Download pdf - Panera Bread (PNRA) Earnings Report: Q1 2015 Conference ...s.t.st/media/xtranscript/2015/Q2/13131535.pdf · Panera 2.0 conversions and delivery hub openings in late Q4 and Q1. Moving

CompanyName:PaneraBreadCoIncCompanyTicker:PNRASector:ServicesIndustry:Leisure

EventDescription:Q12015EarningsCallMarketCapasofEventDate:4.69BPriceasofEventDate:182.11

©2014TheStreet,Inc.Al l R ightsReserved Page1of22

PaneraBread(PNRA)EarningsReport:Q12015ConferenceCallTranscriptThefollowingPaneraBreadconferencecalltookplaceonApril29,2015,08:30AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

RonShaich;PaneraBread;Founder,Chairman&CEOSteveWest;PaneraBread;VP-IRMikeBufano;PaneraBread;CFO

OtherPart icipants

BrianBittner;Oppenheimer&Co.;AnalystDavidTarantino;RobertW.Baird;AnalystJosephBuckley;BofAMerrillLynch;AnalystJohnGlass;MorganStanley;AnalystJeffBernstein;BarclaysCapital;AnalystJasonWest;CreditSuisse;AnalystKarenHolthouse;GoldmanSachs;AnalystRobertDerrington;WunderlichSecurities;AnalystKeithSiegner;UBS;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

Goodday,everyone,andwelcometotoday'sPaneraBreadfirst-quarter2015earningsconference.Justareminderthattoday'scallisbeingrecorded.ItisnowmypleasuretoturntheconferenceovertoSteveWest.Pleasegoahead,sir.

SteveWest (VP-IR):

Goodmorning,everyone,andwelcometoPaneraBread'sfirst-quarterearningscall.ThisisSteveWest,VicePresidentofInvestorRelations.WithmethismorningareRonShaich,ourFounder,ChairmanandCEO,andMikeBufano,ournewChiefFinancialOfficer.

Asareminder,wemaymakeforward-lookingstatementsregardingfutureevents,expectations,plansorprospectsforfuturefinancialperformanceoftheCompany.Anysuchitemsorremarksconstituteforward-lookingstatementsforpurposesoftheSafeHarborprovisionsunderthePrivateSecuritiesLitigationReformActof1995.

Actualeventsorresultsmaydiffermateriallyfromthoseindicatedbytheseforward-lookingstatementsduetoanumberofrisksanduncertainties,includingthosediscussedintheRiskFactorssectionofourmostrecentannualreportonForm10-KwhichwasfiledonFebruary20,2015.

Inaddition,anyforward-lookingstatementsrepresentourviewsonlyasoftodayandshouldnotberelieduponasrepresentingourviewasofanysubsequentdate.Whilewemayelecttoupdatetheseforward-lookingstatementsatsomepointinthefuture,wespecificallydisclaimanyobligationtodosoevenifour




viewschange.Theseforward-lookingstatementsshouldnotberelieduponasrepresentingourviewsasofadatesubsequenttotoday.

NowIhaveoneadministrativeitemforyourfutureschedulingpurposes.Wearetentativelyplanningtopublishoursecond-quarter2015earningsreleaseafterthemarketcloseonJuly28withoursubsequentearningscallonJuly29at8:30AMEasternStandardTime.

Ontheagenda--Mikewillleadoffthecallwithadiscussiononourfirst-quarterfinancialresults.Ronwillthenprovidecolorcommentaryonourcompsandourinitiativestobecomeabettercompetitivealternativeandexpandgrowth.FollowingthatMikewillgiveabriefupdateonourvalueenhancinginitiativesandanupdateonour2015guidance.Andfinally,RonwillgiveaquickclosingcommentbeforeweopenitupforQ&A.IwillnowturnthecallovertoMike.

MikeBufano (CFO):

Thankyou,Steve.Beforegettingstarted,IwouldjustliketosaythatI'mexcitedandhonoredtohavetheopportunitytoserveasthePanera'snewChiefFinancialOfficer.IwouldliketothankRon,BillandtherestoftheBoardfortheopportunity.IlookforwardtocontinuingtoworkwithallourinvestorsandanalystsandgettingtoknowandworkwiththoseofyouIhaven'tyethadachancetomeetinperson.

Yesterdayafterthemarketclosedwereportedadjustedfirst-quarterEPSof$1.41,down9%yearoveryear.Thiswasinlinewithourexpectation.OuradjustedEPSexcludesan$8.9millionpre-tax,or$5.6millionafter-tax,one-timechargerelatedtoourrefranchisinginitiative.

AsIwilldiscusslaterinthecall,excludingone-timecharges,weexpectourrefranchisinginitiativewillbeaccretivetoongoingearnings.Includingtheone-timecharge,ourearningspersharewere$1.20inthequarter.

InQ1ourrevenuesincreased7%to$649million.ThiswasprimarilytheresultofopeningnewCompanyownedcafescombinedwith1.5%compstoresalesgrowthinCompanyownedcafes.Ronwillprovidemorecoloroncompslaterinthecall.

Nowletmetakeafewminutestodiscussmargins.Ourfirst-quarteroperatingmargin,excludingtheone-timerefranchisingcharge,declinedby180basispointsversuslastyeardueprimarilytopressuresonlaboraswellasincreaseddepreciationandamortizationrelatedtoourgrowthinitiative.

Steppingthroughthedetail,laborwasagainthemostsignificantdriveroftheoperatingmargindecline,deleveringby130basispoints.Twofactorsaffectedlaborinthequarter.One,wesawstructurallyhigherwageratesacrosstheboardduetocontinuedpressurecausedbyincreasesinminimumwages.Two,theinvestmentofadditionallaborhoursnecessitatedbystart-upcostsrelatedtoasignificantnumberofPanera2.0conversionsanddeliveryhubopeningsinlateQ4andQ1.

MovingdowntheP&L,foodandpaperdeleveredby60basispointsversusprioryeardueinlargeparttofoodcostinflation.Inthequarterweexperiencedapproximately2.5%ofyear-over-yearfoodcostinflation.Thisinflationwasdrivenprimarilybyhighercostforsoup,ourgrassfedbeef,ourantibioticfreehigh-qualityroastturkeyandproduce.

Thislevelofinflationwasinlinewithourexpectationsforthequarter.Weanticipateinflationwillmoderatethroughouttheyearandcontinuetoexpectfoodandpapercostinflationtobeapproximately1%to1.5%forthefullyear.

Finallyinthebakery-cafeP&Loccupancycostsdeleveredslightlyby20basispointsyear-over-yearassalesgrewslowerthaninflation.




Leavingthebakery-cafes,themarginsofourfreshdoughfacilitiesimprovedby160basispointsinthequarter.Thismarginimprovementisprimarilytheresultofayear-over-yeardecreaseinwheatcostswhichdeclinedbyroughly10%comparedtoQ12014.Asareminder,weladderourwheatpurchases[to]theimpactofswingsupanddowninthemarketaremoderatedinourP&L.

Onthecorporateside,wecontinuetomakeinvestmentsinthecapabilitiesneededtosupportourgrowthinitiatives.Atthesametimeweremaincommittedtoreallocatingresourcesfromsupportfunctionstothesegrowthinitiatives.YouseethisplayoutintheD&AandG&AlinesoftheP&L.

Depreciationandamortizationdeleveragedby30basispointsversustheprioryearduetoincreasedcapitalspendingrelatedtoourgrowthinitiatives,especiallyintheareaoftechnology.G&Aasapercentageofsaleswasflatversusthepreviousyearasyear-over-yearcostsavingsincoreG&Aeffectivelyoffsettheinvestmentsandgrowthinitiatives.

Ourtaxrateforthequarterwas37.4%,essentiallyflatversusQ12014andinlinewithourexpectations.Wecontinuetoholdourtaxrateestimatefor2015intheneighborhoodof37%.

Shiftingtonewunitdevelopment,duringthequarterweopened25newbakery-cafessystemwide,11CompanyOwnedand14franchiseoperated,bringingoursystemwidetrafficcountto1,901.Ofthe11Companyownedcafes,eightweretraditionalbakery-cafesandthreewerenontraditional.

TheaverageweeklysalesoftheeighttraditionalCompanyownedbakery-cafeswere$49,865,inlinewithourexpectationsforthequarter.Theaverageweeklysalesofthe14traditionalfranchiseoperatedbakery-cafeswere$53,665.

Ishouldnotethatthefirstquarternewunitaverageweeklysalesarehistoricallysomewhatchoppybasedonthenumberandtimingofopeningsaswellastheimpactofweather.Asaresult,year-over-yearcomparisonsinthefirstquartercanbetricky.OverallthoughletmereiteratethatwearepleasedwiththenewunitaverageweeklysalesinQ1.

