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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
________________

Form 10-Q
(Mark one)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

or

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number: 0-19253

Panera Bread Company
(Exact Name of Registrant as Specified in Its Charter)

Delaware
04-2723701
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)

3630 South Geyer Road, Suite 100, St. Louis, MO
63127
(Address of Principal Executive Offices)
(Zip Code)

(314) 984-1000
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   x Yes   ¨ No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
                   Large accelerated filer x
                                   Accelerated filer ¨
                   Non-accelerated filer ¨
                                   Smaller reporting company ¨
                   (Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of October 28, 2014, the registrant had 25,587,607 shares of Class A common stock ($.0001 par value per share) and 1,381,865 shares of Class B common stock ($.0001 par value per share) outstanding.





PANERA BREAD COMPANY
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS









2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
PANERA BREAD COMPANY
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share information)
 
September 30, 2014
 
December 31, 2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
146,110

 
$
125,245

Trade accounts receivable, net
35,302

 
32,965

Other accounts receivable
30,616

 
51,637

Inventories
20,430

 
21,916

Prepaid expenses and other
50,185

 
43,064

Deferred income taxes
25,625

 
27,889

Total current assets
308,268

 
302,716

Property and equipment, net
744,107

 
669,409

Other assets:
 
 
 
Goodwill
122,923

 
123,013

Other intangible assets, net
73,132

 
79,768

Deposits and other
5,912

 
5,956

Total other assets
201,967

 
208,737

Total assets
$
1,254,342

 
$
1,180,862

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
20,633

 
$
17,533

Accrued expenses
261,623

 
285,792

Total current liabilities
282,256

 
303,325

Long-term debt
100,000

 

Deferred rent
65,943

 
65,974

Deferred income taxes
50,724

 
65,398

Other long-term liabilities
45,485

 
46,273

Total liabilities
544,408

 
480,970

Commitments and contingencies (Note 8)


 


STOCKHOLDERS’ EQUITY
 
 
 
Common stock, $.0001 par value per share:
 
 
 
Class A, 112,500,000 shares authorized; 30,690,640 issued and 25,581,299 outstanding at September 30, 2014; and 30,573,851 issued and 26,290,446 outstanding at December 31, 2013
3

 
3

Class B, 10,000,000 shares authorized; 1,381,865 issued and outstanding at September 30, 2014 and 1,382,393 issued and outstanding at December 31, 2013

 

Treasury stock, carried at cost; 5,109,341 shares at September 30, 2014 and 4,283,405 shares at December 31, 2013
(680,817
)
 
(546,570
)
Preferred stock, $.0001 par value per share; 2,000,000 shares authorized and no shares issued or outstanding at September 30, 2014 and December 31, 2013

 

Additional paid-in capital
210,910

 
196,908

Accumulated other comprehensive loss
(847
)
 
(333
)
Retained earnings
1,180,685

 
1,049,884

Total stockholders’ equity
709,934

 
699,892

Total liabilities and stockholders’ equity
$
1,254,342

 
$
1,180,862


The accompanying notes are an integral part of the consolidated financial statements.

3


PANERA BREAD COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in thousands, except per share information)

 
For the 13 Weeks Ended
 
For the 39 Weeks Ended
 
September 30,
2014
 
September 24,
2013
 
September 30,
2014
 
September 24,
2013
Revenues:
 
 
 
 
 
 
 
Bakery-cafe sales, net
$
545,393

 
$
505,428

 
$
1,636,587

 
$
1,523,985

Franchise royalties and fees
30,585

 
27,189

 
89,950

 
81,219

Fresh dough and other product sales to franchisees
43,912

 
39,863

 
130,161

 
118,066

Total revenues
$
619,890

 
$
572,480

 
$
1,856,698

 
$
1,723,270

Costs and expenses:
 
 
 
 
 
 
 
Bakery-cafe expenses:
 
 
 
 
 
 
 
Cost of food and paper products
$
165,443

 
$
152,202

 
$
492,524

 
$
454,790

Labor
170,207

 
151,786

 
500,880

 
450,253

Occupancy
40,357

 
36,860

 
118,845

 
108,714

Other operating expenses
79,094

 
73,846

 
233,625

 
213,936

Total bakery-cafe expenses
455,101

 
414,694

 
1,345,874

 
1,227,693

Fresh dough and other product cost of sales to franchisees
39,100

 
35,886

 
113,842

 
103,083

Depreciation and amortization
31,187

 
26,329

 
90,681

 
75,961

General and administrative expenses
34,460

 
28,837

 
102,112

 
86,887

Pre-opening expenses
2,083

 
2,165

 
5,283

 
5,337

Total costs and expenses
561,931

 
507,911

 
1,657,792

 
1,498,961

Operating profit
57,959

 
64,569

 
198,906

 
224,309

Interest expense
462

 
75

 
1,386

 
555

Other (income) expense, net
(719
)
 
324

 
(5,934
)
 
(2,892
)
Income before income taxes
58,216

 
64,170

 
203,454

 
226,646

Income taxes
19,002

 
21,408

 
72,653

 
84,725

Net income
$
39,214

 
$
42,762

 
$
130,801

 
$
141,921

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
1.47

 
$
1.49

 
$
4.85

 
$
4.89

Diluted
$
1.46

 
$
1.48

 
$
4.83

 
$
4.86

 
 
 
 
 
 
 
 
Weighted average shares of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic
26,715

 
28,744

 
26,979

 
28,995

Diluted
26,813

 
28,899

 
27,108

 
29,173

 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
$
(570
)
 
$
206

 
$
(514
)
 
$
(522
)
Other comprehensive (loss) income
$
(570
)
 
$
206

 
$
(514
)
 
$
(522
)
Comprehensive income
$
38,644

 
$
42,968

 
$
130,287

 
$
141,399


The accompanying notes are an integral part of the consolidated financial statements.

4


PANERA BREAD COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

 
For the 39 Weeks Ended
 
September 30,
2014
 
September 24,
2013
Cash flows from operating activities:
 
 
 
Net income
$
130,801

 
$
141,921

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
90,681

 
75,961

Stock-based compensation expense
8,032

 
7,841

Tax benefit from exercise of stock options
(2,733
)
 
(7,818
)
Deferred income taxes
(12,410
)
 
7,991

Other
1,434

 
3,538

Changes in operating assets and liabilities, excluding the effect of acquisitions:
 
 
 
Trade and other accounts receivable, net
17,924

 
2,241

Inventories
1,486

 
299

Prepaid expenses and other
(7,121
)
 
4,920

Deposits and other
237

 
1,005

Accounts payable
3,100

 
425

Accrued expenses
(35,349
)
 
(26,741
)
Deferred rent
(282
)
 
3,464

Other long-term liabilities
(1,162
)
 
(3,536
)
Net cash provided by operating activities
194,638

 
211,511

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(155,348
)
 
(124,334
)
Acquisitions, net of cash acquired

 
(2,446
)
Proceeds from sale-leaseback transactions
10,315

 
2,085

Purchases of investments

 
(97,919
)
Proceeds from sales of investments

 
97,936

Net cash used by investing activities
(145,033
)
 
(124,678
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt
100,000

 

Capitalized debt issuance costs
(193
)
 

Payment of deferred acquisition holdback
(270
)
 

Repurchase of common stock
(134,247
)
 
(200,465
)
Exercise of employee stock options
863

 
456

Tax benefit from exercise of stock options
2,733

 
7,818

Proceeds from issuance of common stock under employee benefit plans
2,374

 
2,178

Net cash used by financing activities
(28,740
)
 
(190,013
)
Net increase (decrease) in cash and cash equivalents
20,865

 
(103,180
)
Cash and cash equivalents at beginning of period
125,245

 
297,141

Cash and cash equivalents at end of period
$
146,110

 
$
193,961


The accompanying notes are an integral part of the consolidated financial statements.

5


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q, which consist of the accounts of Panera Bread Company and its wholly owned direct and indirect subsidiaries (collectively, the “Company”), have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), under the rules and regulations of the United States Securities and Exchange Commission (the “SEC”), and on a basis substantially consistent with the audited consolidated financial statements of the Company as of and for the fiscal year ended December 31, 2013 (“fiscal 2013”). These unaudited consolidated financial statements should be read in conjunction with such audited consolidated financial statements, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the SEC on February 19, 2014. All intercompany balances and transactions have been eliminated in consolidation. The Consolidated Balance Sheet data as of December 31, 2013 was derived from audited financial statements, but does not include all disclosures required by GAAP contained herein.

The unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments and accruals) that management considers necessary for a fair statement of the Company's financial position and comprehensive income for the interim periods presented. Interim results are not necessarily indicative of the results for any other interim period or for the entire fiscal year.

Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40); Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This update requires management of the Company to evaluate whether there is substantial doubt about the Company’s ability to continue as a going concern. This update is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The Company does not expect this standard to have an impact on the Company’s consolidated financial statements upon adoption.

In May 2014, the FASB issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. This update is effective for annual and interim periods beginning after December 15, 2016, which will require the Company to adopt these provisions in the first quarter of fiscal 2017. Early application is not permitted. This update permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect this guidance will have on the Company's consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In July 2013, the FASB issued Accounting Standards Update No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. This guidance requires an unrecognized tax benefit related to a net operating loss carryforward, a similar tax loss or a tax credit carryforward to be presented as a reduction to a deferred tax asset, unless the tax benefit is not available at the reporting date to settle any additional income taxes under the tax law of the applicable tax jurisdiction. The guidance became effective at the beginning of the Company's first quarter of the fiscal year ending December 30, 2014 (“fiscal 2014”) and did not have a material impact on the Company's consolidated financial statements.

