ITEM 1. BUSINESS
General
Panera Bread Company (including its wholly owned subsidiaries) may be referred to as the “Company,” “Panera Bread” or in the first person notation of “we,” “us,” and “ours” in the following discussion.
As of December 26, 2006, we operated, directly and through area development agreements with 41 franchisee groups, bakery-cafes under the Panera Bread ® and Saint Louis Bread Co. ® names. Bakery-cafes are principally located in suburban, strip mall, and regional mall locations and currently operate in 38 states. With our identity rooted in handcrafted, fresh-baked, artisan bread, we are committed to providing great tasting, quality food that people can trust. Highlighted by antibiotic free chicken, whole grain bread, select organic and all-natural ingredients and a menu free of man-made trans fat, our bakery-cafe selection offers flavorful, wholesome offerings. The menu includes a wide variety of year-round favorites, complemented by new items introduced seasonally with the goal of creating new standards in everyday food choices. In neighborhoods across the country, guests are enjoying our warm and welcoming environment featuring comfortable gathering areas, relaxing decor, and free Internet access provided through a managed WiFi network. At the close of each day, our bakery-cafes donate bread and baked goods to community organizations in need.
We operate as three business segments: the Company-owned bakery-cafe operations segment, the franchise operations segment, and the fresh dough operations segment. See Note 17 of our Consolidated Financial Statements for segment information. As of December 26, 2006, our retail operations consisted of 391 Company-owned bakery-cafes, all in the United States. As of December 26, 2006, our fresh dough operations, which supply fresh dough items daily to both Company-owned and franchise-operated bakery-cafes, consisted of 18 Company-owned fresh dough facilities. Our revenues were $829.0 million for the fiscal year ended December 26, 2006, consisting of $666.1 million of bakery-cafe sales, $61.5 million of franchise royalties and fees, and $101.3 million of fresh dough sales to franchisees. Franchise-operated bakery-cafe sales were $1,245.5 million for the fiscal year ended December 26, 2006.
The following table sets forth certain bakery-cafe data relating to Company-owned and franchise-operated bakery-cafes:
| For the fiscal year ended | ||||||||||||
| December 26, 2006 | December 27, 2005 | December 25, 2004 | ||||||||||
Number of bakery-cafes: |
||||||||||||
Company-owned: |
||||||||||||
Beginning of period |
311 | 226 | 173 | |||||||||
Bakery-cafes opened |
70 | 66 | 54 | |||||||||
Bakery-cafes closed |
(3 | ) | (2 | ) | — | |||||||
Acquired from franchisees (1) |
13 | 21 | 1 | |||||||||
Transfer to franchisee (2) |
— | — | (2 | ) | ||||||||
End of period |
391 | 311 | 226 | |||||||||
Franchise operated: |
||||||||||||
Beginning of period |
566 | 515 | 429 | |||||||||
Bakery-cafes opened |
85 | 73 | 89 | |||||||||
Bakery-cafes closed |
(2 | ) | (1 | ) | (4 | ) | ||||||
Sold to Company (1) |
(13 | ) | (21 | ) | (1 | ) | ||||||
Transfer from Company (2) |
— | — | 2 | |||||||||
End of period |
636 | 566 | 515 | |||||||||
System-wide: |
||||||||||||
Beginning of period |
877 | 741 | 602 | |||||||||
Bakery-cafes opened |
155 | 139 | 143 | |||||||||
Bakery-cafes closed |
(5 | ) | (3 | ) | (4 | ) | ||||||
End of period |
1,027 | 877 | 741 | |||||||||
(1) In October 2006, we acquired 13 bakery-cafes (one of which was under construction) and the area development rights from a franchisee in certain markets in Iowa, Nebraska and South Dakota. In September 2006, we acquired one bakery-cafe in Pennsylvania from a franchisee. In November 2005, we acquired 23 bakery-cafes (two of which were under construction) and the area development rights from a franchisee in certain markets in Indiana. In October 2004, we acquired one bakery-cafe in the Dallas, Texas market from a franchisee. (2) In October 2004, we transferred two bakery-cafes to a new franchisee in connection with the acquisition of the remaining minority membership interest. See Note 3 of our Consolidated Financial Statements for further information.