Inaddition,weconverted19cafestoPanera2.0duringthequarterbringingthetotalPanera2.0conversionsto123.Wealsoopenedsevendeliveryhubsbringingthetotalto28andwenowhave183Companyownedcafeshubbedrepresentingabout20%ofourcateringsales.

Finally,letmediscussourdeploymentofcashinthequarter.Firstoff,ourEBITDAforQ1,excludingtheone-timerefranchisingcharge,was$94million,down3.5%versusprioryear.Wegeneratedapproximately$72millionofcashflowfromoperationsduringthefirstquarteranddeployed$50milliontowardscapitalexpenditures.

Wearecontinuingtoreturncashtoourshareholdersonaconsistentbasis.Duringthequarterwerepurchasedapproximately$25millionofsharesatanaveragerepurchasepriceof$160.84.Weendedthequarterwith$202millionincash.

NowIwillturnthecallovertoRonwhowillprovideanupdateoncompsandourstrategicinitiatives.Ron?

RonShaich (Founder,Chairman&CEO):

Great,thankyou,Mike,andgoodmorningtoeveryone,goodmorning.BeforeIbeginIwouldliketosayhowgladIamtohaveMikeasournewCFO.AsweconductedourinternalandexternalsearchitbecameevidentthatMikewasourbestcandidate.

DuringhisfiveyearswithPaneraMikehasprovenhimselftobeaneffectiveleaderbuildinghisfinancegroupintoakeystrengthofourCompany.Alongwithhisfinancialdiscipline,hisin-depthknowledgeof




ourinitiatives,ourplansandourpeople,willbenefitPaneraanditsinvestorsinboththeshort-termandthelong-term.IamhopefulyouallwillenjoyworkingwithMikeasmuchasIhavethroughtheyears.

I'malsogladthatmypartnerofmanyyears,BillMoreton,whosteppedinasinterimCFOthelasteightmonths,willcontinuetoserveasourExecutiveViceChairmanandassistmebymanaginganumberofkeyinitiativesandseveralfunctionsatourCompany.Nowtothebusinessathand.

ThismorningIwillprovideyouwithanupdateonourmultiyeareffortstoensurePaneraisabettercompetitivealternativewithexpandedgrowthopportunity.First,Iwillreviewourfirst-quartercomps,thenIwillreviewandupdateyouonourstrategicinitiatives.AndfinallyIwillprovidesomecontextforhowweholdthejourney.

Let'sbeginbyreviewingourperformanceinQ1relativetocomps.First,IwillsharesomedataandthenIwillexplainthoseresults.OurCompanycompsincreased1.5%inQ1.Diggingalittledeeper,bymonthcompswereup2.9%inJanuary,up1.1%inFebruaryandup0.6%inMarch.

Ishouldnotethatour2014compsincreasedthroughoutthequarterandin2015wewerecomparingtothelaunchofnationaladvertisingwhichbeganinlateFebruary2014.Let'snowreviewthemakeupofourcompgrowthinQ1.

Wesawtransactiongrowthof0.1%andcheckgrowthof1.4%.OurtransactiongrowthinQ1marksourfourthstraightquarterofpositivetransactiongrowth.Weviewourtransactiongrowthasapositivereflectionoftheinvestmentswearemakingtobeabettercompetitivealternative.

FromourperspectivetransactiongrowthmeanscustomersarewalkingpastcompetitorstoreachPanera.ThisiswhywecontinuetocompareourperformancetotheBlackBoxall-industrycomposite.InQ1ourtransactiongrowthwas70basispointsbetterthantheall-industrycomposite.

Stillourtransactiongrowthwasnotoverwhelming.HerearesomeofthefactorswethinkimpactedtransactiongrowthinQ1.First,reducedmediaspendyearoveryearwasaknownheadwindinQ1.Wereducedmediaspendby10%yearoveryearinQ1inanticipationofanewcampaignexpectedtobelaunchedinJuneof2015.WealsoincreasedpriceinQ1whichwasadragontransactiongrowth.

Finally,theweathersurprisedus.Weexpectedthehistoricallybadweatherin2014toserveasatailwindtocompsin2015.Unfortunately2015turnedouttobeeverybitasbadas2014.ThiswasparticularlytrueintheNortheastandtheMidwest,tworegionswhereweareoverindexedversustheindustry.

Okay,thereisonethingrelativetodemandthatIdowanttocalltoyourattention.Ourentreegrowthwasup1.4%inQ1.Aswe'vementionedinthepast,webelievegrowthinentreesisthebestmeasureinvestorscanusetounderstanddemandinourbakery-cafes,particularlywhenentreespertransactionaregrowingasrapidlyastheyareatPanera.Indeednomatterhowyoucutit,morecustomersarebuyingmoreentreesinPaneratodaythantheydidlastyear.

Okay,nowlet'sturnourattentiontotheotherkeydriverofcomps,check.Specificallyourcheckgrew1.4%inQ1.Thiscanbefurtherdisaggregatedintomixof0.1%andpricegrowthof1.3%.Let'sfirstdiscussmix.

MixtookastepdownfromQ4whenmixgrew0.9%.Whileyear-over-yearentreegrowthpertransactionwasstrong,itwasweakerthaninQ4andhadanegativeimpactonthemix.

Nowlet'sdiscusstheothersubcomponentofprice--ofcheck,price.PricegrowthwasmodestinthefirsthalfofQ1.Wetooka1.4%priceincreasepartwaythroughMarchwhichwefeltweneededtotaketocontinueattractingtoPaneratheteammemberswedesired.Wetookthepricetooffsetstructuralwageinflationwhichinturnwasdrivenbysignificantincreasesintheminimumwageinmanymarketsinwhich




weoperate.

InretrospectwelikelywaitedtoolongtotaketheincreaseastheminimumwageincreasesonJanuary1droveourmanagerstoquicklyraisewagestomaintainadifferentialversusminimum.Theincreaseweexecutedwasexecutedthroughacombinationofcompanywidepriceincreases,verymodestbutcompanywide,andstrategicpriceincreasesintargetedmarketswhereweknewwecouldtakeit.Thisstrategyreflectsthemorethoughtfulandresearch-basedapproachtopricingwhichweadoptedin2014.

Okay,let'snowdiscussQ2todatecomps.Letmenotethatinthefirst27daysofQ2compswereup2%primarilydrivenbystrongtransactiongrowth.

Letmeconcludeourdiscussionofcompswiththisfinalandimportantnote--andIwanttomakesureeverybody'sclearonthis.WhenoneadjustsfortheEasterholidayshiftsbetweenquartersin2013and2014onecanseeourmonthlytwo-yearcompshaveacceleratedeachmonthin2015.Theyweredown0.2%inJanuary,theywereup1.3%inFebruary,theywereup2.1%adjustedinMarch,andtheywereup3.9%inApril.Obviouslywearepleasedwiththistrendandhopeitcontinues.

Okay,letmenowcommentonwherewestandwithourinitiatives.Asyouallknow,we'refocusedonbecomingabettercompetitivealternativeandbuildingcapabilitiesforexpandedgrowth.

WebelievethebestwaytodothatistoimprovetheguestexperiencethroughPanera2.0,whichisinclusiveofbothdigitalaccessandimprovedoperationalcapabilities--wecallthatoperationalintegrity--aswellasit'sinclusiveofdrivingconsumerexcitementthroughinnovationinfood,marketingandstoredesign.

Thatinnovationisintendedtobringtolifeourreimaginedbrandpromiseofofferingfoodthatiscraveableandfoodthatallowsustoserveasanallyforwellnessforourguestswhileofferinganelevatedexperience.

We'realsofocusedonbuildingcapabilitiesthatwillallowustoexpandourrunwayforgrowthwellintothefuture.Wearedoingjustthatthroughlargeorderdelivery--manyofyoucallitcatering--smallorderdeliveryandourconsumerproductsgroup.

Iwanttoemphasizethatbuildingthesecapabilitiesandbuildingthesebusinessesispartofamulti-yearjourneythatisintendedtopositionus,topowerfullycompeteforyearstocomeinseveral$1billion-plusadjacentbusinesses.Anduseourcredibilityinsoups,saladsandsandwichestodojustthat.

OurgoalistobegintothinkabouthowmanydollarswecanvacuumoutofaspecificZ IPCode--howmanyhighROIdollarswecanvacuumoutofaspecificZ IPCodeasopposedtosimplyfocusingonhowmanycafeswecanopen.Let'sstartbydiscussingPanera2.0.

AsyouknowPanera2.0consistsoftwoelements:first,itconsistsofdigitalaccessthroughmobile,weband[kiosk];second,itconsistsofoperationalintegrity.EachisanecessarycomponentofPanera2.0andbotharecomplementary.LetmeexplainwhatImean.Let'sstartwithdigitalaccess.