Note 2. Business Combinations

Florida Bakery-cafe Acquisition

On April 9, 2013, the Company acquired substantially all the assets of one bakery-cafe from its Hallandale, Florida franchisee for a purchase price of $2.7 million. The Company paid approximately $2.4 million of the purchase price on April 9, 2013 and paid the remaining $0.3 million with interest on April 9, 2014, the one year anniversary of the transaction closing date. The Consolidated Statements of Comprehensive Income include the results of operations for the bakery-cafe from the date of its acquisition. The pro-forma impact of the acquisition on prior periods is not presented, as the impact is not material to reported results.


6


The Company allocated the purchase price to the tangible and intangible assets acquired in the acquisition at their estimated fair values with the remainder allocated to tax deductible goodwill as follows: $0.4 million to property and equipment; $1.0 million to intangible assets, which represents the fair value of re-acquired territory rights and the favorable lease agreement, that are expected to be amortized on average over approximately 12 years; and $1.3 million to goodwill. The fair value measurement of tangible and intangible assets as of the acquisition date was based on significant inputs not observable in the market and thus represents a Level 3 measurement.

Goodwill recorded in connection with this acquisition was attributed to the workforce of the acquired bakery-cafe and synergies expected from cost savings opportunities. All of the recorded goodwill is tax deductible and is included in the Company Bakery-Cafe Operations segment.

Note 3. Fair Value Measurements

The Company’s cash equivalents of $37.5 million and $18.1 million at September 30, 2014 and December 31, 2013, respectively, were carried at fair value in the Consolidated Balance Sheets based on quoted market prices for identical securities (Level 1 inputs).

Note 4. Inventories

Inventories consisted of the following (in thousands):

 
 
September 30, 2014
 
December 31, 2013
Food:
 
 
 
 
Fresh dough facilities:
 
 
 
 
Raw materials
 
$
3,446

 
$
3,377

Finished goods
 
407

 
545

Bakery-cafes:
 
 
 
 
Raw materials
 
13,293

 
14,329

Paper goods
 
3,284

 
3,665

Total
 
$
20,430

 
$
21,916


Note 5. Goodwill

The following is a reconciliation of the beginning and ending balances of the Company’s goodwill by reportable segment as of September 30, 2014 (in thousands):

 
Company Bakery-
Cafe Operations
 
Franchise
Operations
 
Fresh Dough and Other Product
Operations
 
Total
Balance as of December 31, 2013
$
119,384

 
$
1,934

 
$
1,695

 
$
123,013

Currency translation
(90
)
 

 

 
(90
)
Balance as of September 30, 2014
$
119,294

 
$
1,934

 
$
1,695

 
$
122,923



7


Note 6. Accrued Expenses

Accrued expenses consisted of the following (in thousands):
 
September 30, 2014
 
December 31, 2013
Unredeemed gift cards, net
$
65,537

 
$
86,287

Capital expenditures
55,511

 
41,329

Compensation and related employment taxes
40,271

 
60,123

Insurance
31,504

 
31,545

Taxes, other than income taxes
15,192

 
17,618

Fresh dough and other product operations
8,515

 
8,236

Occupancy costs
7,108

 
5,017

Advertising
6,358

 
5,729

Utilities
5,980

 
5,488

Deferred revenue
5,163

 
2,852

Loyalty program
2,581

 
3,362

Other
17,903

 
18,206

Total
$
261,623

 
$
285,792


Note 7. Debt

On June 11, 2014, the Company entered into a term loan agreement (the “Term Loan Agreement”), by and among the Company, as borrower, Bank of America, N.A., as administrative agent, and other lenders party thereto. The Term Loan Agreement provides for an unsecured term loan (the "Term Loan") in the amount of $100 million that is scheduled to mature on June 11, 2019, subject to acceleration upon certain specified events of defaults, including breaches of representations or covenants, failure to pay other material indebtedness or a change of control of the Company, as defined in the Term Loan Agreement. The Term Loan bears interest at a rate equal to, at the Company's option, (1) LIBOR plus a margin ranging from 1.00 percent to 1.50 percent depending on the Company’s consolidated leverage ratio or (2) the highest of (a) the Bank of America prime rate, (b) the Federal funds rate plus 0.50 percent or (c) LIBOR plus 1.00 percent, plus a margin ranging from 0.00 percent to 0.50 percent depending on the Company’s consolidated leverage ratio. The Company incurred debt issuance costs of $0.2 million in connection with the issuance of the Term Loan. The debt issuance costs are being amortized to expense over the term of the Term Loan. The weighted-average interest rate of the Term Loan, excluding the amortization of debt issuance costs, was 1.15 percent for the thirteen weeks ended September 30, 2014. As of September 30, 2014, the carrying amount of the Term Loan approximates fair value as the interest rate on the Term Loan approximates current market rates (Level 2 inputs).

On November 30, 2012, the Company entered into a credit agreement (the "Credit Agreement") with Bank of America, N.A. and other lenders party thereto. The Credit Agreement provides for an unsecured revolving credit facility of $250 million that will become due on November 30, 2017. As of September 30, 2014 and December 31, 2013, the Company had no loans outstanding under the Credit Agreement.

Both the Term Loan Agreement and the Credit Agreement contain customary affirmative and negative covenants, including covenants limiting liens, dispositions, fundamental changes, investments, indebtedness, and certain transactions and payments. In addition, the Term Loan Agreement and the Credit Agreement contain various financial covenants that, among other things, require the Company to satisfy two financial covenants at the end of each fiscal quarter: (1) a consolidated leverage ratio less than or equal to 3.00 to 1.00, and (2) a consolidated fixed charge coverage ratio of greater than or equal to 2.00 to 1.00. The Company is currently in compliance with all covenant requirements in the Term Loan Agreement and the Credit Agreement.

Note 8. Commitments and Contingencies

Lease Obligations

As of September 30, 2014, the Company guaranteed the operating leases of 24 franchisee or affiliate locations, which the Company accounted for in accordance with the accounting requirements for guarantees. These guarantees are primarily a result of the Company's sales of Company-owned bakery-cafes to franchisees and affiliates, pursuant to which the Company exercised its right to assign the lease or sublease for the bakery-cafe but remain liable to the landlord for the remaining lease term in the event of a default by the assignee. These leases have terms expiring on various dates from October 31, 2014 to September 30, 2027 and potential future rental payments of approximately $17.5 million as of September 30, 2014. The obligations from these leases will decrease over time as these operating leases expire. The Company has not recorded a liability for certain of these guarantees as

8


they arose prior to the implementation of the accounting requirements for guarantees and, unless modified, are exempt from its requirements. The Company has not recorded a liability for those guarantees issued after the effective date of the accounting requirements because the fair value of these lease guarantees was determined by the Company to be insignificant individually, and in the aggregate, based on an analysis of the facts and circumstances of each such lease and each such assignee's performance, and the Company did not believe it was probable that it would be required to perform under any guarantees at the time the guarantees were issued. The Company has not had to make any payments related to any of these guaranteed leases. Applicable assignees continue to have primary liability for these operating leases.

Legal Proceedings

On July 2, 2014, a purported class action lawsuit was filed against one of the Company's subsidiaries by Jason Lofstedt, a former employee of one of the Company's subsidiaries. The lawsuit was filed in the California Superior Court, County of Riverside. The complaint alleges, among other things, violations of the California Labor Code, failure to pay overtime, failure to provide meal and rest periods, and violations of California's Unfair Competition Law. The complaint seeks, among other relief, collective and class certification of the lawsuit, unspecified damages, costs and expenses, including attorneys’ fees, and such other relief as the Court might find just and proper. The Company believes its subsidiary has meritorious defenses to each of the claims in the lawsuit and is prepared to vigorously defend the lawsuit. There can be no assurance, however, that the Company's subsidiary will be successful, and an adverse resolution of the lawsuit could have a material adverse effect on the Company's consolidated financial position and results of operations in the period in which the lawsuit is resolved. The Company is not presently able to reasonably estimate potential losses, if any, related to the lawsuit.

In addition to the legal matter described above, the Company is subject to various legal proceedings, claims, and litigation that arise in the ordinary course of its business. Defending lawsuits requires significant management attention and financial resources and the outcome of any litigation, including the matter described above, is inherently uncertain. The Company does not believe the ultimate resolution of these actions will have a material adverse effect on its consolidated financial statements. However, a significant increase in the number of these claims, or one or more successful claims under which the Company incurs greater liabilities than is currently anticipated, could materially and adversely affect its consolidated financial statements.

Other

The Company is subject to ongoing federal and state income tax audits and sales and use tax audits. The Company does not believe the ultimate resolution of these actions will have a material adverse effect on its consolidated financial statements. However, a significant increase in the number of these audits, or one or more audits under which the Company incurs greater liabilities than is currently anticipated, could materially and adversely affect its consolidated financial statements. The Company believes reserves for these matters are adequately provided for in its consolidated financial statements.

