, or just the headwinds of so many conversions over the -- these two quarters this year, and the four quarters next year, more than enough to overwhelm the cost cutting and the share repos that earnings growth in 2016 is probably not a reasonable expectation, at least directionally?

Ron Shaich

Let me just start with the first part, and then Mike will add his two cents in the guidance. Essentially, we are going to have the majority, or certainly, give or take 50% of the company store is done by the end of 2015. I mean, there is a massive amount of 2.0s getting done right now. I would assume, because we are already out there, having told you we will do hundreds of 2.0s in the company system in 2016, that this significant or the vast predominance of company storage will be on Panera 2.0 by the end of the year. So I think you can assume, we will be through the bulk of that transformation, what makes sense in 2016.

Relative to 2016, we will give you our body range. We are not trying to pull back, but we want to give you clear targets, and we want to make sure we have all the information to do so. Want to share some 2016 perspective?

Mike Bufano

I mean there is a couple of things Jeff, we are not going to get into your point specifically. We are not going to say its positive earnings, both possible and non-possible. If we knew that, we would give guidance. We want to be able to give the guidance that we had and we have the clarity.

What I would tell you, the way we kind of more probably think about it in 2016, is like we said in a release, there is pressure, there is volatility that comes with the rate of investment that we are doing. But as we look at it, the point Ron just made, will be through the bulk -- we should be through the bulk of the Panera 2.0 conversions by the end of the year. Even as we think as we end 2015, we will be up roughly half of the company, own cafes will be converted by the end of the year. So as you build through the year, we start -- we would believe that benefits would start to outweigh the costs, as we move through 2016, is how we would hold it.

I think on top of that, the story of 2016 isn't just about Panera 2.0 though, its about all our expanded growth vehicles and its about all of our innovation efforts, a lot of the stuff that Drew mentioned on the call. So 2016 isn't solely a Panera 2.0 story for us.

Jeffrey Bernstein

Great. Thank you.

Ron Shaich

There is a lot of things that are possible. I think that, other than guiding you to that, there is a wide range of possibilities for 2016, and when we guide you, we want to try to guide you with some clarity.

Operator

Next, we will hear from Sara Senatore, Bernstein.

Mike Bufano

Hi Sara.

Sara Senatore

Hi Mike. Thank you for taking the question. I wanted to go ask a little bit about the difference between franchise comps and company comps and that gap widening, and in particular, is that just -- catering and then 2.0, is there something else, is there any shift in markets that -- where you both have company stores and franchise stores between them. So just trying to get at the drivers, and I guess, related -- are they seeing the same improvement in productivity or -- and also in, as you've talked about the breakfast. So are there trends roughly -- directionally similar but they are not getting the same benefits fully, because they don't have the 2.0 or the catering hub? Thanks.

Ron Shaich

I'd say it this way; one of the advantages of having a system where we own 40% odd of the stores, is we actually put skin in the game and go out and test it. Our franchisees to a person, we just came off our franchise round table, where we meet with them twice a year. Couldn't be more pleased that we actually have done this, and we went forward and did it. And what you see in the widening divergence and the comps, and we talked about that with the franchise community, is the impact of these initiatives. That's simply what it is, because otherwise, its exactly the same, and so it is really the impact of 2.0 and our initiatives. They see that just as well, it gives them even greater confidence relative to making the kind of effort that this requires. I think in a nutshell, the difference you're seeing is the impact of 2.0, the impact of the hubs, and in particular, the impact of some of this intense focus on operations and café health that you are hearing Drew talk about, manifesting itself in throughput. So I think its good for everybody, when we see it.

You get the appreciation for it. It’s a clear control for us and our franchisees are the beneficiaries of it, they can actually see it happening suddenly.

Mike Bufano

Thanks Sara.

Sara Senatore

Thanks.

Operator

From UBS, we will take the next question from Keith Siegner.

Keith Siegner

Thanks.

Ron Shaich

Good morning.

Keith Siegner

Good morning. Quick question, when we think about 2.0 and the rollout and the measured pace, which makes perfect sense given the resource intensity of it. If we switch to delivery, right, you talked about modest costs and startup. You are just in final mile test. Once those decisions are made, once you reach the conclusions on the final mile piece, how does the pace of rollout of delivery happen, right? Does that need to be slow and measured, can that happen more quickly? Just very -- I am not asking you to commit to anything, just structurally, how do you think about that? Thanks.