Digitalaccesscreatesasignificantlybetterto-goandeat-inexperienceanditisthefoundationforcateringanddelivery.Italsomateriallyimpactslaborfavorabilityoverthelong-termasthereisnolaborneededtoinputorderswithdigital.

Furthermore,asdigitalutilizationgoesup,andsurelyitwill,laborgoesdown.Indeedwithhigh-performance,digitalaccess[inplace]Panerahasfargreaterpotentialtobothgrowsalesandtoreducelaborformanyyearstocome.

LetmeupdateyoubrieflynowonPanera'sprogresswithdigital.I'mexcitedtosharewithyouthenews




thatdigitalsalesarerunningover20%ofretailsalesinthePanera2.0cafes.Aswell,digitalsalesaretodayrunningatnearly9%oftotalCompanysales.

Thisislikelyoneofthehighestdigitalpercentagesintherestaurantindustry.Andletmesaythatisexclusiveofthepizzaplayerswhoarerunningcloseto50%digitalandwhohavebeenplayingthee-commercegameforalmostadecade.

Andkeepinmindsomethingelse,digitalutilizationatPaneracanbeexpectedtoincreaserapidly,particularlyasmorePanera2.0cafescomeonlineandasthecustomerbecomesmorecomfortablewithitsuseatPaneraandtheresult,lowerlaborcostasabyproduct.

Okay,letmesaythis:whilethecostofourdigitaleffortsmaybeweighingdownourP&Ltoday,wemustrecognizethevalueofhavingalreadymademanyoftheinvestmentthatothersinourindustryareonlynowcontemplatingmaking.

Forothersinourindustrytheonlyotheroptiontomakingtheinvestmentistofindanoutsidevendorwhooffersaturnkeysolution.Unfortunately,turnkeysolutionscomewithfeespertransactionofashighas10%ormoreofsales.

Inourcase,asPanera2.0rollsoutandasPanera'sdigitalsalesinevitablygoup,ourpertransactioncostwillcomedownandwillbeamongthelowestoutthere.Indeedwearecertainthatinvestorswillbeverypleasedwemadetheinvestmentswemadewhenwemadethem.

Okay,letmenowturntothesecondelementofPanera2.0,operationalintegrity.Operationalintegritymaybelesswellunderstood,butitisascentralasdigitalaccessistothesuccessofourPanera2.0initiative.

Asdigitalaccessincreasescustomerdemandandputsthecustomerincontrolofwhentheywanttheirfoodwithouttheconstraintimposedbyalimitednumberofregisterstoprotecttheproduction,theneedforahigh-capacity,rapidreaction,productionsystemincreases.Itwillhappentous,itisgoingtohappentoanybodyundertakingdigital.

TothatendweatPanerawanttoensurewehavetoproductioncapabilitiestoaccommodatethemanydigitalordersthatarriveinintenseburstsallbeingexecutedwiththehighlevelsofaccuracyandcustomersatisfactionthatareourhallmark.

Further,Panera,likeallrestaurantoperators,mustensurewehavetheprocessesandpeopleneededtoproducefoodthatguestsarecustomizingatratesapproaching70%inPanera2.0cafe.IencourageallofyoutositinoneofourdigitallyenabledcafeswithmeatnoonandwatchthekitchendisplaysystemlightuplikeaChristmastreewithordersallwithinabout5minutes.

IndeedIthinkevery--everyrestaurantCompanycontemplatingdigitalwillultimatelyfacethechallengeofensuringtheyhavethepeopleandtheprocessesneededtomeetnewlevelsofintensedemandandrapidlyrisinglevelsofcustomization.

Letmesharewithyousomeofthedataonoperationalintegrity.Weknowoureffortstoimprovetheguestexperienceareworkingascustomersatisfactionscoresyearoveryearcontinuetoimprove.Further,ourinternalresearchindicatesthereisahighcorrelationbetweencustomersatisfactionscores,frequencyandultimatelycomps.

Thatmayseemobvious,butIwantinvestorstoappreciatethatwhenweaddlabornecessaryforoperationalintegritywearecreatingvalueforthelong-termbyinvestinginandexecutingwithhigherlevelsofcustomersatisfaction.




Aswell,thelaborneededforoperationalintegrityisoffsetasdigitalutilizationkicksinandorderinputcostsgodown.Indeed,suchanunderstandingisessentialtoappreciatingwhyoperationalintegrityisasmartbetforourCompany.

Okay,let'smovefromoperationalintegritybacktoPanera2.0asanintegratedinitiative.WhileweexplicitlyarenotgivingupdatesonPanera2.0dataeachquarter,Iwanttosharesomeobservations.First,wecontinuetofeelpositiveaboutthetrendlinesweareseeingforPanera2.0.IwillalsonotethatweareseeingincreasedfrequencyinPanera2.0stores.

AndIwillnotethatit'sbecomingclearthataftercafeshavebeenconvertedtoPanera2.0foraboutayearweseecompsmateriallyaccelerate.ThismakessensegiventhatittakesaboutaquartertostabilizetheteamafterweconverttoPanera2.0.Andthenittakesthecustomer,whoonaveragevisitsPaneraaboutonceamonth,aquarterortwotorecognizethedifferenceandthenbegintochangetheirbehavior.

LetmeknowupdateyouonthestatusofourPanera2.0conversions.Weexecuted57Panera2.0conversionsinthefourthquarter.Mostofthoseattheendofthefourthquarter.Start-upexpensesandinefficienciesassociatedwiththatmanyconversionsimpactedourQ1profit.

InQ1weconverted19cafestoPanera2.0,thisisinlinewithourplan.Wenowhave123Panera2.0cafesinthesystemandweareontracktocompleteapproximately300conversionsin2015ontopofthe104openedin2014orearlier.

Further,wecontinuetoiteratethe2.0model,wehavebeentestingthePanera2.0experiencewithoutdeliverytothetableinstoresthatdon'tpresentlyhavedelivertothetableservice.Addingdelivertothetablewasprojectedtorepresentan80basispointincreaseinlabor.

BasedonourtestingwenowbelievewecaninstallPanera2.0intomanyofourcafeswithoutmakingdelivertothetableanecessaryupgrade.Thecriteriawewillbeusinggoingforwardrelativetoinstallingdeliverytothetablewillnowbejudgmentonthecompetitiveenvironment.

Let'snowshiftourdiscussiontoourplanstointensifyconsumerexcitementatPanera.Weseealong-termsecularevolutionasmoreandmoreconsumersseektobotheathealthyandeatfoodtheycrave.Theyaredealingwiththeconflictbetweenwhattheyfeeltheyshouldeatandwhattheywanttoeat.

Understandingthisphenomenon,wespentmuchof2014deeplyinvolvedinresearchandindefiningthroughafulsomestrategicreviewanunderstandingofhowwewanttore-imagineourbrandexecutiontoensureitisevermorerelevant.

Whatwecametolearnisthis,Panerahasthecredibilitytowininthisspace.We'vealwaysledtheindustryintransparencyandinofferinghighquality,lowercaloriemorenutritiousfoods.IndeedthroughtheyearsconsumerscontinuetogivePaneraveryhighscoresforthehealthfulnessofourfoodsandthehealthfulnessofPaneraingeneral.

Hereisthereasonwhywehavebeendoingit.Morethan10yearsagowesetanewindustrystandardbyofferingchickenraisedwithoutantibiotics.TodayeveryonefromChick-fil-AtoMcDonald'sandnowTysonthemselvesisfollowingourleadbyofferingsomeformofchickenraisedwithoutantibiotics.

Infact,Panera--we'vegonefurther--nowoffersmanyproteins,awiderangeofproteinsraisedwithoutantibioticsincludingroastedturkey,ham,breakfastsausageandbacon.Fiveyearsagowevoluntarilypostedcaloriesonourmenunationwide.Wewerethefirstonestodothatbecausewebelievetransparencyisaconsumer'srightandkeytoconsumertrust.

Mostcompaniesonlynowtacklingnutritionaldisclosureasitbecomesmandatedforchangelaterthis




year.Meanwhile,wecontinuetoraisethebar.

Lastyearwesharedourcontinuingprogressonouranimalwelfareinitiativesandwepublicizedourfoodpolicyandourcommitmenttoremoveallartificialingredientsincludingartificialcolors,artificialflavors,artificialpreservativesandartificialsweetenersfromthefoodinourbakery-cafebytheendof2016.

Todayallinnovationinfood,bakery,marketingandstoredesignarebeingrootedinourmissiontoofferclean,transparentandcraveablefoodalongwithanelevatedexperience.

Okay,solet'stalkaboutfood.InJanuaryweledtowithbrothbowls,ahealthfulextensionofoursoupofferingcreatedforadventuresomeeaters.InMaywearere-launchingallofoursaladdressing,indeedoversalads,they'llberootedincleandressings--thatmeansnoartificialcolors,flavors,preservativesorsweeteners.Thisisabigstepforusinbringingourfoodpolicytolife.