Note 9. Business Segment Information

The Company operates three business segments. The Company Bakery-Cafe Operations segment is comprised of the operating activities of the bakery-cafes owned directly and indirectly by the Company. The Company-owned bakery-cafes conduct business under the Panera Bread®, Saint Louis Bread Co.® or Paradise Bakery & Café® names. These bakery-cafes offer some or all of the following: fresh baked goods, made-to-order sandwiches on freshly baked breads, soups, salads, pasta dishes, custom roasted coffees, and other complementary products through on-premise sales, as well as catering.

The Franchise Operations segment is comprised of the operating activities of the franchise business unit, which licenses qualified operators to conduct business under the Panera Bread or Paradise Bakery & Café names and also monitors the operations of these bakery-cafes. Under the terms of most of the agreements, the licensed operators pay royalties and fees to the Company in return for the use of the Panera Bread or Paradise Bakery & Café names.

The Fresh Dough and Other Product Operations segment supplies fresh dough, produce, tuna, and cream cheese, and indirectly supplies proprietary sweet goods items through a contract manufacturing arrangement, to Company-owned and franchise-operated bakery-cafes. The fresh dough is sold to a number of both Company-owned and franchise-operated bakery-cafes at a delivered cost generally not to exceed 27 percent of the retail value of the end product. The sales and related costs to the franchise-operated bakery-cafes are separately stated line items in the Consolidated Statements of Comprehensive Income. The sales, costs, and operating profit related to the sales to Company-owned bakery-cafes are eliminated in consolidation in the Consolidated Statements of Comprehensive Income.


9


Segment information related to the Company’s three business segments is as follows (in thousands):
 
For the 13 Weeks Ended
 
For the 39 Weeks Ended
 
September 30,
2014
 
September 24,
2013
 
September 30,
2014
 
September 24,
2013
Revenues:
 
 
 
 
 
 
 
Company bakery-cafe operations
$
545,393

 
$
505,428

 
$
1,636,587

 
$
1,523,985

Franchise operations
30,585

 
27,189

 
89,950

 
81,219

Fresh dough and other product operations
92,789

 
85,095

 
275,353

 
251,779

Intercompany sales eliminations
(48,877
)
 
(45,232
)
 
(145,192
)
 
(133,713
)
Total revenues
$
619,890

 
$
572,480

 
$
1,856,698

 
$
1,723,270

Segment profit:
 
 
 
 
 
 
 
Company bakery-cafe operations
$
90,292

 
$
90,734

 
$
290,713

 
$
296,292

Franchise operations
29,214

 
25,732

 
85,403

 
76,738

Fresh dough and other product operations
4,812

 
3,977

 
16,319

 
14,983

Total segment profit
$
124,318

 
$
120,443

 
$
392,435

 
$
388,013

 
 
 
 
 
 
 
 
Depreciation and amortization
$
31,187

 
$
26,329

 
$
90,681

 
$
75,961

Unallocated general and administrative expenses
33,089

 
27,380

 
97,565

 
82,406

Pre-opening expenses
2,083

 
2,165

 
5,283

 
5,337

Interest expense
462

 
75

 
1,386

 
555

Other (income) expense, net
(719
)
 
324

 
(5,934
)
 
(2,892
)
Income before income taxes
$
58,216

 
$
64,170

 
$
203,454

 
$
226,646

Depreciation and amortization:
 
 
 
 
 
 
 
Company bakery-cafe operations
$
25,593

 
$
22,489

 
$
75,791

 
$
65,198

Fresh dough and other product operations
2,141

 
2,010

 
6,295

 
5,988

Corporate administration
3,453

 
1,830

 
8,595

 
4,775

Total depreciation and amortization
$
31,187

 
$
26,329

 
$
90,681

 
$
75,961

Capital expenditures:
 
 
 
 
 
 
 
Company bakery-cafe operations
$
44,111

 
$
31,799

 
$
110,664

 
$
97,813

Fresh dough and other product operations
4,356

 
3,668

 
9,127

 
7,448

Corporate administration
16,138

 
7,365

 
35,557

 
19,073

Total capital expenditures
$
64,605

 
$
42,832

 
$
155,348

 
$
124,334


 
September 30,
2014
 
December 31,
2013
Segment assets:
 
 
 
Company bakery-cafe operations
$
900,921

 
$
867,093

Franchise operations
13,064

 
10,156

Fresh dough and other product operations
62,908

 
62,854

Total segment assets
$
976,893

 
$
940,103

 
 
 
 
Unallocated cash and cash equivalents
$
146,110

 
$
125,245

Unallocated trade and other accounts receivable
2,213

 
2,281

Unallocated property and equipment
76,628

 
53,587

Unallocated deposits and other
3,698

 
3,865

Other unallocated assets
48,800

 
55,781

Total assets
$
1,254,342

 
$
1,180,862


“Unallocated cash and cash equivalents” relates primarily to corporate cash and cash equivalents, “unallocated trade and other accounts receivable” relates primarily to rebates and interest receivable, “unallocated property and equipment” relates primarily to corporate fixed assets, “unallocated deposits and other” relates primarily to insurance deposits, and “other unallocated assets” relates primarily to deferred income taxes.


10


Note 10. Income Taxes

The Company records income taxes using an estimated annual effective tax rate for interim reporting.  The estimated annual effective tax rate may fluctuate due to changes in forecasted annual operating income; changes to the valuation allowance for deferred tax assets; changes to actual or forecast permanent book to tax differences; impacts from future tax settlements with state, federal or foreign tax authorities (such changes would be recorded discretely in the quarter in which they occur); or impacts from tax law changes.  To the extent such changes impact the Company’s deferred tax assets/liabilities, these changes would generally be recorded discretely in the quarter in which they occur. 

The Company's effective tax rates were 32.6% and 33.4% for the thirteen weeks ended September 30, 2014 and September 24, 2013, respectively, and 35.7% and 37.4% for the thirty-nine weeks ended September 30, 2014 and September 24, 2013, respectively. 

In the thirteen and thirty-nine weeks ended September 30, 2014, the Company recorded discrete items resulting in net tax benefits of $2.4 million and $3.4 million, respectively. These amounts include tax benefits of $2.3 million related to additional federal tax credits and an increased deduction for domestic production activities.

In the thirteen and thirty-nine weeks ended September 24, 2013, the Company recorded discrete items resulting in net tax benefits of $3.8 million and $2.9 million, respectively. These amounts include tax benefits of $3.8 million related to the net impact of changes in permanent differences between financial and tax reporting, refinement of estimates of certain state tax attributes, and settlement of tax audits.

Note 11. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except for per share data):

 
For the 13 Weeks Ended
 
For the 39 Weeks Ended
 
September 30,
2014
 
September 24,
2013
 
September 30,
2014
 
September 24,
2013
Amounts used for basic and diluted per share calculations:
 
 
 
 
 
 
 
Net income
$
39,214

 
$
42,762

 
$
130,801

 
$
141,921

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding — basic
26,715

 
28,744

 
26,979

 
28,995

Effect of dilutive stock-based employee compensation awards
98

 
155

 
129

 
178

Weighted average number of shares outstanding — diluted
26,813

 
28,899

 
27,108

 
29,173

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
1.47

 
$
1.49

 
$
4.85

 
$
4.89

Diluted
$
1.46

 
$
1.48

 
$
4.83

 
$
4.86


For the thirteen and thirty-nine weeks ended September 30, 2014 and September 24, 2013, weighted-average outstanding stock options, restricted stock, and stock-settled appreciation rights of less than 0.1 million shares, respectively, were excluded in calculating diluted earnings per share as the exercise price exceeded fair market value and the inclusion of such shares would have been antidilutive.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Matters discussed in this report and in our public disclosures, whether written or oral, relating to future events or our future performance, including any discussion, expressed or implied, of our anticipated growth, operating results, future earnings per share, plans, objectives, and the impact of our investments in sales-building initiatives and operational capabilities on future sales and earnings, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the words “believe”, “positioned”, “estimate”, “project”, “plan”, “goal”, “target”, “assumption”, “continue”, “intend”,

11


“expect”, “future”, “anticipate”, and other similar expressions, whether in the negative or the affirmative, that are not statements of historical fact. These forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict, and you should not place undue reliance on our forward-looking statements. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Risk Factors” and elsewhere in this report and in our other public filings with the United States Securities and Exchange Commission, or SEC, including our Form 10-K for the year ended December 31, 2013 and our quarterly reports on Form 10-Q. All forward-looking statements and the internal projections and beliefs upon which we base our expectations included in this report or other periodic reports represent our estimates as of the date made and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we expressly disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

General

Panera Bread Company and its subsidiaries are referred to as the “Company,” “Panera Bread,” or in the first person notation of “we,” “us,” and “our” in the following discussion.

Our revenues are derived from Company-owned net bakery-cafe sales, fresh dough and other product sales to franchisees, and franchise royalties and fees. Fresh dough and other product sales to franchisees are primarily comprised of sales of fresh dough, produce, tuna, and cream cheese to certain of our franchisees. Franchise royalties and fees include royalty income and franchise fees, which includes fees for development and real estate services and information technology services. The cost of food and paper products, labor, occupancy, and other operating expenses relate primarily to Company-owned net bakery-cafe sales. The cost of fresh dough and other product sales to franchisees relates primarily to the sale of fresh dough, produce, tuna, and cream cheese to certain of our franchisees. General and administrative, depreciation and amortization, and pre-opening expenses relate to all areas of revenue generation.