Concept and Strategy
Our restaurant concept focuses on the “Specialty Bread/Bakery-Cafe” category. Our artisan breads, which are breads made with all natural ingredients, a craftsman’s attention to quality and detail, and overall award-winning bakery expertise, are at the heart of our menu. The concept is designed to deliver against consumer desire for a more responsive and more special dining experience than that offered by traditional fast food. Our goal is to maintain recognition of Panera Bread as a leading brand. Our menu, prototype, operating systems, design, and real estate strategy allow us to compete successfully in several segments of the restaurant business: breakfast, lunch, PM “chill out,” dinner, or the evening daypart, and take home bread, through both on-premise sales and Via Panera ® catering. One of our initiatives in 2006 was to increase our traffic and sales during dinner, or the evening daypart, with Crispani ® hand-crafted pizzas being an entree into this daypart initiative. See “Menu” below for additional description of our evening daypart initiative and our Crispani ® hand-crafted pizzas.
The distinctive nature of our menu offerings (centered around the fresh artisan bread products), the quality of our bakery-cafe operations, our signature cafe design, and the locations of our cafes are integral to our success. We believe our concept has significant growth potential, which we hope to realize through a combination of Company and franchisee efforts. Franchising is a key component of our success. Utilization of franchising has enabled us to grow more rapidly because of the added resources and capabilities franchisees provide to implement the concepts and strategy developed by Panera Bread. As of December 26, 2006, there were 636 franchised bakery-cafes operating and signed commitments to open an additional 359 franchised bakery-cafes.
We believe providing bakery-cafe operators the opportunity to participate in the success of the bakery-cafe enables us to attract and retain experienced and highly motivated personnel, referred to as associates, which results in a better customer experience. As a result, our compensation, subject to annual minimums, provides general managers and multi-unit managers compensation based upon a percentage of the cash flows of the units they operate and participation in a multi-year bonus structure also based on unit cash flow. This compensation structure is referred to as the JV program.
Menu
The menu is designed to provide our target customers with products which build on the strength of our bakery expertise. The key menu groups are fresh baked goods, made-to-order sandwiches on freshly baked breads, Crispani ® hand-crafted pizza, soups, salads, and cafe beverages. Included within these menu groups are a variety of freshly baked bagels, breads, muffins, scones, rolls, and sweet goods; made-to-order sandwiches; a variety of Crispani ® hand-crafted pizzas; hearty, unique soups; custom roasted coffees and cafe beverages such as hot or cold espresso and cappuccino drinks. Our concept emphasizes the sophisticated specialty and artisan breads that support each daypart and a take-home bread business.
We regularly review and revise our menu offerings to satisfy changing customer preferences. Product development is focused on providing food that customers crave and trust. New menu items are developed in test kitchens and then introduced in a limited number of the bakery-cafes to determine customer response and verify that preparation and operating procedures maintain product consistency and high quality standards. If successful, they are then rolled out system-wide. New product rollouts are integrated into periodic or seasonal menu rotations, which we refer to as “Celebrations.” Examples of products introduced in 2006 include Crispani ® hand-crafted pizza, Panera Kids™ Meals with New White Whole Grain Bread, Chicken Olivada Sandwich, Turkey Romesco Sandwich, Turkey Caprese Sandwich, Mediterranean Veggie Sandwich, Lemon Artichoke Panini, California Mission Chicken Salad, Roasted Garlic & Tomato Soup, Vegetarian Spring Pea & Asparagus Soup, Tuscan Vegetable & Ditalini Soup, Vegetarian Roasted Red Pepper & Lentil Soup, Vegetarian Butternut Squash Soup, and Roasted Turkey Noodle Soup.
Beginning in the third quarter of fiscal 2006, we introduced our Crispani ® hand-crafted pizza in the evening daypart. The Crispani ® crust is a unique and delicious flatbread with just a hint of olive oil. We use many savory toppings including roasted crimini mushrooms and fresh shiitakes, Organic Muir Glen ® tomatoes, roasted garlic, and many kinds of cheeses. Our toppings are grown and produced responsibly. We offer several Crispani ® hand-crafted pizzas at our bakery-cafes including, among others, BBQ Chicken, Pepperoni, Roasted Wild Mushroom, Sweet Sausage and Roasted Peppers, Three Cheese, and Tomato and Fresh Basil. Crispani ® hand-crafted pizzas are offered at our bakery-cafes during dinner, which is our evening daypart. Our overall initiative was to increase our traffic and sales during the evening daypart is another of our major initiatives in 2006 with Crispani ® hand-crafted pizzas being an entree into this daypart initiative. Our evening daypart initiative required additional equipment and labor in our bakery-cafes and our brand of marketing, which is tailored to each area market. Depending on the area, we utilized sampling of new product, print ads, coupons, and/or television to market our evening daypart.