Duringthesummerwewillintroduceseveralnewsaladsandre-introducesomeperennialfavorites.Forinstance,inMaystrawberrypoppyseedwillreturntothemenualongwithournewMediterraneanquinoaandchicken,ourcontemporarytwistonaGreeksalad.

InJunewewillhighlightourbarbecuechickensaladandournewpowerkaleCaesar,ournewtwistonaCaesarsalad.Inthefallwewillfocusonoursandwichesandourcleanprotein.

StartinginSeptemberguestscanchoosetoupgradeanyofourtraditionaldeliturkeysandwichessothattheywillbeservedwithcarved,slowroastedturkeybreast,freeofantibioticsandallnitratesandprocessing.Itwillbesimplyturkeywithabitofsaltandpepperandoliveoil.SeveralexcitingnewsandwichesusingthatTurkeywillbeoffered.

Aswellbreadremainsanimportantdemonstrationofourbrandpromise,sowewillcontinueimprovingthehealthbenefitsofourbreads.BeginninginSeptemberallofourflatbreadswillfeature15gramsofwholegrainineachserving.

Finally,expecttoseeusremoveanumberofproductsandarangeofingredientsfromourmenuinordertoreducecomplexity,improvemanagerialfocusand,mostimportantly,toelevatetheguestexperience.

Okay,nowlet'sdiscussmarketing.AnewcampaignhighlightingourpositioningandgivingPaneraaunifiedvoiceacrossallmarketingchannelsisexpectedtodebutinJune.Iwillmakenocommentonthatcampaigntoday.Simplyput,Idon'twanttospoilthesurpriseofyouhearingitdirectly.ButIwanttotellyouweareveryexcitedaboutitandweareveryexcitedaboutitspotentialtosupportwherewehopetotakePanera.

Letmenotethis,wealsocontinuetousethegreatbenefit,ourMyPaneraloyaltyprogram.MyPaneraisapowerfulprogramforone-on-onemarketing,period.Ithas19millionmembers,accountingfornearlyhalfofallCompanytransactions.AndI'mquiteconfidentthereisn'tanotherrestaurantcompanyintheindustrythatcansayanythingapproachingthat.

Asanexampleofitseffectiveness,inAprilwelaunchedacoffeeclubpromotionallowingselectedMyPaneramemberstocomeinforafreedailycupofcoffee.Thisprogramisdrivingtransactionsand,thoughitdecreasescheckandpennyprofitpertransaction,itwillbeanoverallpositivecontributortonetsalesandprofit.

Lastly,wehaveanewmorecontemporarydesignindevelopment.Thenewdesignusesauthenticmaterialsuchasreclaimedwoodstocreateanupdatedandinvitinggatheringspace.

Inaddition,aremodelprogramthatevolvesourinternalface,thatredefinesourmenus,andalsoredefinesourinternalseatingareasandincorporateselementsofthenewcafedesignisbeingtested




andreadiedforusageinourmoreoutdatedcafes.

Okay,let'snowdiscussoureffortstobuildcapabilitiesthatprovideaccesstoseverallarge,powerfulgrowthrunways.Let'sfirstfocusoncatering.Wewillbeginbydiscussingourthesisrelativetocatering.Welikelyhavethelargestmarketshareinthecountryinlargeorderdelivery/catering.Butitisstillaverytinysliceofthepotentialmarketsharewecanobtain.

Weknowthatthisisalargebusinessopportunityandwealsoknowwecannotfulfillthatopportunityoutofthebackofa$50,000aweekcafe.Finally,weknewthatourcafesdoabetterjobwhentheyarefocusedononemaster,retail,andwhentheydonothavetomakethedifficulttradeoffsofstealingpeoplefromthecountertoservethecateringcustomerandviceversa.

Wehavecometolearnthatourcateringbusinessbenefitsfromdedicatedfacilitiesthataresetupandreadytohandlethesalesformultiplecafes.Becauseourhubsfillordersformultiplecafesandbecausetheyoperatewithmuchhighervolumes,they'reabletolowerthesalesvolatilitythatmakesacateringbusinesssodifficulttoefficientlyexecute.

Tothatendourhubswithmuchhighervolumebenefitfromhigherratesofdriverutilization.Aswellourhubsremovetheconstraintsourprofessionalsalesteamfacesinsellingfromcafesanditallowsustoapplydisciplineandfocustooperationalandsalesexecution.

Letmesharewithyousomethingelseaboutourhubthesis.Ourbeliefindeliveryhubsisbasedonourexperiencewiththem.Severalyearsagowewereforcedbyvolumetoopenanumberofhubsandinthecaseoftheseprototypicalhubs,wefoundtheygeneratedapowerfulIRRovertime.Butproducedshort-termP&Lpressureforthefirstyearortwo.

Addingacateringhubislikeaddingcapacityontoahotelthatisalreadyoperatingatfullcapacity--ittakessometimeuntilthatnewcapacityactuallyproducesincrementalprofitability.Letmesaythis,ItrulybelievethatinvestorsarewiseenoughtoknowthatthesekindsofhighIRRprojects,inspiteoftheshort-termpressurestheygenerate,areasmartbet.

Nowlet'sturnourattentiontodelivery.Thisisapowerfulsalesbuildinginitiative,andsomethingthateverybodyinourindustryseemstobetalkingaboutthis.InthecaseofPanera,we'vebeenworkingonthisforsometime.IndeedwehavebeentestingdeliveryforoverayearandarenowoperatingintwomarketswithourownPaneradrivermodelandintwomarketswithtwopartnersprovidingthirdparty[outsourced]drivermodel.

TogiveyousomesenseofourcommitmenttothiseffortIshouldnotethatourdeliveryeffortsareledbytheformerpresidentofoneofthebigthreepizzadeliveryoperatorsandhisformerseniorvicepresidentofoperations.

Letmesharesomeofwhatwe'vecometounderstandaboutdelivery.We'vecometobelievethatdeliveryoffersusthepotentialtomateriallyincreaseoursalesvolumespercafeandtobecomealong-termdriverofsalesgrowth.Infact,Iwouldcallitaverypowerfulopportunity.

Further,wehavecometolearnsaladsandsandwiches,becausethey'regenerallynotheatedandbecausetheytravelparticularlywellinavehicle,areaperfectproductfordeliveryespeciallyatlunch.

We'vealsocometounderstandthatdeliveryishardandthekeytosuccesswithdeliveryishavingthecapabilitiesinplaceneededtoexecutedeliveryconsistentwiththehighvolumesitcangenerateanddoingsoallthewhilewithoutdamagingtheretailbusiness.

Indeeddeliveryisnotsomethingyouwanttothrowintoanalreadyhighvolumecafeenvironmentasdoingsowillappearsmartintheshort-termbutultimatelyprovealimitedlong-termpositiveimpactifnot




executedproperlywithhighcustomersatisfactionandwithadrivernetworkthatefficientlyleveragescost.

Indeed,we'vecometounderstandsuccessindeliveryrequiresseveralthings.First,itrequiresdigitaland/orphoneorderingwiththefullmenuavailable.Andthatmenumustbefullycustomizable,consistentwithwhatonewouldfindinaretailenvironment.

Simplyput,youwon'tbesuccessfulindeliveryifyouoffertheguestapartialexperienceorifyouofferaplain-vanillaoutsourcede-commercesolutioninwhichthecustomerneedstomanuallytypeincustomization.Itsimplydoesn'tgetthejobdonetothesatisfactionoftheguest.

Second,Iwouldaddthatwe'vecometounderstandaneffectivedeliveryprogramrequiresintegrationbetweentheorderingsystemandthefoodproduction(inaudible)ifoneistooperateathighvolumeandwithhighlevelsofcustomersatisfaction.Indeed,webelieveanythinglessthanfullintegrationleadstoaflawedsystemandultimatelycreatesdisappointedguests.

Third,webelieveaneffectivedeliveryprogramrequiresadrivernetworkthatisavailableandcost-efficientsothatdeliveryfeesultimatelychargedtothecustomermakesenseforfrequentuse.

Indeeditisourviewthatanycompanyinterestedinreallywinningatdeliveryisgoingtoneedtoresolvealloftheseissuesorriskfailure.Infact,wehaveconcludedthatfordeliverytobesuccessfulatPaneraweneedtobuilditsoourcafemanagersexperiencedeliveryassimplyanothertake-outorder.

Letmenotethatwebelievewehaveinplacetodaymuchofwhatwe'retalkingabout--wehavefulldigitalaccessandwehaveapowerfulsystem,ane-commercesystemthatlinksorderplacementtoourproduction(inaudible).