We include in this report information on Company-owned, franchise-operated, and system-wide comparable net bakery-cafe sales percentages. Bakery-cafes in our comparable net bakery-cafe sales percentages include those bakery-cafes with an open date prior to the first day of our prior fiscal year, which we refer to as our base store bakery-cafes. Company-owned comparable net bakery-cafe sales percentages are based on net sales from Company-owned base store bakery-cafes. Franchise-operated comparable net bakery-cafe sales percentages are based on net sales from franchise-operated base store bakery-cafes, as reported by franchisees. System-wide comparable net bakery-cafe sales percentages are based on net sales at Company-owned and franchise-operated base store bakery-cafes. Acquired Company-owned and franchise-operated bakery-cafes and other restaurant or bakery-cafe concepts are included in our comparable net bakery-cafe sales percentages only if we or our franchisee previously held or acquired a 100 percent ownership interest prior to the first day of our prior fiscal year.  Comparable net bakery-cafe sales exclude closed locations.

We do not record franchise-operated net bakery-cafe sales as revenues. However, royalty revenues are calculated based on a percentage of franchise-operated net bakery-cafe sales, as reported by franchisees. We use franchise-operated and system-wide sales information internally in connection with store development decisions, planning, and budgeting analyses. We believe franchise-operated and system-wide sales information is useful in assessing consumer acceptance of our brand, facilitates an understanding of our financial performance and the overall direction and trends of sales and operating income, helps us appreciate the effectiveness of our advertising and marketing initiatives, to which our franchisees also contribute based on a percentage of their net sales, and provides information that is relevant for comparison within the industry.

We also include in this report information on Company-owned, franchise-operated, and system-wide average weekly net sales. Average weekly net sales are calculated by dividing total net sales in the period by operating weeks in the period. Accordingly, year-over-year results reflect sales for all locations, whereas comparable net bakery-cafe sales exclude closed locations and are based on sales only from our base store bakery-cafes. New stores typically experience an opening “honeymoon” period during which they generate higher average weekly net sales in the first 12 to 16 weeks after opening, after which customers “settle-in” to normal usage patterns. On average, average weekly net sales during the “settle-in” period are 5 percent to 10 percent less than during the “honeymoon” period. As a result, year-over-year results of average weekly net sales are generally lower than the results in comparable net bakery-cafe sales. This results from the relationship of the number of bakery-cafes in the “honeymoon” period, the number of bakery-cafes in the “settle-in” period, and the number of bakery-cafes in the comparable bakery-cafe base.

Executive Summary of Results

For the thirteen weeks ended September 30, 2014, we earned $1.46 per diluted share with the following performance on key metrics: system-wide comparable net bakery-cafe sales increased 1.4 percent on a calendar basis (growth of 2.1 percent for Company-owned bakery-cafes and growth of 0.7 percent for franchise-operated bakery-cafes); system-wide average weekly net

12


sales increased 0.9 percent to $46,397 ($46,936 for Company-owned bakery-cafes and $45,881 for franchise-operated bakery-cafes); 28 new bakery-cafes opened system-wide (13 Company-owned bakery-cafes and 15 franchise-operated bakery-cafes); and one Company-owned bakery-cafe closed. Additionally, included in diluted earnings per share for the thirteen weeks ended September 30, 2014 were discrete tax benefits of $0.08 per diluted share, as described further in Note 10 in the accompanying consolidated financial statements.

For the thirteen weeks ended September 24, 2013, we earned $1.48 per diluted share with the following performance on key metrics: system-wide comparable net bakery-cafe sales grew 1.3 percent (growth of 1.7 percent for Company-owned bakery-cafes and growth of 0.9 percent for franchise-operated bakery-cafes); system-wide average weekly net sales increased 0.5 percent to $45,999 ($46,239 for Company-owned bakery-cafes and $45,769 for franchise-operated bakery-cafes); 32 new bakery-cafes opened system-wide (17 Company-owned bakery-cafes and 15 franchise-operated bakery-cafes); and four bakery-cafes closed system-wide (two Company-owned bakery-cafes and two franchise-operated bakery-cafes). Additionally, included in diluted earnings per share for the thirteen weeks ended September 24, 2013 were discrete tax benefits of $0.13 per diluted share.

For the thirty-nine weeks ended September 30, 2014, we earned $4.83 per diluted share with the following performance on key metrics: system-wide comparable net bakery-cafe sales increased 0.5 percent on a calendar basis (growth of 0.7 percent for Company-owned bakery-cafes and growth of 0.2 percent for franchise-operated bakery-cafes); system-wide average weekly net sales were generally consistent year-over-year at $47,036 ($47,463 for Company-owned bakery-cafes and $46,627 for franchise-operated bakery-cafes); 74 new bakery-cafes opened system-wide (39 Company-owned bakery-cafes and 35 franchise-operated bakery-cafes); and six bakery-cafes closed system-wide (three Company-owned bakery-cafes and three franchise-operated bakery-cafes).

For the thirty-nine weeks ended September 24, 2013, we earned $4.86 per diluted share with the following performance on key metrics: system-wide comparable net bakery-cafe sales grew 2.8 percent (growth of 3.0 percent for Company-owned bakery-cafes and growth of 2.6 percent for franchise-operated bakery-cafes); system-wide average weekly net sales increased 2.2 percent to $47,053 ($47,354 for Company-owned bakery-cafes and $46,766 for franchise-operated bakery-cafes); 91 new bakery-cafes opened system-wide (45 Company-owned bakery-cafes and 46 franchise-operated bakery-cafes); and seven bakery-cafes closed system-wide (five Company-owned bakery-cafes and two franchise-operated bakery-cafes). Additionally, during the thirty-nine weeks ended September 24, 2013, we acquired one bakery-cafe in Hallandale, Florida from a franchisee.


13


The following table sets forth the percentage relationship to total revenues, except where otherwise indicated, of certain items included in the Consolidated Statements of Comprehensive Income for the periods indicated. Percentages may not add due to rounding:

 
For the 13 Weeks Ended
 
For the 39 Weeks Ended
 
September 30,
2014
 
September 24,
2013
 
September 30,
2014
 
September 24,
2013
Revenues:
 
 
 
 
 
 
 
Bakery-cafe sales, net
88.0
 %
 
88.3
%
 
88.1
 %
 
88.4
 %
Franchise royalties and fees
4.9

 
4.7

 
4.8

 
4.7

Fresh dough and other product sales to franchisees
7.1

 
7.0

 
7.0

 
6.9

Total revenues
100.0
 %
 
100.0
%
 
100.0
 %
 
100.0
 %
Costs and expenses:
 
 
 
 
 
 
 
Bakery-cafe expenses (1):
 
 
 
 
 
 
 
Cost of food and paper products
30.3
 %
 
30.1
%
 
30.1
 %
 
29.8
 %
Labor
31.2

 
30.0

 
30.6

 
29.5

Occupancy
7.4

 
7.3

 
7.3

 
7.1

Other operating expenses
14.5

 
14.6

 
14.3

 
14.0

Total bakery-cafe expenses
83.4

 
82.0

 
82.2

 
80.6

Fresh dough and other product cost of sales to franchisees (2)
89.0

 
90.0

 
87.5

 
87.3

Depreciation and amortization
5.0

 
4.6

 
4.9

 
4.4

General and administrative expenses
5.6

 
5.0

 
5.5

 
5.0

Pre-opening expenses
0.3

 
0.4

 
0.3

 
0.3

Total costs and expenses
90.7

 
88.7

 
89.3

 
87.0

Operating profit
9.3

 
11.3

 
10.7

 
13.0

Interest expense
0.1

 

 
0.1

 

Other (income) expense, net
(0.1
)
 
0.1

 
(0.3
)
 
(0.2
)
Income before income taxes
9.4

 
11.2

 
11.0

 
13.2

Income taxes
3.1

 
3.7

 
3.9

 
4.9

Net income
6.3
 %
 
7.5
%
 
7.0
 %
 
8.2
 %
Other comprehensive (loss) income, net of tax
(0.1
)
 

 

 

Comprehensive income
6.2
 %
 
7.5
%
 
7.0
 %
 
8.2
 %

(1)
As a percentage of net bakery-cafe sales.
(2)
As a percentage of fresh dough and other product sales to franchisees.