Marketing
We believe we compete on the basis of providing an entire experience rather than by price only. Pricing is structured so customers perceive good value with high quality food at reasonable prices to encourage frequent visits. We perform extensive market research, including utilizing focus groups, to determine customer food and drink preferences and price points. We attempt to increase our per location sales through menu development, product merchandising, and promotions at every day prices and by sponsorship of local community charitable events.
Franchise-operated bakery-cafes contribute to us 0.7% of their sales to a national advertising fund and 0.4% of their sales as a marketing administration fee and are required to spend 2.0% of their sales in their local markets on advertising. We contribute similar amounts from Company-owned bakery-cafes towards the national advertising fund and marketing administration. National advertising fund contributions can be increased from current levels up to a total of 2.6% of sales by us. The national advertising fund and marketing administration contributions received from franchise-operated bakery-cafes are consolidated with our amounts in our financial statements. Liabilities for unexpended funds are included in accrued expenses in our consolidated balance sheets. Our contributions to the national advertising fund and marketing administration, as well as our own media costs, are recorded as part of other operating expenses in the consolidated statements of operations. We may utilize external media when deemed appropriate and cost effective in specific markets.
We have established and may continue to establish local and/or regional advertising associations covering specific geographic regions for the purpose of promoting and advertising the bakery-cafes located in that geographic market. If we establish an advertising association in a specific market, the franchise group in that market must participate in the association including making contributions in accordance with the advertising association bylaws. Contributions to the advertising association are credited towards required local advertising spending.
In 2006, we used a portion of our national advertising fund to market our evening daypart in conjunction with the introduction of our Crispani ® hand-crafted pizza. Depending on the area, we utilized sampling of new product, print ads, coupons, and/or television to market our evening daypart. See “Menu” above for additional description of our marketing efforts and our Crispani ® hand-crafted pizzas.
Site Selection and Bakery-Cafe Environment
The bakery-cafe concept relies on a substantial volume of repeat business. In evaluating a potential location, we study the surrounding trade area, demographic information within that area, and information on competitors. Based on this analysis including utilization of predictive modeling using proprietary software, we determine projected sales and return on investment. The Panera Bread concept has proven successful in a number of different types of locations (i.e., in-line or end-cap locations in strip or power centers, regional malls, and free-standing).
We design each bakery-cafe to provide a distinctive environment, in many cases using fixtures and materials complementary to the neighborhood location of the bakery-cafe to engage customers. Many locations incorporate the warmth of a fireplace and cozy seating areas and groupings which facilitate utilization as a gathering spot. The design visually reinforces the distinctive difference between our bakery-cafes and other bakery-cafes. Many of our cafes also feature outdoor cafe seating and free Internet access through a managed WiFi network. The average construction, equipment, furniture and fixture, and signage cost for the 70 Company-owned bakery-cafes opened in 2006 was $0.92 million per bakery-cafe after landlord allowances.
The average Company-owned bakery-cafe size is approximately 4,600 square feet. We lease all of our bakery-cafe locations and fresh dough facilities. Lease terms for our bakery-cafes and fresh dough facilities are generally for ten years with renewal options at most locations, and generally require us to pay a proportionate share of real estate taxes, insurance, common area, and other operating costs. Many bakery-cafe leases provide for contingent rental (i.e., percentage rent) payments based on sales in excess of specified amounts. Certain of our lease agreements provide for scheduled rent increases during the lease terms or for rental payments commencing at a date other than the date of initial occupancy. See Note 2 to the Consolidated Financial Statements for further information on our accounting for leases.