Indeedwebelievewehaveeverythingnecessarytorolloutdeliverybroadlywiththeexceptionofthedrivernetwork.Thatiswhywearepresentlytestingbothinternalandoutsourcedsolutionstoourdrivernetworkneeds.

Sowheredowegowithdeliveryinthefuture?Wewillexpandourtesttoadditionalmarketsin2015andwillmakeajudgmentrelativetoabroaderrolloutin2016.Inanycase,expectthatwhenPaneradoesdeliveryitwilldoitright.

Okay,IwillnowturnthereinsbacktoMikewhowillprovideanupdateonourvalueenhancinginitiativesandhewillalsoprovideguidanceforQ2andfull-year2015andthenIwilltakeitbackforafewclosingcomments.Mike?

MikeBufano (CFO):

Thankyou,Ron.AsRonsaid,Iwillstartbyspendingafewminutesonourrecentlyannouncedvalueenhancinginitiativesandhowweholdthem.Aspartofitsongoingevaluationofourcapitalstructure,ourBoardofDirectorsapprovedanincreasedsharerepurchaseauthorizationto$750million.

Aswepreviouslyannounced,weexpecttopurchase$500millionofshareswithinthenext12monthsthroughacombinationofcashonhand,cashflowfromoperationsandupto$500millionofnewdebt,takingadvantageoftheattractivecurrentinterestrateenvironment.

Additionally,theBoardapprovedtheuseofthenetproceedsfromourrefranchisingefforttoalsobeusedtowardsrepurchasingshares.

Toprovidealittlemorecoloronthenewdebtwehavestartedverypreliminarydiscussionswiththebanksbutnothingisyetdefinitive.Fromthesepreliminarydiscussionsweexpectinterestratestobein




theneighborhoodof5%.

Wewillprovidefurtherupdatesaswefinishdiscussionsandsecurethedebt.Inthemeantime,wewillcontinueourrepurchasingprogramusingcashonhand,cashflowfromoperationsandourcurrentrevolverifneeded.

Basedonthetimingofsecuringthedebtandtheanticipatedtimingofthebuybackweexpecttheincrementalbuybacktobemodestlyaccretivein2015andmoresoin2016.

NowIwouldliketoupdateyouonourprogressagainstourrefranchisingtargetof50to150cafes.DuringthequarterwesoldoneCompanyownedcafeinamixedCompanyandfranchisemarkettoanexistingfranchisee.

Additionally,aspreviouslyannounced,wesignedlettersofintenttorefranchise73bakery-cafes.Thesecafesareinprofitablebutmateriallybelowaverageprofitabilitymarkets,sopriortransactionsdonotprovideagoodbenchmark.Wewouldcounselyoutothinkofthemintermsofvaluationsasopposedtotryingtobenchmarkthemagainstanabsolutevaluepercafebasedonourpastacquisitionsofaboveaverageprofitabilitycafes.

Itisimportanttostressthatweexpectthesaletobe73cafeswillbeaccretivetoongoingearningsbeforetheuseofproceedstorepurchaseshares.Thisaccretionwasfactoredintoourfull-year2015expectation.

Duetoaccountingruleswehadtorecognizetheone-timechargeinthefirstquarter,aheadofwhenweactuallyrealizedtheproceedsfromsaleuponclosing.Asyouwillseeanour10-Qfilinghaveclassifiedthecafesasheldforsaleonthebalancesheet.

BeforemovingonIwanttoemphasizeonepoint.Wewillonlyrefranchisemarketswheredoingsomakeseconomicsenseandgeneratesongoingearningsaccretionexcludingtheimpactofanyone-timecharges.Ourrefranchisinginitiativeisnotachangeinstrategyaswehavelongheldthat35%to50%Companyownedcafesistherightbalance.

Finally,Iwouldliketotouchontheworkwe'vebeendoingonourcoststructure.Weremaincommittedtocloselymonitoringournonstrategiccoststoenableustoreallocateresourcesfromsupportfunctionstogrowthinitiatives.

Aswenotedinthefourth-quartercall,forfull-year2015weanticipatethiswillresultina5%reductionincoreG&Aexpenses.Saidanotherway,thatisessentiallya5%reductionincore--insupportfunctionsoutsideofIT.Aspartofthiseffortwemadethedifficultdecisiontoeliminate36rolesincoresupportfunctionsinthefirstquarterof2015.

OurcoststructurewillremainafocusareaforPaneramovingforward.WeareestablishingaleanSixSigma-basedapproachtocostsavingswithafocusonidentifyingandeliminatingnon-valueaddedactivitiesandreducingcostonproductsandservicesthatwillnotaffectourcustomerexperience.

Inaddition,inFebruaryweengagedaleadingglobalmanagementconsultingandtechnologyservicesfirmtoreviewourtechnologyplans,processes,proceduresandcost.

Letmenowmoveontoourfull-yearandsecond-quartertargets.Wearemaintainingourfull-yeartargets.Excludingtheone-timerefranchisingloss,wereiterateouradjustedEPSgrowthtargetofflattodownmid-tohigh-single-digitsversusour2014adjustedEPSof$6.53.

WecontinuetotargetanadjustedEPS--I'msorry,EBITDAgrowthrateofflattodown--up4%.Letmesaythatagainjustsoweareclearonthatpiece.WecontinuetotargetanadjustedEBITDAgrowthrateof




flattoup4%comparedto2014againexcludingtheone-timerefranchisingloss.

Finally,wearereiteratingourkeyassumptionsincludingsame-storesalesgrowthof2%to3.5%;operatingmargincontractionof100to175basispoints;105to115newbakery-cafessystemwidewithaverageweeklynetsalesof$43,000to$45,000;approximately300unitsconvertedto2.0;50to150Companyownedbakery-cafesrefranchised;andaneffectivetaxrateofabout37%.

Giventheverydynamicnatureoftheinvestmentswearecurrentlyundertakingwearenotgoingtogivespecificguidanceforthesecondquarter.Wecontinuetoinvestaheadofthecurveand,althoughthebenefitsofmanyoftheseinitiativeswillplayoutoveranumberofmonths,youshouldcontinuetoholdourcurrentEPStrajectoryaschoppy.

However,wewouldexpectthatoursecond-quarterEPSresultswillonceagainbeatthelowerendofourfull-yearEPSrange.WiththatIwillnowturnthecallbackovertoRonforclosingthoughtsbeforeweopenupthecallforyourquestions.


Okay,thankyou,Mike.Acoupleoflastthoughts.Paneraisclearlymakinganumberofinvestmentstoensureitremainscompetitiveanddrivesgrowthwellintothefuture.However,withthatinvestmentcomesshort-termP&Lpressure.Itistrue.

Whileitmaycostusintheshortterm,weareconfidenttheseinvestmentsgeneratehighreturnsforshareholders.Indeed,webelievenotmakingtheseinvestmentswillresultinafarlessvaluableCompany.OurintentioninexecutingthisplanistoensurePanera'sabilitytogeneratedouble-digitearningsgrowthformanyyearstocome.

AsarelativelylargeshareholderwiththevastpreponderanceofmypersonalandfamilynetworthinPanera,Iwantverymuchtodriveupshareholdervalue.ButIknowitwon'thappenunlessPaneraisabettercompetitivealternativewithexpandedgrowthcapabilities.

Letmestatetheobvious,reengineeringanycompanyforgrowthisdifficultandittakestimeandistypicallyastepfunctionphenomenon.Extensiveprototypingandtestinghasshownusthatourinitiativeswillhaveamateriallypositiveimpactonourbusinessoverthenextyearortwo,butourtestingalsoindicateswemustbepreparedtogivetimefortheseinitiativestotakeholdandtobuildsalesandtoleveragecost.

Tobeclear,leadingindicatorswillbevisible,butrealprogresscannotbemeasuredinacompanythesizeofPanerainamonthortwoorevenaquarterortwo.Rather,progresswillbemeasuredinyear-over-yearimprovement.

Iwanttoremindpeopleofsomethingelse.WhatsetsPaneraapartiswehavedonejustthesekindsofevolutionssuccessfullybefore.Wediditinthemid-1990swhenweevolvedSaintLouisBreadintoPanera,establishingavisionforwhatwouldbecomethefastcasualmarket.

Backthenpeopledidnotbelieveinourvisionandyoucouldhaveboughtboatloadsofourstockforbetween$3and$4ashare.Aninvestoronceaskedme,whydidn'tyoutellme?Ididn'twanttoremindhim,Idid.

Wediditagaininthelate1990swhenwesoldAuBonPain,thelargerofthetwocompanies,tofocusallourenergyonPanera.MyBoarddidn'tbelieveitwastherightthingtodo.Backthenyoucouldhaveboughtthestockforabout$3ashare.Andagainaninvestoraskedme,whydidn'tyoutellmetobuythestock.