14


The following table sets forth certain information relating to the number of Company-owned and franchise-operated bakery-cafes for the periods indicated:

 
For the 13 Weeks Ended
 
For the 39 Weeks Ended
 
September 30,
2014
 
September 24,
2013
 
September 30,
2014
 
September 24,
2013
Number of bakery-cafes:
 
 
 
 
 
 
 
Company-owned:
 
 
 
 
 
 
 
Beginning of period
891

 
835

 
867

 
809

Bakery-cafes opened
13

 
17

 
39

 
45

Bakery-cafes closed
(1
)
 
(2
)
 
(3
)
 
(5
)
Bakery-cafes acquired from franchisees

 

 

 
1

End of period
903

 
850

 
903

 
850

Franchise-operated:
 
 
 
 
 
 
 
Beginning of period
927

 
873

 
910

 
843

Bakery-cafes opened
15

 
15

 
35

 
46

Bakery-cafes closed

 
(2
)
 
(3
)
 
(2
)
Bakery-cafes sold to Company

 

 

 
(1
)
End of period
942

 
886

 
942

 
886

System-wide:
 
 
 
 
 
 
 
Beginning of period
1,818

 
1,708

 
1,777

 
1,652

Bakery-cafes opened
28

 
32

 
74

 
91

Bakery-cafes closed
(1
)
 
(4
)
 
(6
)
 
(7
)
End of period
1,845

 
1,736

 
1,845

 
1,736


Comparable Net Bakery-cafe Sales

The following table sets forth certain information relating to comparable net bakery-cafe sales growth for the periods indicated:

 
For the 13 Weeks Ended
 
For the 39 Weeks Ended
 
September 30, 2014 (1)
 
September 24,
2013
 
September 30, 2014 (1)
 
September 24,
2013
Company-owned
2.1
%
 
1.7
%
 
0.7
%
 
3.0
%
Franchise-operated
0.7
%
 
0.9
%
 
0.2
%
 
2.6
%
System-wide
1.4
%
 
1.3
%
 
0.5
%
 
2.8
%

(1) Comparable net-bakery cafe sales growth for the thirteen and thirty-nine weeks ended September 30, 2014 is presented on a calendar basis. We believe that comparable net bakery-cafe sales percentages presented on a calendar basis, which match the specific operating weeks in a fiscal period to the same specific operating weeks in another, are useful in understanding our sales results because such comparisons are generally not impacted by the shifting of seasonal holidays between fiscal periods or by additional weeks of sales in a particular fiscal period.

15


The following table sets forth the composition of Company-owned comparable net bakery-cafe sales growth for the periods indicated:

 
For the 13 Weeks Ended

For the 39 Weeks Ended
 
September 30,
2014

September 24,
2013

September 30,
2014

September 24,
2013
Price
0.8
 %

1.7
 %

1.1
 %

1.9
 %
Mix
(0.1
)%
 
1.0
 %
 
 %
 
2.4
 %
Average check
0.7
 %
 
2.7
 %
 
1.1
 %
 
4.3
 %
 
 
 
 
 
 
 
 
Transactions
1.4
 %
 
(1.0
)%
 
(0.4
)%
 
(1.3
)%
Company-owned comparable net bakery-cafe sales growth
2.1
 %
 
1.7
 %
 
0.7
 %
 
3.0
 %

The year-over-year increase in transactions during the thirteen weeks ended September 30, 2014 was primarily due to an increase in transactions during the breakfast and lunch dayparts. The decline in mix during the thirteen weeks ended September 30, 2014 was primarily due to slower catering sales growth and a lower total average check as a result of the increase in breakfast transactions, which carry a lower average check than lunch or dinner transactions. Price growth year-over-year during the thirteen weeks ended September 30, 2014 was modest, generally due to our decision to take minimal price increases in anticipation of expected modest inflation.

The year-over-year decline in transactions during the thirty-nine weeks ended September 30, 2014 was due to a variety of factors, including, but not limited to, severe weather, operational issues impacting the customer experience, a continued challenging consumer environment, and intensified competition, partially offset by an increase in transactions during both the thirteen weeks ended July 1, 2014 and September 30, 2014. Price growth year-over-year during the thirty-nine weeks ended September 30, 2014 was modest, generally due to our decision to take minimal price increases in anticipation of modest inflation. Mix was flat year-over-year during the thirty-nine weeks ended September 30, 2014 due, in part, to slower catering sales growth and a lower total average check as a result of the increase in breakfast transactions during the thirty-nine weeks ended September 30, 2014.

As noted, we believe that comparable net bakery-cafe sales percentages presented on a calendar basis are useful in understanding our sales results because such comparisons are generally not impacted by the shifting of seasonal holidays between fiscal periods or by additional weeks of sales in a particular fiscal period. The following table sets forth information relating to comparable net bakery-cafe sales growth presented on both a calendar and fiscal basis for the thirteen and thirty-nine weeks ended September 30, 2014:

 
For the 13 Weeks Ended September 30, 2014
 
For the 39 Weeks Ended September 30, 2014
 
Calendar
 
Fiscal
 
Calendar
 
Fiscal
Company-owned
2.1
%
 
2.4
%
 
0.7
%
 
1.1
%
Franchise-operated
0.7
%
 
1.9
%
 
0.2
%
 
0.8
%
System-wide
1.4
%
 
2.2
%
 
0.5
%
 
0.9
%


16


Results of Operations

Revenues

The following table sets forth revenues for the periods indicated (dollars in thousands, except for average weekly net sales information):

 
For the 13 Weeks Ended

Percentage
 
September 30, 2014

September 24, 2013

Change
Bakery-cafe sales, net
$
545,393


$
505,428


7.9
%
Franchise royalties and fees
30,585


27,189


12.5
%
Fresh dough and other product sales to franchisees
43,912


39,863


10.2
%
Total revenues
$
619,890


$
572,480


8.3
%









System-wide average weekly net sales
$
46,397


$
45,999


0.9
%

 
For the 39 Weeks Ended
 
Percentage
 
September 30, 2014
 
September 24, 2013
 
Change
Bakery-cafe sales, net
$
1,636,587

 
$
1,523,985

 
7.4
 %
Franchise royalties and fees
89,950

 
81,219

 
10.7
 %
Fresh dough and other product sales to franchisees
130,161

 
118,066

 
10.2
 %
Total revenues
$
1,856,698

 
$
1,723,270

 
7.7
 %
 
 
 
 
 
 
System-wide average weekly net sales
$
47,036

 
$
47,053

 
 %

The growth in total revenues for the thirteen and thirty-nine weeks ended September 30, 2014 compared to the same periods in fiscal 2013 was primarily due to the opening of 116 new bakery-cafes system-wide since September 24, 2013, partially offset by the closure of seven bakery-cafes system-wide since September 24, 2013.

Bakery-cafe sales, net

The following table sets forth net bakery-cafe sales for the periods indicated (dollars in thousands, except for average weekly net sales information):

 
For the 13 Weeks Ended

Percentage
 
September 30, 2014

September 24, 2013

Change
Bakery-cafe sales, net
$
545,393


$
505,428


7.9
%
As a percentage of total revenues
88.0
%

88.3
%












Company-owned average weekly net sales
$
46,936


$
46,239


1.5
%
Company-owned number of operating weeks
11,620


10,931


6.3
%

17



 
For the 39 Weeks Ended
 
Percentage
 
September 30, 2014
 
September 24, 2013
 
Change
Bakery-cafe sales, net
$
1,636,587

 
$
1,523,985

 
7.4
%
As a percentage of total revenues
88.1
%
 
88.4
%
 
 
 
 
 
 
 
 
Company-owned average weekly net sales
$
47,463

 
$
47,354

 
0.2
%
Company-owned number of operating weeks
34,481

 
32,182

 
7.1
%

The increase in net bakery-cafe sales for both the thirteen and thirty-nine weeks ended September 30, 2014 compared to the same periods in fiscal 2013 was primarily due to the opening of 57 new Company-owned bakery-cafes since September 24, 2013, partially offset by the closure of four Company-owned bakery-cafes since September 24, 2013.

Franchise royalties and fees

The following table sets forth franchise royalties and fees for the periods indicated (dollars in thousands, except for average weekly net sales information):

 
For the 13 Weeks Ended

Percentage
 
September 30, 2014

September 24, 2013

Change
Franchise royalties
$
29,280


$
26,774


9.4
%
Franchise fees
1,305


415


214.5
%
Total
$
30,585


$
27,189


12.5
%
As a percentage of total revenues
4.9
%

4.7
%












Franchise-operated average weekly net sales
$
45,881


$
45,769


0.2
%
Franchise-operated number of operating weeks
12,125


11,439


6.0
%

 
For the 39 Weeks Ended
 
Percentage
 
September 30, 2014
 
September 24, 2013
 
Change
Franchise royalties
$
87,750

 
$
79,849

 
9.9
 %
Franchise fees
2,200

 
1,370

 
60.6
 %
Total
$
89,950

 
$
81,219

 
10.7
 %
As a percentage of total revenues
4.8
%
 
4.7
%
 
 
 
 
 
 
 
 
Franchise-operated average weekly net sales
$
46,627

 
$
46,766

 
(0.3
)%
Franchise-operated number of operating weeks
35,992

 
33,656

 
6.9
 %

The increase in franchise royalty and fee revenues for both the thirteen and thirty-nine weeks ended September 30, 2014 compared to the same periods in fiscal 2013 was primarily due to the opening of 59 franchise-operated bakery-cafes since September 24, 2013 and increased information technology fees, partially offset by the closure of three franchise-operated bakery-cafes since September 24, 2013.

As of September 30, 2014, there were 942 franchise-operated bakery-cafes open and we had received commitments to open 110 additional franchise-operated bakery-cafes. The timetables for opening these bakery-cafes are established in the respective Area Development Agreements, or ADAs, with franchisees, which provide for the majority of such bakery-cafes to open in the next four to five years. An ADA requires a franchisee to develop a specified number of bakery-cafes by specified dates. If a franchisee fails to develop bakery-cafes on the schedule set forth in the ADA, we have the right to terminate the ADA and develop Company-owned bakery-cafes or develop locations through new franchisees in that market. We may exercise one or more alternative remedies to address defaults by franchisees, including not only development defaults, but also defaults in complying with our operating and brand standards and other covenants included in the ADAs and franchise agreements. We may waive compliance with certain

18


requirements included in our ADAs and franchise agreements if we determine such action is warranted under the particular circumstances.