Ron Shaich

I think its materially lighter than 2.0. 2.0 is physical change, heavy. You got to make physical changes in the production system. You have got to install the kiosk and it has got major retraining involved in it. So that's what has caused us to have to build up a machine, literally, to convert 2.0s. That machine is now operating at the rate of 100 stores a quarter, and its working very effectively, big machines, serious [ph] training machine.

Delivery is of a different form. I mean, delivery, all of the infrastructure is in place, the technology, that's already existing and working. For our managers, the only issue that -- the way they experience a delivery order, is another to go order. They don't even have to deal with where it goes. The issue for us, and the only real issue in rolling out delivery, quite frankly, is acquiring the drivers, and the question really turns on this question I raised earlier, do you go internally, do you go externally, do external organizations have the breadth and scale to handle the thousands of stores we have? Do they have the presence? What's the quality of that experience when you are doing it in a mass market, how best to do it? But I think the long and short answer to your question, and I want to be very clear, delivery and literally everything at this point, but delivery in particular has very modest, almost no capital costs associated with it. Almost no material technology costs associated with it, all of that has already sunk, and it has modest training and -- talent acquisition, hiring costs associated with it.

Keith Siegner

Thank you.

Ron Shaich

Thanks Keith.

Operator

And next, we will hear from Jeff Farmer, Wells Fargo

Jeff Farmer

Great, thank you.

Ron Shaich

Good morning Jeff.

Jeff Farmer

Yeah, how are you?

Ron Shaich

Good.

Jeff Farmer

Mike, you called out 110 basis points of structural wage pressure in the third quarter, driven by higher wage rates and some of the benefit cost inflation. Should we be expecting a similar level of pressure in Q4 or both of those pressure points still mounting in the current quarter, and what's the outlook for 2015 on, again, structural and wage rate inflation?

Mike Bufano

I would say, on Q4, we would expect similar to what we saw in Q3, and its similar to what we actually saw in the second quarter as well, Jeff. In terms of 2016, we are not going to get too specific on it. I mean, like I mentioned on the call, I do think the structural wage inflation piece is here for the foreseeable future, and we will think about that as we think about all our overall guidance for 2016, and how we think about the year.

Jeff Farmer

Okay. Thank you.

Operator

Next up, we will hear from Sharon Zackfia, William Blair.

Ron Shaich

Good morning Sharon.

Sharon Zackfia

Hi. Good morning. I think you might have mentioned, Ron, the opportunity to take more price next year as you see some of the labor dynamics that are structural in the industry. Can you talk about kind of where you are on the science of price elasticity demand, and kind of how you're comfortable in taking that price? Is it region by region, product by product, just kind of walk us through the dynamics there?

Ron Shaich

Yeah, I think, Sharon, as you know, we did a very extensive series of pricing research last year, as we develop [indiscernible] there. But very extensive, brought in one of the top consulting groups to help us with it. But what we came to understand, is that -- in pricing, it all depends. It really depends on the individual item and how much headroom that item has, how much brand franchise it has, how differentiated it is, and it depends on the market. And we began to understand that in certain markets on certain products. We had much greater headroom than we did in other products, and it also led us to conclude that, this version was too narrow within Panera and that we would probably -- there was opportunities in some of the more expensive markets. [Indiscernible] was probably 3%. Other concepts are running as much as 10% or more, there was opportunities in some of the higher priced markets to take more price, but at the same time, being more cautious in lower cost markets.

But again, it all depends on the market and on the product. More recently, I think what we learned is this; I think we feel very -- relative to wage increases and minimum wage. I think we all understand public policy has evolved. And there may not be a federal wage increase, but there absolutely is a national wage increase happening in a patchwork fashion across the country. I think 22 states that have now raised their minimum wages. Its going up and its going up significantly.

Toss that to inflation. Its affecting all of us, and one of the things we noticed, in Emeryville, California, for example, where we hit at a $15 wage increase, it was voted by the City Council one day, and it went into effect literally the next day. And we saw all the usual cast of characters that we usually compare ourselves to, Starbucks and Chipotle, take price immediately to cover that. We did as well, and --

Mike Bufano

We did. We [indiscernible].