Anddon'tforgettheyearsaroundtherecessionwhenwewerecontrarianandchosetoinvestinthecustomerexperiencedespitetheeconomicslowdown.Ultimatelyourcompsimprovesignificantlystrongerandwewerebeatingothercompanies.Ourstockpricenearlydoubledin2009versus2008.Andonceagainsomeoneaskedme,whydidn'tyoutellme.

Therealityiswehaveatrackrecord--wehaveatrackrecordofseeingthefutureandexecutinginitiativesthatcreatesignificantlong-termvalue.Hereistheproof--Panera'sshareswereupnearly4,000%overthepast15yearsascomparedto39%fortheS&P500.SoIwilltellyousomethingItrulybelieve,wewilldoityetagain.

Indeed,Ibelievethat,asinthepast,shareholderswillbenefitmostwhenwechangethetrajectoryofourrelationshipwithourguestandwhenweexpandourgrowthopportunities.Thoughwehavechosenthemoredifficultpath,Iamconfidentitwillultimatelyleadtomoresustainableandlongerlastingearningsexpansion.ThankyouandwewillturnitovertoStevewhowillconductthequestions.

SteveWest (VP-IR):

Allright,operator,wewilltakequestionsnowatthistime.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions).BrianBittner,Oppenheimer.

BrianBittner (Analyst-Oppenheimer&Co.):

Aquestiononjustthe2.0dynamicsherein2015.Youmentionedthe57storesthatyoudidinthefourthquarterdid--wereamaterialreasonwhywesawthemargindeclineinthefirstquarter.

AndIthinkallofuscanappreciatethat,asyouhaveoutlinedmany,manytimes,howtheinvestmentcyclefora2.0storeworks.Andwhenyoulookforwarditdoesappearyouneedtoconvertabout90plusstoresperquarteroverthenextthreequarterstohityour300goalfortheyear,whichisunprecedentedforyourmodel.

AndIamreallywonderingdoesthisprovidearisktothemarginguidancethatyou'vegivenusfor2015atall?AndIaskthatbecauseyouareassumingmarginsdeclineatalesssevereratefortherestoftheyeardespitewhatdoesappeartobeanintensifyinginvestmentcyclehere.Soifyoucouldjustputsomecolortothatthatwouldbehelpful.

MikeBufano (CFO):

Yes,Brian,itisMike;IwillstartandRonwilladdsomecoloraswell.Soitisbuiltintoourguidancenow,thatrateofinvestment.Whatyouhavetorememberisitisnotjustthekindofupfrontinvestment.AsRonsaid,oncePanera2.0hasbeeninthecafesforawhilethesalescontinuetobuildaswell,soyoukindofhaveatwoprongedpieceofit.

Sothe100thatweopenedbefore2014,the19we'veopenedalready,the123intotal--youwillstarttoseesomeofthesalesliftcomefromthoseaswellatthesametimeyouareseeingtheinvestmentcome.


Yes,Iwouldjustaddthe57--57weopenedinthefourthquarter,Ithinkthevastpredominanceweopenedatthelastfourweeks.Andinsomewaysitwasreallyatestforusofourorganizationalcapabilitiestoexecuteit.AndIfeellikewegotveryclearaboutthatinour--tookabreakbutweare




thereandverycapabletodoit.

BrianBittner (Analyst-Oppenheimer&Co.):

Okay,thankyou.

Operator :

DavidTarantino,RobertWBaird.

DavidT arantino (Analyst-RobertW.Baird):

Ihaveanear-termquestionaboutthecompsoutlook.And,Ron,Iwashopingmaybeyoucouldgivesomeperspectiveonyourconfidencelevelinachievingthefullyearplanthatyouhavelaidout,givenwhatyouhaveseentodate.

AndIguessifIlookatthemathitdoesrequirefurtheraccelerationinthetwo-yeartrendsrelativetowhatyoulaidout.Sojustwonderingwhatyouthinkthedriverofthatpotentialaccelerationcouldbeandyourconfidencelevelingettingthere.


Well,Iwouldsayitthisway,andIthinkitisprettysimple.Ourfullyearrangeis2%to3.5%.Weareat2%;wehaveanumberofmaterialinitiativesunderway.Wearebuildingsomemomentumunderneaththecompswiththeseinitiatives.

We'refeelinglikethesearestructuralthingsbuttheyaremakingadifferencewhetheritbe2.0,whetheritbewhatwearedoingwithinnovationinfood,whetheritbethecampaignthatwillrolloutinJune,whetheritbewhatwearebeginningtodowith--we'regettingthebenefitsupwithoperations.

SoIthinkitisreasonabletosaywe--inaworldwherenobodyknowswhatthefutureisgoingtobring,particularlycomps,feellikethatwearereasonablycomfortableinourviewthatwewillbeintherangeof2%to3.5%.

DavidT arantino (Analyst-RobertW.Baird):

Great,andifIcouldjustaskonefollow-up,itisrelatedtothefirstquestion(multiplespeakers).Iguessthefollowitisaroundmarketing.AndIguessinhindsight,howmuchdoyouthinkthemarketingspendincomparisonmighthaveinfluencedthefirstquarterrelativetokindofhowyouarethinkingaboutitontheoutlook?


Straightup,Idon'tthinkanybodyknowswiththatlevelofprecision.Thesearestewsandthereismanyfactorsinthere.WhatIdoknowismarketingwasdown10%andthatisreallyallIcansay.Itismaterialityrelativetoawholebunchofotherthingstotoughtopullout.

Operator :

JosephBuckley,BankofAmericaSecurities.

JosephBuckley(Analyst-BofAMerrillLynch):

Ron,canIaskyoutogobacktothesalesanalysis?IfIlookattheentreegrowthof1.4%,itmakesthecheckgrowinthequartervery,verymodestlookingatitonthatbasis.Andsoitbegsthequestionwhatcateringdelivered.




Andcouldyouclarifythattwo-yeartrend,becauseonthereportednumberstheApriltwo-yearcompactuallyslowed.SoIknowtherewasanEastershift2013versus2014,butnotthecase2014versus2015.SojustifyoucouldanswerthisbroadquestiononsalesprovidingthatperspectiveagainIwouldappreciateit.


Youwanttotakeit,Mike?

MikeBufano (CFO):

Yes.So,Joe--.


Givethisguysomeairtimehere.

MikeBufano (CFO):

Yes,solet'sstartonthecalendarshift.SoIthinkwhatweweretryingtotalkabout,Joe,wasthetwo-year.Soyouareright,itdidn'tmove2014versus2015butitdidmove2013versus2014.

Soagain,thewaywelookattheadjustedforEastertwo-yearcomptrend--right,whichisthetrendthatwereallyfeellikematterssothatgetsridofthenoise--isP1wasminus0.2;P2was1.3;P3was2.1;andthenthefirst27dayswas3.9.SothatiswhenyoumaketheadjustmentforEasterback2013to2014.Sohopefullythatclarifiesthatpartofthequestion.

Intermsofyourquestionaboutentreegrowthandhowthatplaysintototalcheckgrowth,rememberthereisotherfactorsbeyondjustentreegrowth.Entreegrowthisonethingthatcandriveupthemixonourcheckifentreesaregrowingfasterthantransactions,itdidinthisquarter.Butthere'sabunchofotherfactors.Therearesomesecularthingsgoingonaroundbeverageattachment,thereisalotofpieceslikethat.

So,yes--andalsothedaypartpieceplaysintoitaswellforus,right.Thebreakfast--breakfasthasalowercheckthantherestoftheday.Ithinkwehadtalkedaboutoncallslastyear,sothisisaquarterwherewedidseebreakfastgrowfasterthantheotherdaypartsaswell.Soallthosethingsplayintoit,soitisnotjustkindofjustentreegrowthgrowingfasterthantransactiongrowththatwoulddrivethecheckup.


(Technicaldifficulty)andthatansweraswell,please?

MikeBufano (CFO):

Whatwasthat,Joe,wedidn'treally--?


Couldyouputcateringinperspectiveaswell,justwhatthecateringsaleslooklikeversustheoverallcompandwhatthemixwas,justanybarometersoncateringwouldbehelpful.

MikeBufano (CFO):

Yes,Imean,Joe,atahighlevelwhatwewouldshareisthatcateringgrewalittlebitfasterthantherestofthebusinessishowwewouldqualifyit.





Joe,youandDavidarelong-timeanalystshereanddearfriends,andsoyougotthatoneandahalf,butwearegoingtoholdeverybodytoone.Let'smarchforward.


Thankyou.

Operator :

JohnGlass,MorganStanley.