Fresh dough and other product sales to franchisees

The following table sets forth fresh dough and other product sales to franchisees for the periods indicated (dollars in thousands):

 
For the 13 Weeks Ended

Percentage
 
September 30, 2014

September 24, 2013

Change
Fresh dough and other product sales to franchisees
$
43,912


$
39,863


10.2
%
As a percentage of total revenues
7.1
%

7.0
%




 
For the 39 Weeks Ended
 
Percentage
 
September 30, 2014
 
September 24, 2013
 
Change
Fresh dough and other product sales to franchisees
$
130,161

 
$
118,066

 
10.2
%
As a percentage of total revenues
7.0
%
 
6.9
%
 
 

The increase in fresh dough and other product sales to franchisees for both the thirteen and thirty-nine weeks ended September 30, 2014 compared to the same periods in fiscal 2013 was primarily due to the opening of 59 franchise-operated bakery-cafes since September 24, 2013, partially offset by the closure of three franchise-operated bakery-cafes since September 24, 2013.

Costs and Expenses

The cost of food and paper products includes the costs associated with our fresh dough and other product operations that sell fresh dough and other products to Company-owned bakery-cafes, as well as the cost of food and paper products supplied by third-party vendors and distributors. The costs associated with our fresh dough and other product operations that sell fresh dough and other products to the franchise-operated bakery-cafes are excluded from the cost of food and paper products and are shown separately as fresh dough and other product cost of sales to franchisees in the Consolidated Statements of Comprehensive Income.

The following table sets forth cost of food and paper products for the periods indicated (dollars in thousands):

 
For the 13 Weeks Ended

Percentage
 
September 30, 2014

September 24, 2013

Change
Cost of food and paper products
$
165,443


$
152,202


8.7
%
As a percentage of bakery-cafe sales, net
30.3
%

30.1
%




 
For the 39 Weeks Ended
 
Percentage
 
September 30, 2014
 
September 24, 2013
 
Change
Cost of food and paper products
$
492,524

 
$
454,790

 
8.3
%
As a percentage of bakery-cafe sales, net
30.1
%
 
29.8
%
 
 

The increase in the cost of food and paper products as a percentage of net bakery-cafe sales for both the thirteen and thirty-nine weeks ended September 30, 2014 compared to the same periods in fiscal 2013 was primarily due to higher ingredient costs, including, but not limited to, unexpected increases in the costs of butter, avocados, and bacon, and increased food variance, primarily due to severe weather during early fiscal 2014. These increases were partially offset by improved leverage of our fresh dough manufacturing costs due to additional bakery-cafe openings. For both the thirteen and thirty-nine weeks ended September 30, 2014, there was an average of 79 bakery-cafes per fresh dough facility, respectively, compared to an average of 75 and 73 for the thirteen and thirty-nine weeks ended September 24, 2013, respectively.


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The following table sets forth labor expense for the periods indicated (dollars in thousands):

 
For the 13 Weeks Ended

Percentage
 
September 30, 2014

September 24, 2013

Change
Labor expense
$
170,207


$
151,786


12.1
%
As a percentage of bakery-cafe sales, net
31.2
%

30.0
%




 
For the 39 Weeks Ended
 
Percentage
 
September 30, 2014
 
September 24, 2013
 
Change
Labor expense
$
500,880

 
$
450,253

 
11.2
%
As a percentage of bakery-cafe sales, net
30.6
%
 
29.5
%
 
 

The increase in labor expense as a percentage of net bakery-cafe sales for both the thirteen and thirty-nine weeks ended September 30, 2014 compared to the same periods in fiscal 2013 was primarily a result of adding additional labor hours, as well as employees in the bakery-cafes and related training costs, both to support ongoing operational initiatives, partially offset by lower manager bonus expense.

The following table sets forth other operating expenses for the periods presented (dollars in thousands):

 
For the 13 Weeks Ended

Percentage
 
September 30, 2014

September 24, 2013

Change
Other operating expenses
$
79,094


$
73,846


7.1
%
As a percentage of bakery-cafe sales, net
14.5
%

14.6
%




 
For the 39 Weeks Ended
 
Percentage
 
September 30, 2014
 
September 24, 2013
 
Change
Other operating expenses
$
233,625

 
$
213,936

 
9.2
%
As a percentage of bakery-cafe sales, net
14.3
%
 
14.0
%
 
 

The decrease in other operating expenses as a percentage of net bakery-cafe sales for the thirteen weeks ended September 30, 2014 compared to the same period in fiscal 2013 was primarily a result of lower controllable expenses.

The increase in other operating expenses as a percentage of net bakery-cafe sales for the thirty-nine weeks ended September 30, 2014 compared to the same period in fiscal 2013 was primarily a result of increased marketing expense and utilities expense, partially offset by lower controllable expenses.

The following table sets forth fresh dough and other product cost of sales to franchisees for the periods indicated (dollars in thousands):

 
For the 13 Weeks Ended

Percentage
 
September 30, 2014

September 24, 2013

Change
Fresh dough and other product cost of sales to franchisees
$
39,100


$
35,886


9.0
%
As a percentage of fresh dough and other product sales to franchisees
89.0
%

90.0
%





20


 
For the 39 Weeks Ended
 
Percentage
 
September 30, 2014
 
September 24, 2013
 
Change
Fresh dough and other product cost of sales to franchisees
$
113,842

 
$
103,083

 
10.4
%
As a percentage of fresh dough and other product sales to franchisees
87.5
%
 
87.3
%
 
 

The decrease in fresh dough and other product costs of sales to franchisees as a percentage of fresh dough and other product sales to franchisees for the thirteen weeks ended September 30, 2014 compared to the same period in fiscal 2013 was primarily the result of modestly lower wheat costs, partially offset by higher year-over-year sales of zero margin fresh produce to franchisees.

The increase in fresh dough and other product costs of sales to franchisees as a percentage of fresh dough and other product sales to franchisees for the thirty-nine weeks ended September 30, 2014 compared to the same period in fiscal 2013 was primarily the result of higher year-over-year sales of zero margin fresh produce to franchisees.

The following table sets forth depreciation and amortization for the periods indicated (dollars in thousands):

 
For the 13 Weeks Ended

Percentage
 
September 30, 2014

September 24, 2013

Change
Depreciation and amortization
$
31,187


$
26,329


18.5
%
As a percentage of total revenues
5.0
%

4.6
%




 
For the 39 Weeks Ended
 
Percentage
 
September 30, 2014
 
September 24, 2013
 
Change
Depreciation and amortization
$
90,681

 
$
75,961

 
19.4
%
As a percentage of total revenues
4.9
%
 
4.4
%
 
 

The increase in depreciation and amortization as a percentage of total revenues for both the thirteen and thirty-nine weeks ended September 30, 2014 compared to the same periods in fiscal 2013 was primarily the result of increased depreciation on investments in bakery-cafes and support centers to support ongoing operational initiatives.

The following table sets forth general and administrative expenses for the periods indicated (dollars in thousands):

 
For the 13 Weeks Ended

Percentage
 
September 30, 2014

September 24, 2013

Change
General and administrative expenses
$
34,460


$
28,837


19.5
%
As a percentage of total revenues
5.6
%

5.0
%




 
For the 39 Weeks Ended
 
Percentage
 
September 30, 2014
 
September 24, 2013
 
Change
General and administrative expenses
$
102,112

 
$
86,887

 
17.5
%
As a percentage of total revenues
5.5
%
 
5.0
%
 
 

The increase in general and administrative expenses as a percentage of total revenues for both the thirteen and thirty-nine weeks ended September 30, 2014 compared to the same periods in fiscal 2013 was primarily due to an increase in headcount to support ongoing operational initiatives, partially offset by lower incentive compensation.


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Other (income) expense, net

Other (income) expense, net was $0.7 million of income, or 0.1 percent of total revenues, for the thirteen weeks ended September 30, 2014 compared to $0.3 million of expense, or 0.1 percent of total revenues, for the thirteen weeks ended September 24, 2013. Other (income) expense, net for both the thirteen weeks ended September 30, 2014 and September 24, 2013 was comprised of immaterial items.

Other (income) expense, net was $5.9 million of income, or 0.3 percent of total revenues, for the thirty-nine weeks ended September 30, 2014 compared to $2.9 million of income, or 0.2 percent of total revenues, for the thirty-nine weeks ended September 24, 2013. Other (income) expense, net for the thirty-nine weeks ended September 30, 2014 was primarily comprised of a $3.2 million benefit from a favorable resolution of an insurance coverage matter. Other (income) expense, net for the thirty-nine weeks ended September 24, 2013 was primarily comprised of a $2.2 million benefit from a favorable resolution of legal and tax matters.