Franchise Operations
We began a broad-based franchising program in 1996. We are continuing to extend our franchise relationships beyond our current franchisees and annually file a Uniform Franchise Offering Circular to facilitate sale of additional franchise and area development agreements (ADAs). The franchise agreement typically requires the payment of a franchise fee of $35,000 per bakery-cafe (broken down into $5,000 at the signing of the area development agreement and $30,000 at or before the bakery-cafe opens) and continuing royalties of 4-5% on sales from each bakery-cafe. Franchise-operated bakery-cafes follow the same standards for in store operating standards, product quality, menu, site selection, and bakery-cafe construction as do Company-owned bakery-cafes. The franchisees are required to purchase all of their dough products from sources approved by us. Our fresh dough facility system supplies fresh dough products to substantially all franchise-operated bakery-cafes. We do not finance franchisee construction or ADA payments. In addition, we do not hold an equity interest in any of the franchise-operated bakery-cafes.
We have entered into franchise ADAs with 41 franchisee groups (area developers) as of December 26, 2006. Also, as of December 26, 2006, there were 636 franchise-operated bakery-cafes open and commitments to open 359 additional franchise-operated bakery-cafes. We expect these bakery-cafes to open according to the timetables established in the various ADAs with franchisee groups, with the majority opening in the next four to five years. We expect our area developers to open 85 to 90 new franchise-operated bakery-cafes in 2007. The ADAs require an area developer to develop a specified number of bakery-cafes on or before specific dates. If a franchisee fails to develop bakery-cafes on schedule, we have the right to terminate the ADA and develop Company-owned locations or develop locations through new area developers in that market. We may exercise one or more alternative remedies to address defaults by area developers, including not only development defaults, but also defaults in complying with our operating and brand standards and other covenants under the ADAs and franchise agreements. At the present time, we do not have any international franchise development agreements.
Bakery-Cafe Supply Chain
Bakery-cafes use fresh dough for their artisan and sourdough breads and bagels and for their Crispani ® hand-crafted pizza. Fresh dough is supplied daily to both Company-owned and franchise-operated bakery-cafes by fresh dough facilities, which are called our bakery-cafe supply chain. There were 19 fresh dough facilities, of which 18 were Company-owned and one was franchise-operated, as of December 26, 2006, and 17 fresh dough facilities, of which 16 were Company-owned and one was franchise-operated, as of December 27, 2005 and December 25, 2004.
We believe our fresh dough facility system provides a competitive advantage. The fresh dough facilities ensure consistent quality and supply of fresh dough products to both Company-owned and franchise-operated bakery-cafes. We focus our growth in areas that allow us to continue to gain efficiencies through leveraging the fixed cost of the fresh dough facility structure and to selectively enter new markets which require the construction of additional facilities when sufficient numbers of bakery-cafes may be opened that permit efficient distribution of the fresh dough. The fresh dough distribution system delivers product daily to the bakery-cafes. Distribution is accomplished through a leased fleet of temperature controlled trucks operated by our associates. At December 26, 2006, we leased 152 trucks. The optimal distribution is approximately 300 miles; however, when necessary, distribution range may be 500 miles. An average distribution route delivers dough to 7 bakery-cafes. Although we may contract for the supply of ingredients with only one supplier, we believe there are numerous suppliers of needed product ingredients and we could obtain ingredients from another supplier if necessary.
We have contracted externally for the supply of the remaining baked goods in the bakery-cafes, referred to as sweet goods. In November 2002, we entered into an agreement with Dawn Food Products, Inc. to provide sweet goods for the period 2003-2007. This agreement was subsequently extended to May 2008. The agreement with Dawn is structured as a cost plus agreement. Sweet good products are completed at each bakery-cafe by professionally trained bakers. Completion includes finishing with fresh toppings and other ingredients and baking to established artisan standards.
We use independent distributors to distribute sweet goods products, tuna and other materials to bakery-cafes. With the exception of fresh dough products and the majority of our cream cheese supplied by the fresh dough facilities, virtually all other food products and supplies for retail operations, including paper goods, coffee, and smallwares, are contracted for by us and delivered by the vendors to an independent distributor for delivery to the bakery-cafes. The individual bakery-cafes order directly from a distributor two to three times per week.
Franchise-operated bakery-cafes operate under individual contracts with one of our distributors. As of December 26, 2006, there were three primary distributors serving the Panera Bread system.
Competition
We experience competition from numerous sources in our trade areas. We compete with specialty food, casual dining and quick service cafes, bakeries, and restaurant retailers including national, regional and locally-owned cafes, bakeries, and restaurants. Our bakery-cafes compete based on customers’ needs for breakfast, lunch, PM “chill-out,” dinner, and take home bread sales. The competitive factors include location, environment, customer service, price, and quality of products. We compete for leased space in desirable locations. Certain of our competitors may have capital resources exceeding those available to us. For further information on competition, see “Item 1A. Risk Factors” in this Form 10-K.