JohnGlass (Analyst-MorganStanley):

Withonequestion.Ron,Iappreciatethecoloron2.0thisquarter.Canyoutalkaboutwhetherthemostrecentlyconvertedstoresinthefourthquarterarenowbeginningtooutcompthesystem?YoutalkedaboutalittlebitofalagandthatwassortofnewIguess.Arethesenewerstorescompingquickerthanthey--thantheoldercohorts?Areyouhelpingconsumersunderstand2.0forexampleinthestoresbetterthanyouusedto?Anycoloronthatwouldbehelpful.


Yes,I'mgoingtotellalittlestory,John.Afterthelast--wewentintolastcallandIdecided,youknowwhat,everybodykeepsaskingthesequestionsabout2.0.I'mjustgoingtoputeverypieceofdataliterallywithtremendousgranularity.IfIhadmydruthersIwould'vegivenittobystore.

AndafterthecallIgotalltheseinterestingresponses.Somepeoplesaidtheremustbeareasonyou--Ihaveneverseenanybodyputoutthatmuchstuff.Whatareyoutryingtodo?AndIthinkinsomewayswerealizedinputtingitoutitjustgivepeoplealotofirrelevantdatathattheybegantochokeon.Wethoughttheywouldseeit.

Soweclearlydon'twanttostarttorespond,asmuchasIwouldliketo,tohowdidthismarketdosixweeksintoitversussomethingelse,becausewearegoingtogodownapaththatisn'tnecessarilygoingtohelpyou.SoIamgoingtorefrainfromrespondingtothatquestion.

MikeBufano (CFO):

Yes,andwewillsharethedataonthenextcall.Soyouwillbeabletoseethelonger-termtrendonthoserecentconversions.


Areyouatleasthelpingtheconsumerfigureitoutfasterthanevenifyouarenotgoingtosaywherecompsare?


Arewehelpingtheconsumerfigureitout,I'mnotsureIknow--.


Yes,ifitistakingthemacoupleofquarterstofigurethisoutanduseit,can'tyoushortenthatperiodoftimesothattheyengagequicker?





Well,youcanbesurewecontinuetoiteratethat,thatispartofthewholeprocess.Buttobeclear,whattakestime?First,whenyouputthisintoplaceyouareretrainingpeople.Thewholeorganizationisgoingthrough,inthatstore,abitofadisruption.Theythenhavetogetnewmusclememory.Theyhavetoknowhowtodoit.

Theyhavetofeelconfidentwithit,theyhavetoworkdowntherelaborcharts.Theyhavetobuilduptheirsenseofthisisthewaywedoithere.Thatisoftendisruptivetocustomers.

Thenwehavetotrainthecustomeronhowtousethekiosk,howtofeelcomfortablewithit,howthestoreworks.Thatusuallytakesusaquarter,itcouldtakeustwoquarterstosortofgothroughthosephases.

Itisparticularlyinterestingbecausethecustomeronaveragecomesonceamonth,sotheymaynotevennoticethechangeforawhile.Itthentakesthecustomerthemselveswhatevertimeperioditisforthemtoevolvetheirbehavior.

Soyouhavethiscycle,anditisnotonecustomergoesthisway.Youhavesomeittakeslonger,awholebunchitmovesmorequickly.Whatiscleartousisitclearlymoves.

Operator :

JeffBernstein,Barclays.

Jef f Bernstein (Analyst-BarclaysCapital):

Aquestionontherefranchisingeffortwhichyoualludedtolastquarterandweobviouslygotsomemorecolortoday.SoIunderstandbeingontrackforthat50to150in2015.

MyquestionIguessbroadlyspeaking,Imeanacoupleofparts,butjustwonderinghowthatnumberwasestablished.Whetheryouhave--Ithinkyoumentionedthetargetis35%to50%,whetherweshouldassumewearenowonapathtogotowards35%andkindof50%isdoneorwhetherornotweshouldseeanaccelerationofthatnumbermaybein2016?

Andjustlastly,whenyoudothoserefranchisings,doyougetapromisemaybeofeithera2.0upgradeordoyougetapromiseoffuturenewunitgrowth?ImeanIthinkthatwouldbeagoodcarrotforpotentialfranchiseesifyouofferitatabetterpriceiftheypromisetodocertainthingsthatyouwouldliketohaveaccomplished.Thanks.

MikeBufano (CFO):

Sothereisafewpiecesinthere,Jeff.IwillcertainlystartandRonmaychoosetoaddsomecoloraswell.Sotoyourinitialpartofthequestionofhowdidweestablishthe50to150,likeIsaidonthecall,weareonlygoingtorefranchisemarketswhereitmakeseconomicsenseandwebelieveitisgoingtobeaaccretivetotheP&L.

Sothatishowwecameupwiththatnumber,welookedatthemarketsthatfitthatcriteria.SoIthinkthatstartstoansweralittlebitofyoursecondpartofthequestionofwouldwedomore?Imeanweestablishedarangeof50to150,we'vemadeprogresson73andthatiswhereweareleavingthatpartofthediscussionrightnow.

Intermsoffuturepromises,ImeanallofourfranchiseeswanttodoPanera2.0,sowedon'thavetoputacarrotouttheretogetthemtodoit.Mostofourfranchiseesarecontinuingtoaggressivelybuildouttheirmarkets.

Imeancertainlywhenwesellandmarketwegothroughthefuturedevelopmentinthemarketwiththebuyer,butitisnotlikewehavetolowerthepriceorputsomecarrotouttheretogetpeopletoinvest




behindthebusinessbecauseourfranchiseesbelieveintheconceptandwhatwearedoing.


Thefranchiseesarealloverthe2.0rollout,itisnotasiftheyarewaitingtoseehowyourstoresdoandthey'regoingtobeayearbehind?


No,theyarereadytogo.Differentplacesbuttheyarereadytogoandwejusthadabigmeetingwiththemwheretheyliterallyweretouchingit,feelingit,goingthroughnumbers.AndIthinkthatthereisalotofexcitement.Andastheiterationscontinuetogetbettertheyarethebeneficiaryofit.


Great,thankyou.

Operator :

JasonWest,CreditSuisse.

JasonWest (Analyst-CreditSuisse):

And,Ron,IwilltakeyouuponthatoffertohavelunchataPanerawheneveryouhavesometime(laughter).But,yes,IguessJeffkindofstolemyquestiontherearoundtherefranchisingphilosophy.ButIguessjusttoaddontothat(multiplespeakers).


(Multiplespeakers)secondquestion.


Thereyougo.Thethoughtsonthebuybackthatyouannounced,whichobviouslygotareallypositivereception,ifyoualsothoughtaboutadividendasyoumovetoabitmoreofanassetlightmodelIguessandaddingsomemorecashtothebalancesheet.Howdidthatplayintoyourthinkingandisthatsomethingthatyouthinkinvestorswouldbelookingfor?

MikeBufano (CFO):

Jason,wearealwayslisteningtoinvestors,wearealwayskindofthinkingthroughthis.ItisanongoingdiscussionwehavewiththeBoardaroundcapitalstructure.Atthistimewebelievedthebuybackwasthebestwaytoreturncashtoshareholders.Butwecertainlykindofconsiderallouroptionsaswehaveallthesediscussions.Allright,nextquestion.


Allright.

Operator :

KarenHolthouse,GoldmanSachs.


Karen,beforewetakeyourquestionIwouldjustliketoaddoneothercommenttoJason.Therewassomediscussion,beingverystraightonit,onthepoliticsofthewholebuybackandhowitoccurred.Thereality




isIthinkforusIthinkweinternallyandIthinkthatwithinourBoard,thisisadiscussionwe'vebeenhavingforalongtime.

AndIthinkweactuallyfeltstraightupthatthebuybackandtheexpansionoftheauthorizationwastherightthingnotbecauseofpressurebutreallytherightthingtodoforrunningthisCompanyforthemedium-andlong-term.Andthatisthecontextinwhichthatdecisiongotmadewhichiswhyitisarelativelyeasydecisionforus.Sorry,goahead,Karen.

KarenHolthouse (Analyst-GoldmanSachs):

Noproblem.Soaquestionaboutmenucomplexity.Canwethinkaboutthereareacoupleofputsandtakesforaddingsomenewthingstothemenuandthenmenusimplification.ShouldwethinkofthatasthetotalnumberofSKUsgoingintothekitchengoingupordown?

Andwiththeabilitytoupgradeproteinsaddinganincrementalversionorwaytocustomizeanorder,whichissomethingthathasbeenachallenge,arethereanyway--isthereanywaytoquantifyoranupdateonwithPanera2.0unitsordigitalorderstheextenttowhichorderaccuracyisactuallyimproving?


Sure,alotinthere.Letmefirstjustsayyouactuallygottothekickandit'sbeenhardformetohelppeoplegetthere.Complexityisnotrootedinthenumberofmenuitems,itmaybeinthewaytheconsumerexperiencesandtheirabilitytoorder,butfundamentallyitisrootedintheSKUs,thenumberofingredientsyouhaveonyourline.Complexityisrootedandthedifferentprocessesyouusetomakethatfood.