Income Taxes

The following table sets forth income taxes for the periods indicated (dollars in thousands):

 
For the 13 Weeks Ended

Percentage
 
September 30, 2014

September 24, 2013

Change
Income taxes
$
19,002


$
21,408


(11.2
)%
Effective tax rate
32.6
%

33.4
%




 
For the 39 Weeks Ended
 
Percentage
 
September 30, 2014
 
September 24, 2013
 
Change
Income taxes
$
72,653

 
$
84,725

 
(14.2
)%
Effective tax rate
35.7
%
 
37.4
%
 
 

In the thirteen and thirty-nine weeks ended September 30, 2014, we recorded discrete items resulting in net tax benefits of $2.4 million and $3.4 million, respectively. These amounts include tax benefits of $2.3 million related to additional federal tax credits and an increased deduction for domestic production activities.

In the thirteen and thirty-nine weeks ended September 24, 2013, we recorded discrete items resulting in net tax benefits of $3.8 million and $2.9 million, respectively. These amounts include tax benefits of $3.8 million related to the net impact of changes in permanent differences between financial and tax reporting, refinement of estimates of certain state tax attributes, and settlement of tax audits.

Liquidity and Capital Resources

Cash and cash equivalents were $146.1 million as of September 30, 2014 compared to $125.2 million as of December 31, 2013. This $20.9 million increase was primarily a result of cash generated from operations during the thirty-nine weeks ended September 30, 2014 of $194.6 million and proceeds from the issuance of long-term debt of $100 million, partially offset by capital expenditures of $155.3 million and the use of $134.2 million to repurchase shares of our Class A common stock. We finance our activities through cash flow generated through operations and term loan borrowings. We also have the ability to further borrow up to $250 million under a credit facility, as described below. Historically, our principal requirements for cash have primarily resulted from the cost of food and paper products, employee labor, the repurchase of shares of our common stock, and our capital expenditures for the development of new Company-owned bakery-cafes, for maintaining or remodeling existing Company-owned bakery-cafes, for purchasing existing franchise-operated bakery-cafes or ownership interests in other restaurant or bakery-cafe concepts, for developing, maintaining, or remodeling fresh dough facilities, and for other capital needs such as enhancements to information systems and other infrastructure.

We had positive working capital of $26.0 million as of September 30, 2014 compared to negative working capital of $0.6 million as of December 31, 2013. The increase in working capital resulted primarily from a decrease in accrued expenses of $24.2 million and the previously described increase in cash and cash equivalents of $20.9 million, partially offset by a decrease in trade and other accounts receivable of $18.7 million. We believe that cash provided by our operations, our term loan borrowings, and

22


available borrowings under our existing credit facility will be sufficient to fund our cash requirements for the foreseeable future. We have not required significant working capital because customers generally pay using cash or credit and debit cards and because our operations do not require significant receivables, nor do they require significant inventories due, in part, to our use of various fresh ingredients.

A summary of our cash flows, for the periods indicated, are as follows (in thousands):

 
For the 39 Weeks Ended
 
September 30, 2014
 
September 24, 2013
Cash provided (used) by:
 
 
 
Operating activities
$
194,638

 
$
211,511

Investing activities
(145,033
)
 
(124,678
)
Financing activities
(28,740
)
 
(190,013
)
Net increase (decrease) in cash and cash equivalents
$
20,865

 
$
(103,180
)

Operating Activities

Cash provided by operating activities was $194.6 million and $211.5 million for the thirty-nine weeks ended September 30, 2014 and September 24, 2013, respectively. Cash provided by operating activities consists primarily of net income, adjusted for non-cash expenses such as depreciation and amortization, and the net change in operating assets and liabilities.

Cash provided by operating activities for the thirty-nine weeks ended September 30, 2014 consisted primarily of net income adjusted for non-cash expenses and a decrease in trade and other accounts receivable, partially offset by a decrease in accrued expenses. The decrease in trade and other accounts receivable was primarily due to a decrease in other receivables due to the timing of the holidays near our fiscal 2013 year end and a decrease in refundable income taxes due to the timing of payments. The decrease in accrued expenses was primarily due to a decrease in the balance of outstanding gift cards and lower incentive compensation accruals.

Cash provided by operating activities for the thirty-nine weeks ended September 24, 2013 consisted primarily of net income adjusted for non-cash expenses, partially offset by a decrease in accrued expenses. The decrease in accrued expenses was primarily due to a decrease in the balance of outstanding gift cards and lower incentive compensation accruals.

Investing Activities

Cash used by investing activities was $145.0 million and $124.7 million for the thirty-nine weeks ended September 30, 2014 and September 24, 2013, respectively. Cash used in investing activities consists primarily of capital expenditures and for the thirty-nine weeks ended September 24, 2013, also included the purchase and sale of investments of $97.9 million.
 
Capital Expenditures

Capital expenditures are the largest ongoing component of our investing activities and include expenditures for new bakery-cafes and fresh dough facilities, improvements to existing bakery-cafes and fresh dough facilities, and other capital needs, which include investments in technology infrastructure to support ongoing strategic initiatives. A summary of capital expenditures for the periods indicated consisted of the following (in thousands):

 
For the 39 Weeks Ended
 
September 30, 2014
 
September 24, 2013
New bakery-cafe and fresh dough facilities
$
70,498

 
$
69,262

Bakery-cafe and fresh dough facility improvements
50,412

 
35,162

Other capital needs
34,438

 
19,910

Total
$
155,348

 
$
124,334


Our capital requirements, including development costs related to the opening or acquisition of additional bakery-cafes and fresh dough facilities, maintenance and remodel expenditures, and investments in technology infrastructure, have been and will continue to be significant. Our future capital requirements and the adequacy of available funds will depend on many factors, including the

23


pace of expansion, real estate markets, site locations, and the nature of arrangements negotiated with landlords. We believe that cash provided by our operations, our term loan borrowings, and available borrowings under our credit facility will be sufficient to fund our capital requirements in both our short-term and long-term future. We continue to anticipate $225 million to $250 million of capital expenditures in fiscal 2014.

Financing Activities

Cash used by financing activities was $28.7 million for the thirty-nine weeks ended September 30, 2014. Cash used by financing activities was $190.0 million for the thirty-nine weeks ended September 24, 2013. Financing activities for the thirty-nine weeks ended September 30, 2014 consisted primarily of $134.2 million used to repurchase shares of our Class A common stock and $100 million of proceeds from term loan borrowings. Financing activities for the thirty-nine weeks ended September 24, 2013 consisted primarily of $200.5 million used to repurchase shares of our Class A common stock.

Share Repurchases

On August 23, 2012, our Board of Directors, or Board, approved a three year share repurchase authorization of up to $600 million
of our Class A common stock, which we refer to as the 2012 repurchase authorization, pursuant to which we may repurchase shares from time to time on the open market or in privately negotiated transactions and which may be made under a Rule 10b5-1 plan. Repurchased shares may be retired immediately and resume the status of authorized but unissued shares or may be held by us as treasury stock. During the thirty-nine weeks ended September 30, 2014, we repurchased 514,357 shares under the 2012 repurchase authorization, at an average price of $170.15 per share, for an aggregate purchase price of approximately $87.5 million. During the thirty-nine weeks ended September 24, 2013, we repurchased 1,144,886 shares under the 2012 repurchase authorization, at an average price of $169.02 per share, for an aggregate purchase price of approximately $193.5 million. As of September 30, 2014, under the 2012 repurchase authorization, we had repurchased a total of 2,630,707 shares of our Class A common stock, at a weighted-average price of $167.13 per share, for an aggregate purchase price of approximately $439.7 million. On June 5, 2014, our Board terminated the 2012 repurchase authorization.

On June 5, 2014, our Board approved a new three year share repurchase authorization of up to $600 million of our Class A common stock, which we refer to as the 2014 repurchase authorization, pursuant to which we may repurchase shares from time to time on the open market or in privately negotiated transactions and which may be made under a Rule 10b5-1 plan. Repurchased shares may be retired immediately and resume the status of authorized but unissued shares or may be held by us as treasury stock. The 2014 repurchase authorization may be modified, suspended, or discontinued by our Board at any time. As of September 30, 2014, under the 2014 share repurchase authorization, we had repurchased a total of 277,644 shares of our Class A common stock, at a weighted-average price of $149.84 per share, for an aggregate purchase price of approximately $41.6 million. We have approximately $558.4 million available under the 2014 repurchase authorization.

In total, during the thirty-nine weeks ended September 30, 2014, we repurchased 792,001 shares under the 2012 and 2014 repurchase authorizations, at an average price of $163.03 per share, for an aggregate purchase price of approximately $129.1 million.

We have historically repurchased shares of our Class A common stock from participants of the Panera Bread 1992 Stock Incentive Plan and the Panera Bread 2006 Stock Incentive Plan, as amended, or collectively, the Plans, through a share repurchase authorization approved by our Board. Repurchased shares are netted and surrendered as payment for applicable tax withholding on the vesting of participants’ restricted stock. During the thirty-nine weeks ended September 30, 2014, we repurchased 33,935 shares of Class A common stock surrendered by participants of the Plans at a weighted-average price of $150.41 per share for an aggregate purchase price of approximately $5.1 million. During the thirty-nine weeks ended September 24, 2013, we repurchased 40,018 shares of Class A common stock surrendered by participants of the Plans at a weighted-average price of $172.94 per share for an aggregate purchase price of approximately $6.9 million. These share repurchases were made pursuant to the terms of the Plans and the applicable award agreements and were not made pursuant to publicly announced share repurchase authorizations.