Management Information Systems
Each Company-owned bakery-cafe has computerized point-of-sale registers which collect transaction data used to generate pertinent information, including, among other things, product mix and average check. All product prices are programmed into the point-of-sale register from our headquarters office. We allow franchisees, that elect to do so, access to certain of our proprietary bakery-cafe systems and systems support. Franchisees set their own menu prices.
We use in-store Enterprise Application tools to assist in labor scheduling and food cost management, to provide corporate and retail operations management quick access to retail data, to allow for on-line ordering with distributors, and to reduce managers’ administrative time. The system supplies sales, bank deposit, and variance data to our accounting department on a daily basis. We use this retail data to generate daily and weekly consolidated reports regarding sales and other key metrics, as well as detailed profit and loss statements for each Company-owned bakery-cafe. Additionally, we monitor the average check, customer count, product mix, and other sales trends. We also use this retail data in our “exception-based reporting” tools to safeguard our cash, protect our assets, and train our employees. The fresh dough facilities have computerized systems which allow the fresh dough facilities to accept electronic orders from the bakery-cafes and deliver the ordered product back to the bakery-cafes. We also use an eLearning system and Learning Tools website to provide on-line training for our retail associates and on-line baking instructions for our bakers.
We have network/integration systems which are corporate office electronic systems and tools which link various information subsystems and databases, encompassing e-mail and all major financial systems, such as general ledger database systems, and all major operational systems, such as store operating performance database systems. Most bakery-cafes also provide customers free Internet access provided through a managed WiFi network. As a result, we host one of the largest free public WiFi networks in the country.
Employees
As of December 26, 2006, we had approximately 7,200 full-time associates (defined as associates who average 25 hours or more per week), of whom approximately 400 were employed in general or administrative functions principally at or from our support centers or executive offices, approximately 900 were employed in our fresh dough facility operations, and approximately 5,900 were employed in our bakery-cafe operations as bakers, managers, and associates. We also had approximately 10,200 part-time hourly associates at the bakery-cafes at December 26, 2006. We do not have any collective bargaining agreements with our employees and consider our employee relations to be good. We place a priority on staffing our bakery-cafes, fresh dough facilities, and support center operations with skilled associates and invest in training programs to ensure the quality of our operations.
Proprietary Rights
Our brand, intellectual property and our confidential and proprietary information are very important to our business and competitive position. We protect these assets through a combination of trademark, copyright, trade secret and unfair competition and contract law.
The Panera ® , Panera Bread ® , Saint Louis Bread Co. ® , Via Panera ® , Crispani ® , and Mother Bread design trademarks are some of the trademarks that we have registered with the United States Patent and Trademark Office. In addition, we have filed to register other marks with the United States Patent and Trademark Office. We have also registered some of our marks in a number of foreign countries.
Corporate History and Additional Information
We are a Delaware corporation. Our principal executive offices are located at 6710 Clayton Road, Richmond Heights, Missouri 63117 and our telephone number is (314) 633-7100.
We were originally organized in March 1981 as a Massachusetts corporation under the name Au Bon Pain Co., Inc. and reincorporated in Delaware in June 1988. In December 1993, we purchased Saint Louis Bread Company. In August 1998, we sold our Au Bon Pain Division and changed our name to Panera Bread Company.
We are subject to the informational requirements of the Exchange Act, and, accordingly, file reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information can be read and copied at the public reference facilities maintained by the Securities and Exchange Commission at the Public Reference Room, 100 F Street, NE, Room 1580, Washington, D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Securities and Exchange Commission.
Our Internet address is www.panerabread.com. We make available at this address, free of charge, nutritional information, press releases, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the Securities and Exchange Commission. In addition, we provide periodic investor relations updates and our corporate governance materials at our Internet address.
Government Regulation
Each fresh dough facility and Company-owned and franchise-operated bakery-cafe is subject to regulation and licensing by federal agencies, as well as to licensing and regulation by state and local health, sanitation, safety, fire, and other governmental departments. Difficulties or failures in obtaining and retaining the required licensing or approval could result in delays or cancellations in the opening of fresh dough facilities or bakery-cafes as well as fines and possible closure relating to existing fresh dough facilities or bakery-cafes. In addition, we are subject to the Fair Labor Standards Act and various state laws governing such matters as minimum wages, overtime, and other working conditions.