Ron Shaich

We watched. We held that. But the point I am trying to make is, I think what you are going to see, is that all of us in the industry, essentially view this as inflationary, just like if there was a broad based increase in any commodity, and labor is a commodity in that sense, its going to affect all of us, and we are all going to have to take price, that's the reality of it, and I think its going to affect us all. It may affect our industry, relative to other industries that have lower or greater price, and its reality. Its also one of the reasons, quite frankly -- when we think about 2.0, we think about digital utilization.

We did our digital capabilities -- that's part of 2.0, to give a better guest experience, it was never about labor. Having said that, it’s a powerful beneficiary. When you're running, 10%, 15%, 20% labor; digital utilization, and with order input, is 30% or 40% of your costs, you can figure it out on your own, you're literally reducing or removing the demand that is assigned to that labor. Labor is going to go down, and as digital utilization goes up, and -- like the sun comes up in the morning, it is going to continue to go up, digital utilization, much as you are seeing it happen in Panera today, as it happened, its going to benefit larger organizations like Panera, who already have the technology in place.

Sharon Zackfia

Okay, great. Thank you.

Ron Shaich

Thanks Sharon.

Operator

Our next question comes from Andrew Charles, Cowen and Company.

Ron Shaich

Good morning Andrew.

Andrew Charles

Great. Good morning guys. Last year, you talked about the decision to develop technology initiatives in-house given the upside versus licensing digital initiatives. And now you seem to be in a parallel situation with delivery in Panera at Home, with outsourcing and licensing initiatives, albeit you remain delivery agnostic, using Panera employees and tests. Just given the early success you are seeing with delivery in Panera at Home, are there opportunities to bring these more in house, to capture the full upside as you go?

Ron Shaich

First, I want to correct something, because there maybe a confusion on your behalf or others. Most of our technology was not developed in-house. Much of our original technology has been developed out of house. What we did, was integrate it, and we brought it together, and to be clear, we are rather agnostic in how we do it, that we'd rather not do it in-house. All things being equal, and we'd rather not -- simply because we don't want to tie down the resources and we want to be the customer.

Having said that, when you're dealing in an integrated fashion, you can't just take off the shelf solutions. And I think, any number of the folks that I talk to, that are providing off the shelf solutions, are suggesting that the Panera system today, that's at the core of the 2.0 is actually the gold standard of what they'd look to do. And we are now running a major technology organization here, with nearing hundreds of thousands of orders a day. And this is a serious enterprise.

But anyway, the first point I want to make, is this has not been primarily developed in-house, it has been developed to a range of [indiscernible]. Secondly, I think that's just the question you want us to be asking, relative to delivery and relative to Panera at Home. Relative to delivery, we are going through that in a very serious way. Its ultimately a question of the quality of the guest experience, in-house versus out of house. It’s a question of variable versus fixed expenses, we'd much rather have it variable. Reducing the startup expenses, while we do look at the lifecycle of the economics.

Now you get to the question of CPG; and in CPG, I will tell you that we have done it almost entirely on an out of house basis, with a wonderful little crack team here [ph], it has been extraordinary what they have been able to do, and it has been done on a licensing basis.

You will probably see us, as this takes on larger and larger scale, moving to capture more of the margin and be more in control of our customers in the whole process. But clearly, we are not prepared to make comments on this call, relative to that. But soon, we are smart enough to look at this, in a disciplined way and never take a kneejerk approach, but try to take a lifecycle approach.

Andrew Charles

Thank you.

Operator

Next we will hear from Jason West, Credit Suisse.

Ron Shaich

Good morning Jason.

Jason West

Hi. Good morning guys. Thanks. I guess, just thinking big picture about the trajectory here of earnings, you guys have talked this year about taking some steps to improve the capital efficiency by the stock. I mean, you kind of have guidance on that through 1Q. But without offering specific guidance, strategically, do you think those types of steps continue to make sense to protect the earnings power, improve the earnings power of the organization, while you are making these investments, even beyond 1Q?

Mike Bufano

Yeah Jason, I can take that one. I mean, that's the conversation we are constantly having with our Board of Directors. Its something that we are certainly very sensitive to, as we think about where we [indiscernible] in 2016 and it plays, and then what we think our overall capital needs are, to continue to get high. IRR investments in the business, as well as the right rate to return cash to shareholders. So its something that we certainly are thinking about now, even how it plays into 2016.