24



Term Loan

On June 11, 2014, we entered into a term loan agreement, or the Term Loan Agreement, with Bank of America, N.A., as administrative agent, and other lenders party thereto. The Term Loan Agreement provides for an unsecured term loan, or the Term Loan, in the amount of $100 million that bears interest at a rate equal to, at our option, (1) LIBOR plus a margin ranging from 1.00 percent to 1.50 percent depending on our consolidated leverage ratio or (2) the highest of (a) the Bank of America prime rate, (b) the Federal funds rate plus 0.50 percent or (c) LIBOR plus 1.00 percent, plus a margin ranging from 0.00 percent to 0.50 percent depending on our consolidated leverage ratio. Our obligations under the Term Loan Agreement are guaranteed by certain of our direct and indirect subsidiaries. The Term Loan Agreement also allows us from time to time to request that the Term Loan be further increased by an amount not to exceed, in the aggregate, $150 million, subject to the arrangement of additional commitments with financial institutions acceptable to us and Bank of America and other customary terms and conditions. The Term Loan Agreement contains various financial covenants that, among other things, require us to maintain certain leverage and fixed charge coverage ratios. The Term Loan is scheduled to mature on June 11, 2019, subject to acceleration upon certain specified events of defaults, including breaches of representations or covenants, failure to pay other material indebtedness or a change of control of the Company, as defined in the Term Loan Agreement. We expect to use the proceeds from the Term Loan for general corporate purposes. We are currently in compliance with all covenant requirements under the Term Loan Agreement.

Credit Facility

On November 30, 2012, we entered into a credit agreement, or the Credit Agreement, with Bank of America, N.A. and other lenders party thereto. The Credit Agreement provides for an unsecured revolving credit facility of $250 million and provides that we may select interest rates under the credit facility equal to (1) LIBOR plus the Applicable Rate for LIBOR loans (which is an amount ranging from 1.00 percent to 2.00 percent depending on our consolidated leverage ratio) or (2) the Base Rate (which is defined as the higher of Bank of America prime rate, the Federal funds rate plus 0.50 percent, or LIBOR plus 1.00 percent) plus the Applicable Rate for Base Rate loans (which is an amount ranging from 0.00 percent to 1.00 percent depending on our consolidated leverage ratio). Our obligations under the credit facility are guaranteed by certain of our direct and indirect subsidiaries. The Credit Agreement allows us from time to time to request that the credit facility be further increased by an amount not to exceed, in the aggregate, $150 million, subject to the arrangement of additional commitments with financial institutions acceptable to us and Bank of America. The Credit Agreement contains various financial covenants that, among other things, require us to maintain certain leverage and fixed charge coverage ratios. The credit facility will become due on November 30, 2017, subject to acceleration upon certain specified events of defaults, including breaches of representations or covenants, failure to pay other material indebtedness or a change of control of the Company, as defined in the Credit Agreement. We expect to use the proceeds from the credit facility for general corporate purposes. As of September 30, 2014 and December 31, 2013, we had no loans outstanding under the Credit Agreement. We are currently in compliance with all covenant requirements under the Credit Agreement.

Critical Accounting Policies and Estimates

Our discussion and analysis of our consolidated financial condition and results of operations is based upon the consolidated financial statements and notes to the consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of the consolidated financial statements requires us to make estimates, judgments and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Variances in the estimates or assumptions used to actual experience could yield materially different accounting results. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances.

We have chosen accounting policies we believe are appropriate to report accurately and fairly our consolidated operating results and financial position, and we apply those accounting policies in a consistent manner. As described in Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, we consider our policies on accounting for revenue recognition, valuation of goodwill, self-insurance, income taxes, lease obligations, and the impairment of long-lived assets to be the most critical in the preparation of the consolidated financial statements because they involve the most difficult, subjective, or complex judgments about the effect of matters that are inherently uncertain. There have been no material changes to our application of critical accounting policies and significant judgments and estimates since December 31, 2013.

Contractual Obligations and Other Commitments


25


In addition to our planned capital expenditure requirements, we have certain other contractual and committed cash obligations. Our contractual cash obligations consist of non-cancelable operating leases for our bakery-cafes, fresh dough facilities and trucks, and support centers; capital leases; purchase obligations primarily for certain commodities; and uncertain tax positions. Lease terms for our trucks are generally for five to seven years. The reasonably assured lease term for most bakery-cafe and support center leases is the initial non-cancelable lease term plus one renewal option period, which generally equates to an aggregate of 15 years. The reasonably assured lease term for most fresh dough facilities is the initial non-cancelable lease term plus one to two renewal option periods, which generally equates to an aggregate of 20 years. Lease terms generally require us to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs. Certain bakery-cafe leases provide for contingent rental (i.e. percentage rent) payments based on sales in excess of specified amounts, scheduled rent increases during the lease terms, and / or rental payments commencing on a date other than the date of initial occupancy.

Off-Balance Sheet Arrangements

As of September 30, 2014, we guaranteed operating leases of 24 franchisee or affiliate locations, which we account for in accordance with the accounting requirements for guarantees. These guarantees are primarily a result of the sales of Company-owned bakery-cafes to franchisees and affiliates, pursuant to which we exercised our right to assign the lease or sublease for the bakery-cafe but remain liable to the landlord for the remaining lease term in the event of a default by the assignee. These leases have terms expiring on various dates from October 31, 2014 to September 30, 2027 and potential future rental payments of approximately $17.5 million as of September 30, 2014. Our obligation from these leases will decrease over time as these operating leases expire. We have not recorded a liability for certain of these guarantees as they arose prior to the implementation of the accounting requirements for guarantees and, unless modified, are exempt from its requirements. We have not recorded a liability for those guarantees issued after the effective date of the accounting requirements because the fair value of these lease guarantees was determined by us to be insignificant individually, and in the aggregate, based on analysis of the facts and circumstances of each such lease and each such assignee's performance, and we did not believe it was probable that we would be required to perform under any guarantees at the time the guarantees were issued. We have not had to make any payments related to any of these guaranteed leases. Applicable assignees continue to have primary liability for these operating leases.

Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40); Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This update requires management to evaluate whether there is substantial doubt about our ability to continue as a going concern. This update is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. We do not expect this standard to have an impact on our consolidated financial statements upon adoption.

In May 2014, the FASB issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This update is effective for annual and interim periods beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of fiscal 2017. Early application is not permitted. This update permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect this guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

In July 2013, the FASB issued Accounting Standards Update No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. This guidance requires an unrecognized tax benefit related to a net operating loss carryforward, a similar tax loss or a tax credit carryforward to be presented as a reduction to a deferred tax asset, unless the tax benefit is not available at the reporting date to settle any additional income taxes under the tax law of the applicable tax jurisdiction. The guidance became effective for us at the beginning of our first quarter of fiscal 2014 and did not have a material impact on our consolidated financial statements.


26


Item 3. Quantitative and Qualitative Disclosures about Market Risk

There were no material changes in the quantitative and qualitative information about market risk since the end of our most recent fiscal year. For further information, see Item 7A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2014. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act are accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2014, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the third fiscal quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On July 2, 2014, a purported class action lawsuit was filed against one of our subsidiaries by Jason Lofstedt, a former employee of one our subsidiaries. The lawsuit was filed in the California Superior Court, County of Riverside. The complaint alleges, among other things, violations of the California Labor Code, failure to pay overtime, failure to provide meal and rest periods, and violations of California‘s Unfair Competition Law. The complaint seeks, among other relief, collective and class certification of the lawsuit, unspecified damages, costs and expenses, including attorneys’ fees, and such other relief as the Court might find just and proper. We believe our subsidiary has meritorious defenses to each of the claims in the lawsuit and we are prepared to vigorously defend the lawsuit. There can be no assurance, however, that our subsidiary will be successful, and an adverse resolution of the lawsuit could have a material adverse effect on our consolidated financial position and results of operations in the period in which the lawsuit is resolved. We are not presently able to reasonably estimate potential losses, if any, related to the lawsuit.

In addition to the legal matter described above, we are subject to other routine legal proceedings, claims and litigation in the ordinary course of business. Defending lawsuits requires significant management attention and financial resources and the outcome of any litigation, including the matters described above, is inherently uncertain. We do not believe the ultimate resolution of these actions will have a material adverse effect on our consolidated financial statements. However, a significant increase in the number of these claims, or one or more successful claims under which we incur greater liabilities than is currently anticipated, could materially and adversely affect our consolidated financial statements.

Item 1A. Risk Factors

Our business is subject to a number of risks, some of which are beyond our control. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Item 1A. - “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the SEC on February 19, 2014, that could have a material adverse effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from period to period. As of September 30, 2014, there have been no material changes to the risk factors disclosed in our most recent Annual Report on Form 10-K, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or operating results.


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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the thirteen weeks ended September 30, 2014, we repurchased Class A common stock as follows:
Period
Total Number of Shares Purchased (1)
 
Average Price Paid per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Programs (2)
 
Approximate Dollar Value of Shares That May
Yet Be Purchased
Under the Program (3)
July 2, 2014 - July 29, 2014
28,933

 
$
142.90

 
28,933

 
$
583,392,700

July 30, 2014 - September 2, 2014
166,355

 
$
149.19

 
135,200

 
$
563,197,476

September 3, 2014 - September 30, 2014
32,366

 
$
152.95

 
31,426

 
$
558,397,800

Total
227,654

 
$