We are also subject to federal and state laws regulating the offer and sale of franchises. Such laws impose registration and disclosure requirements on franchisors in the offer and sale of the franchises and may also apply substantive standards to the relationship between franchisor and franchisee.
We are subject to various federal, state, and local environmental regulations. Compliance with applicable environmental regulations is not believed to have a material effect on capital expenditures, financial condition, results of operations, or our competitive position.
The Americans with Disabilities Act prohibits discrimination in employment and public accommodations on the basis of disability. Under the Americans with Disabilities Act, we could be required to expend funds to modify our Company-owned bakery-cafes to provide service to, or make reasonable accommodations for the employment of, disabled persons. Compliance with the requirements of the Americans with Disabilities Act is not believed to have a material effect on our financial condition or results of operations.
ITEM 1A. RISK FACTORS
The following important factors, among others, could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Form 10-K or presented elsewhere by management from time to time.
Our ability to increase our revenue and operating profits could be adversely affected if we are unable to execute our growth strategy.
Our growth strategy consists of new market development and further penetration of existing markets, both by us and our franchisees. The success of our growth strategy depends on numerous factors that are not completely controlled by us or involve risks that may impact the development, or timing of development, of our bakery-cafes. Our ability to grow successfully will depend on a number of factors, including:
• identification and availability of suitable locations for new bakery-cafes on acceptable terms including obtaining waivers of exclusive use restrictions from landlords and tenants, as needed, and within appropriate delivery distances from our fresh dough facilities;
• competition for restaurant sites;
• variations in the number and timing of bakery-cafe openings as compared to our construction schedule;
• management of the costs of construction of bakery-cafes, particularly factors outside our control, such as the timing of delivery of a leased location by the landlord;
• securing required governmental approvals and permits and complying with applicable zoning, land use and environmental regulations; and
• general economic conditions.
Although we have been able to successfully manage and plan our growth to date, we may experience difficulties doing so in the future.
Our growth strategy includes opening bakery-cafes in new markets where we may have little or no operating experience. Accordingly, there can be no assurance that a bakery-cafe opened in a new market will have similar operating results, including average store sales, as our existing bakery-cafes. Bakery-cafes opened in new markets may not perform as expected or may take longer to reach planned operating levels, if at all. Operating results or overall bakery-cafe performance could vary as a result of higher construction, occupancy or general operating costs, a lack of familiarity with our brand which may require us to build brand awareness, differing demographics, consumer tastes and spending patterns, and variable competitive environments. Additional expenses attributable to costs of delivery from our fresh dough facilities may exceed our expectations in areas not currently served by those facilities.
Our growth strategy also includes opening bakery-cafes in existing markets to increase the penetration rate of our bakery-cafes in those markets. However, this strategy could result in a sales decline in some of our existing bakery-cafes if customers choose to patronize a new location over an existing location. There can be no assurance that we will be successful in operating bakery-cafes profitably in new markets or further penetrating existing markets.
Our growth strategy depends on continued development by our franchisees. If our franchisees do not continue to successfully open new bakery-cafes, our business could be adversely affected.
Our growth strategy also includes continued development of bakery-cafes through franchising. At December 26, 2006, approximately 62% of our bakery-cafes were operated by franchisees (636 franchise-operated units out of a total of 1,027 units system wide). The opening and success of bakery-cafes by franchisees depends on a number of factors, including those identified above as well as the availability of suitable franchise candidates and the financial and other resources of our franchisees.
Additionally, our results of operations include revenues derived from royalties on sales from, and revenues from sales by our fresh dough facilities to, each franchise-operated bakery-cafe. As a result, our growth expectations and revenue could be negatively impacted by a material downturn in sales at and to franchise-operated bakery-cafes or if one or more key franchisees became insolvent or otherwise refused to pay us our royalties.
If we fail to comply with governmental regulations or if these regulations change, our business could suffer.
We must comply with extensive federal, state and local laws, and if we expand internationally, foreign laws and treaties, in connection with the operation of our business, including those related to:
• franchise relationships;
• building construction and zoning requirements;
• environmental matters;
• the preparation and sale of food; and
• employment.