Operator

Next up from Piper Jaffray, it's Nicole Miller.

Mike Bufano

Good morning Nicole.

Nicole Miller

Hi, how are you?

Mike Bufano

Doing well.

Nicole Miller

Great. Can you just please remind us what elements of 2.0 does a new store open with, both company and franchise please?

Ron Shaich

Sure. I mean, we are -- it all depends, stores would be different, but they begin basically with a single point of pick up. We generally convert to a single point of pick up business, as opposed to a spread system, with the exception of our front of the house bakery case. We generally, as part of that, have moved away from the wall, and are wrapping the cappuccino station so we have an integrated wall. And then it includes all the technology package, inclusive of the proper number of kiosks for that store and the flow that needs to be rearranged to do that, and depending on the market, it may or may not get delivery to the table, and the infrastructure that goes with that.

Nicole Miller

Thank you.

Mike Bufano

Sure. Thanks Nicole.

Operator

From Guggenheim, up next is Matt DiFrisco.

Mike Bufano

Hi Matt.

Matt DiFrisco

Thank you. Hi guys. I was just curious, also a little bit of follow-up on that, and some clarity on 2.0. Last couple of calls, you gave some detail, as far as what you were just covering with Nicole. But I was also curious I mean -- is it correct to assume that we are going to have all near 1,000 company owned stores or designated against the 2.0? I think maybe a little bit into question, is it right for all or is it [indiscernible] stores?

Ron Shaich

I don't think you should its all stores at all times. I think that, large system, like Panera's, any number of stores are in different places at different points. Maybe the store has got a limited time left on its lease. Maybe measuring in a year or two, maybe we are relocating it. Maybe it doesn't have the volume that warrants it. So I think the way I would hold it, as you should, about anything in Panera we do. We don't believe anything has to be done nationally, everything is ultimately local. But I think you should assume that Panera 2.0 will be done in the significant or a material breadth of Panera, without it being something that's conditioned to being Panera.

Matt DiFrisco

Okay. Is it correct to assume that, if you look back and you say the ones you have done today, and if you did the same exact amount over the next period. Same like period, it will be less weighed, because of optimize that you are taking away to the wall. You have decided efficiently if it should be delivered to the table or not. So let's say 300 that you just did was the future 300, would the future 300 be less weighted? Is that correct, still?

Mike Bufano

Absolutely. Getting smarter.

Matt DiFrisco

Thank you.

Ron Shaich

Well, thank you.

Mike Bufano

Great. Thanks Matt. That was an easy answer.

Operator

We will now hear from Brian Bittner, Oppenheimer.

Brian Bittner

Thanks guys. Good morning. I want to talk about labor again, just I guess, a little different angle. I think only a small portion of the deleverage this quarter was really related to these transitory 2.0 actions. I think you said it was 30 basis points of the 140. So when I think -- is your belief that this 30 basis points pressure from 2.0, was that abnormally low, or is that kind of how we should think about it directionally going forward, or should we think about it directionally worsening from what we saw in the third quarter? Just trying to think about this third quarter, the 30 basis points of pressure, and if that's kind of a good sample?

Mike Bufano

Yeah, I mean, there is a lot of factors that play into it. So we can't really give a specific answer to the question. I mean, like, for example, in the quarter, our comps are up 3.8%. So that by itself, impacts the amount of deleverage you are going to see on the labor line, whether its due to minimum wage inflation or anything else, that certainly plays into it. I think by the same token, we rolled in 108 units in the quarter for Panera 2.0, so that's a startup days, from what I talked about earlier, we moved into the transition cost days, rolling in another 108. So its very hard to say, in a given quarter, is the answer going to be exactly like 30 basis points. And it’s a layer, as we said on the call, layer in over time as it will happen.

I think what we were trying to do there, just to be clear on labor is, I think we have realized, as we talked to a lot of analysts and a lot of investors after the second quarter call, everyone was looking at our labor line and assuming that all of the deleverage was coming from the investments in 2.0 and hubs, and that really isn't the case. That's where we are trying to give you guys a little more granularity around, the impact of the statutory minimum wage increases, and the impact of benefit costs, and how that's affecting us in 2015. Is it the full story on labor, its not just about the investments. That's what we are trying to go. We are trying to signal something specific about 2.0 in terms of the number. We are just trying to add a little more color to it, for your clarity.