Andsoourwholeattemptandouroperator'sattempttosimplifyisrootedinreducingSKUsandreducingduplicativeordifferentprocessesthatcreatechallengesfor[operators].Aswellitistryingtotaketheadministrativeburdensawayfromourmanagersusingtechnologyasameanstodothat,whichwehadn'tdonebeforequitehonestly,sotheycanfocusonwhatreallymatterswhichisguestexperience.Soyoureallygetit.

Iwouldsaytoyousecondly,yes,wemonitoritall.Oneofthemost--thebestthing--oneofthebestinnovationswemadelastyear,Iwillbeverydirectonthis,inallofPanerawasthedevelopmentofourwholecustomerinformationsystem.AndwenowgooutandweliterallygotoourMyPaneramembers.Anditiscompletelyunbiased,theydon'tcallintoustheydon'tuse--theydon'tselfselect,wegoouttothem.

Andwearegettingtensofthousands,nearly100,000piecesofdataacrossthesystemeverysinglemonth,we'restatisticallysignificantineverysinglestoreinsignificantwayswithunbiaseddata.Soweareveryabletomonitorcustomersatisfaction,wemonitoraccuracy,wemonitorfoodquality,wemonitorwarmth.

Andwehavealsogoneinanddidthedeepanalyticstounderstandwhatcorrelateswithwhat.Itisnotenoughtoknowyouwanttodrivecustomerhealth,itiswhatlevelofspeed,whatlevelofaccuracymatters.

Finally,whatweknowinusingthatsystemisinthe2.0storeswe'vebeenabletodrivethefrequency.Andinparticulardaypartsbecauseit'snotacrossthewholemenu,right.We'vebeenabletomateriallydrivetheaccuracy.Soweseeit.Andweknowthoseinternallyaretheleadingindicatorsforwhatwewantwhichis[sat]whichtiesintofrequencywhichultimatelydrivescomps.AndIcanshowyouthecorrelationsandallthat.




KarenHolthouse (Analyst-GoldmanSachs):

Great,thankyou.

Operator :

RobertDerrington,WunderlichSecurities.

RobertDerrington (Analyst-WunderlichSecurities):

Ron,theopportunityfordeliveryforPaneraisaprettyexcitingone.NowIguessthatbeingsaid,asyoulookatthat,howdoyouthinkaboutdelivery?Isitsomethingthatyouwould--youneedtohavedeliveryhubsinplaceinordertodo?Andifyoudon'tneedthose,howdoyou--wouldyouovercomplicatethecafebusinessifyouhaveyourowndeliverydriversonhandtorundeliveryoutofyourcafes?


Greatquestion.Justtobeclear,weareassumingthehubsareusedprimarilyforcatering,largeorderdelivery,whichwethinkofasdifferentmenuitems,differentproductionprocessanddifferentdeliverymechanism.Theywouldbeusedforsmallorderdeliverybutthat'ssortofsecondaryandtertiary.Onourpresentmodeldeliverywillbedoneinourretailstore.

Nowourmission,asIdefinedforyouearlier,thewaywethinkofdeliveryisithastomanifestitselforshowuptoourstoremanagersassimplyanotherto-goorder.Iftheygetmoreinvolvedinitthanthatitisgoingtocomplicatetheirlivesandbeproblematic.

Thatiswhyitissoimportantthatwehavethedigitalorderingsystem.Thatiswhyitissoimportantthedigitalorderingsystemliterallytieintotheproductionsystemsintheir[KDA],theydon'tknowitisanydifferent.

Nowwhatourmodelcallsforisthedriversthatwoulddeliverthatdeliveryandtheactualdeliverystructurewouldbeessentiallyeitheroutsourcedormanagedthroughamodestlydifferentmanagementsystemmuchlikewemanageourbakingthatisfocusedonthosedrivers,sothatwe'reabletomovedriversaroundbetweenstores,weareabletohiredriversinafocusedwaydistrictbydistrict,marketbymarket.Andsounderstanditinthatsense.


Youknow,that--.

MikeBufano (CFO):

Sorry,Bob.


IfIcouldjustfollowuponthat,Ron.Onthedeliverypiece,clearlytheleverageofthatopportunityisterrific.Andifinfactyouuse--itsoundslikeyouranswerpointstowardsathird-partyoutsource.Ifthatisthecase,howultimatelydoyoucontrolthedeliveryforsomethingotherthansame-dayserviceordriversgettinglost?Haveyouworkedthroughsomeofthosedynamics?


Absolutely--letmeagainsaywhat--firstoff,letmeanswerdirectlyyourcommentandthenletmesharewithyousomedataorinformation.First,Idon'tthinkitnecessarilypointstoanoutsourcedsolution.Ithinkanoutsourcedsolutionbringswithitplusesandminusesandacontrolledbutseparatelyexecuted




deliverysystembringswithitcertainplusesandminuses.

Ithinktheyarebothreality.AndIthinkthatisthereasonweareouttherewithtests,withtwooutsourceproviders,peopleyouwouldknow,majorplayers.Andwearealsointestswithourowninternal[resources].Idon'tknowtheanswertothatyet.Wearelookingatit,wearestudyingit,wearethinkingaboutit.

WhatIdoknowisthatdeliverysystemhastodeliver100%ofthetime,ithastodeliverinalimitedtimeframeandcan'tbedependentonwhetherthereisadriveravailable.Ithastoworkandithastobesomethingthecustomercancounton.Aswellitcan'tbesomethingthatissortofpricedonasurgebasisthatcouldrun$5,$10,$15andnobodyknows.

Thatmaybewonderfulinaverytightphysicaldomainanditmaybeinterestinginsortofsqueezingthetopofthemarketforsomebodywhoiswillingtopayforconvenience.Butitdoesn'tdrivetothekindsofvolumesweknowaretheretobehad.


SothatrulesoutUber?


Ididn'tsaythatatall.Isaid--excusemeletmejust--Ididn'tsayitrulesoutanything.


I'msorry.


Isaidwhatwearetryingtoaccomplishinaveryrealway.

SteveWest (VP-IR):

Operator,willtakeonemorequestionandthenwewillcloseoutthecall.

Operator :

KeithSiegner,UBS.

KeithSiegner (Analyst-UBS):

Ron,Ijustwanttoswitchitupalittlebithere.Whenwetalkabout20%plusdigitalordersatthese2.0conversions,nineacrossthesystem,youexpectitto[move]--itisafundamentalchangeinhowthecustomersandyourbrandareinteracting.

Sowhenyoutalkaboutthingslikenewdesignsindevelopment,aremodelprogrambeingtested,etc.,isthereanopportunityheretosaylookforandseethatnewrelationshipandmaybecomeupwithnewrealestateoptions,notstandardboxes?

Couldyoudodeliverycarryoutonlyboxes?Couldyouplayaroundwithmoreotherformats?Basicallybroadenouttheoptions,reducethecostofrealestatepersalesdollar?Areyouexploringtheseoptionsaswell?





Yes.

KeithSiegner (Analyst-UBS):

Couldweseeanyofthem?


ImeanI'dsayittoyouthisway,Keith.Yes,noquestion,yougettosomeofthekindsofopportunitiesthatexist,right,simplystoresthatareto-goanddelivery.It'sveryreal.Wehavehadvehicleslikethatintestfor24monthsormore,straightup.Iamnotcommentingonitbecausewehavelotsoftestsinvolved.

Ithinktheimportantpointtotakeawayfromyourcomment,andyougetit,iseverythingwehavecreatedandarecreatingcreatesastructureandabasethatallowsustodosignificantlymoreinthefuture.Thatiswhatwemeanwhenwesayweareplayingforarunwayforgrowth.

Wearenotsimplyplayingtopopthecompsnextquarter.Weareplayingtoputourselvesinapositionthatwearemajorplayers--majorplayersincatering,indelivery,andultimatelyinconsumerproducts.Andwehavebig--wehaverealsizableexperiencesinthat,realsizablesuccess.Wehavedoneit,Ithinkweunderstandwhatittakestodoitdeeplyandwearemovingforward.

Therearemanythingsthatwekeeplearning.ThethingaboutourCompanythatIlovethemostisthatwekeeplearning.Andwearegoingtolearnagreatdealmoreaboutopportunitiesthatcomefromthethingsthatwe'reputtinginplace.TheonethingIknowisthatitwillcreateopportunity.Thankyou.

SteveWest (VP-IR):

Allright,operator,thatconcludesourcall.Thankyou.

MikeBufano (CFO):

Yes,thankyou,everybody.

Operator :

Onceagain,ladiesandgentlemen,thatdoesconcludetoday'sconference.

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