Our bakery-cafes and fresh dough facilities are licensed and subject to regulation under state and local laws, including business, health, fire and safety codes.
Various federal and state labor laws govern our operations and our relationship with our employees, including minimum wage, overtime, accommodation and working conditions, benefits, citizenship requirements, insurance matters, workers’ compensation, disability laws such as the federal Americans with Disabilities Act, child labor laws and anti-discrimination laws.
While we believe we operate in substantial compliance with these laws, they are complex and vary from location to location, which complicates monitoring and compliance. As a result, regulatory risks are inherent in our operation. Although we believe that compliance with these laws has not had a material effect on our operations to date, there can be no assurance that we will not experience material difficulties or failures with respect to compliance in the future. Our failure to comply with these laws could result in required renovations to our facilities, litigation, fines, penalties, judgments or other sanctions including the temporary suspension of bakery-cafe or fresh dough facility operations or a delay in construction or opening of a bakery-cafe, any of which could adversely affect our business, operations and our reputation.
If we expand into foreign markets we may be exposed to uncertainties and risks, which could negatively impact our results of operations.
We may expand our operations into new foreign markets, which will expose us to new risks and uncertainties. For example, we currently intend to expand our operations into Canadian markets, primarily through franchisee agreements, in 2007. If we expand into Canada we will be subject to Canadian economic conditions and political factors, either of which could have a material adverse affect on our financial condition and results of operations. Economic conditions and political factors include, but are not limited to, taxation, inflation, currency fluctuations, increased regulations and quotas, tariffs and other protectionist measures. Any future expansion into other international markets would expose us to similar risks.
Loss of senior management or the inability to recruit and retain other associates could adversely affect our future success.
Our success depends on the services of our senior management and other associates, all of whom are “at will” employees. The loss of a member of senior management could have an adverse impact on our business or the financial market’s perception of our ability to continue our growth.
Our success also depends on our continuing ability to hire, train, motivate and retain qualified associates in our bakery-cafes, fresh dough facilities and support centers. Our failure to do so could result in higher employee turnover and increased labor costs, and could compromise the quality of our service, all of which could adversely affect our business.
Our failure or inability to protect our brand, trademarks or other proprietary rights could adversely affect our business and competitive position.
We believe that our brand, intellectual property and our confidential and proprietary information is very important to our business and our competitive position. Our primary trademarks, Panera ® , Panera Bread ® , Saint Louis Bread Co. ® , Via Panera ® , Crispani ® , and Mother Bread design, along with other trademarks, copyrights, service marks, trade secrets, confidential and proprietary information and other intellectual property rights are key components of our operating and marketing strategies. Although we have taken steps to protect our brand, intellectual property and confidential and proprietary information, the steps that we have taken may not be adequate. Unauthorized usage or imitation by others could harm our image, brand or competitive position and, if we commence litigation to enforce our rights, cause us to incur significant legal fees.
We are not aware of any assertions that our trademarks or menu offerings infringe upon the proprietary rights of third parties, but we cannot assure you that third parties will not claim infringement by us in the future. Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation, cause delays in introducing new menu items in the future or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of operations and financial condition.
We try to ensure that our franchisees maintain and protect our brand and our confidential and proprietary information. However, since our franchisees are independent third parties that we do not control, if they do not operate their bakery-cafes in a manner consistent with their agreements with us, the Panera Bread brand and reputation or the value of our confidential and proprietary information could be harmed. If this occurs, our business and operating results could be adversely affected.
Competition may adversely affect our operations and results of operation.
The restaurant industry is highly competitive with respect to location, environment, customer service, price, quality of products and overall customer experience. We compete with specialty food, casual dining and quick service restaurant retailers including national, regional and locally owned restaurants. Many of our competitors or potential competitors have substantially greater financial and other resources than we do, which may allow them to react to changes in pricing, marketing and the casual dining restaurant industry better than we can. Additionally, other companies may develop restaurants that operate with concepts similar to ours. We also compete with other restaurant chains and other retail businesses for quality site locations and hourly employees. If we are unable to successfully compete in our markets, we may be unable to sustain or increase our revenues and profitability.
Additionally, competition could cause us to modify or evolve our products, designs or strategies. If we do so, we cannot assure you that we will be successful in implementing the changes or that our profitability will not be negatively impacted by them.
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