Brian Bittner

That was super helpful. Thanks.

Mike Bufano

Great. Thanks Brian.

Operator

Karen Short from Deutsche Bank is up next.

Mike Bufano

Good morning Karen.

Karen Short

Hey. Thanks for taking my question. Just on the conversion, I guess what I want to find out, is in terms of the 2.0, given the pace of the conversions into the fourth quarter, and then I guess, looking at next year. I guess the first question is, is it fair to think that the know-all conversions -- will be predominantly know-all conversions, and then I guess within that, do they generally drive the same sales lift as the wall conversions, and are therefore higher ROIC? And then the second question I had is, just on the classes of 2015 and 2016 conversions, what percent were in 2015, more constrained cafes? Because I think you, Ron, mentioned on the last call, that that's obviously where you get the best sales list. So wondering, what percent were in the more constrained cafes in 2015, and what percent you think will be in 2016, in the more constrained?

Ron Shaich

I will make it very quick. I will say that hey, we are not doing the wall generally, I think except in very rare occasions, the walls being bought up within -- start up separately. We think a good thing, but it pays out over a longer period of time than we are willing to accept at this moment.

Secondly, what that implicitly means, is the ROI is going up. The I is going down, and the R isn't changing. We don't believe in a material way, in the short term. So we would say, affirmatively yes, on the ROI.

And then, relative to constrained stores, my guess is, because when we did do the testing work on 2.0, now let me tell you -- I think you have got probably -- if I were to be a guessing man, and on average you got more constrained stores coming in the cycle in which we are in today, which is the 100 we just did, and the 100 we are going to do in Q4 and into 2016, you have got more constrained stores than you probably had in the testing. The reason I say it, is because when we test it, we didn't look for whether they were constrained or not, we are just looking -- we didn't really care which one to try [indiscernible].

Now we have been very clear, that it is more beneficial in a constrained environment, and we know it does better in an urban environment, for example, than a non-urban. So we are a little more -- we have learned more and we are a little clear in our selection of stores.

Karen Short

So would it to be fair to say that the sales lift going forward should be a little higher than what we have seen?

Ron Shaich

I don't want to start to --

Mike Bufano

Yes.

Ron Shaich

I am just giving the facts relative to your question.

Mike Bufano

And operator, we have time for one more question, before we have to wrap it up.

Operator

Okay. We will take our final question today from John Glass, Morgan Stanley.

Mike Bufano

Good morning John.

John Glass

Good morning. Can you maybe put in perspective, breakfast seemed to have driven the comps, so there was the preponderance of the growth or the highest growth area, and yet that doesn't seem like that's the capacity area constrained business? It doesn't seem that has been the focus of recent marketing, that doesn't seem to be -- where more product innovation has gone, at least that I have seen. So can you just help square up, is that really what's driving the comp and not 2.0 or other elements or why did breakfast grow and has that been the trend you continue to have seen over the last several quarters?

Mike Bufano

I will start, and I think Drew and Ron could add some commentary. I mean, John, what I would say is, we saw transaction growth across all day parts, so it all helps, it all contributes. I think 2.0 is certainly a contributor to the comp growth that we saw in the quarter, and the quarter-to-date comp number that we are seeing. So I think saying its just breakfast is probably not how we would hold it.

Ron Shaich

I will just interrupt you, well you go back to an earlier question. You can see it in the [indiscernible] company and franchise. The franchise has exactly the same product mix that Panera does, but they don't have the same comps as us.

Mike Bufano

Yeah no, that's right. I mean, in terms of like the day part itself, and kind of our review, on why that day part is growing, I mean, Drew or Ron can add a little bit of commentary on what we are doing, specific to breakfast. Its not really about the operation -- know that the operation side at breakfast, its more about some of the separate -- and pull people in the cafes.

Ron Shaich

Well we have had some My Panera emphasis on breakfast over the course of the year and quarter, and so that probably impacted it some, and we have seen breakfast day part grow across the industry faster than other day parts as well. So could be partly a customer lifecycle question as well.

Mike Bufano

Thanks John. Thanks everybody for being on the call this morning. We are really [79:26] to talk to you about the results, and I am sure we will be speaking with many of you over the next couple of days. Have a great morning everyone. And thanks to the operator.

Operator

Thank you. That does conclude today's conference. Thank you all for your participation.