Panera Bread Company: Financial Analysis and Strategy

Company Overview and Background

Panera Bread Company operates in the restaurant industry, specifically in the retail bakery-café segment of the service sector. The company can be classified as a "fast casual restaurant" because it blends elements of fast food and casual dining (Tillotson, 2003). The company is listed on NASDAQ under the ticker symbol PNRA, and its stores are mostly located in suburban areas. Its main competitors include McDonald's and Wendy's. As of 2010, Panera operated 1,380 bakery-cafés across 38 states and was planning to expand into Canada.

Panera Bread Company began operations in 1981 under the name Au Bon Pain Company, initially operating on the East Coast. The company later purchased St. Louis Bread Company and rebranded as Panera Bread.

Panera Bread is one of the fastest-growing companies in the restaurant industry. As of 2010, it had 429 franchise locations and 173 company-owned bakery-cafés. A primary driver of its high growth rate has been the expansion of franchises. The company maintains strict criteria for prospective franchise buyers, including a minimum capital requirement.

Panera's main emphasis is on nutritional value and quality, which differentiates it within the industry. The company also provides a longer, more relaxed dining experience for its customers and has opened approximately 90 new stores while focusing on both existing and new markets.

"A loaf of bread in every arm."

The mission statement is intentionally brief, designed to guide employees at every level in their daily operations and to assist them in making sound decisions.

The company's vision is to build brand recognition and make its products well-known throughout the industry by providing the highest-quality food to its customers. It also aims to expand through both franchised and company-owned stores, and to distinguish its restaurants and cafés by offering fresh products and a quick-service menu.

Industry Analysis and Competitive Landscape

The restaurant industry is highly competitive and almost entirely labor-intensive. Panera competes by offering fast food products alongside a distinctive dining environment. Major competitors include McDonald's, Burger King, and Wendy's. Panera Bread Company continues to expand its market position and grow its market share by offering bakery and deli-style sandwiches that set it apart from traditional fast food chains. The industry is highly saturated, particularly in the fast food segment, making it challenging for any company to capture market share and build strong brand recognition.

The primary competitor of Panera Bread is McDonald's, the largest fast food chain in the world. McDonald's has been expanding internationally and has recently enhanced and diversified its menu. While Panera targets suburban areas, McDonald's operates in both urban and suburban markets. Panera's key competitors include:

SWOT Analysis and Business Model

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Weaknesses:

Opportunities:

Threats:

The primary source of revenue for Panera Bread Company is sales from company-operated stores. The company also earns royalty fees from franchisees and generates revenue from its fresh dough facilities. Panera expects to increase its new unit openings from 95 to 105. The company's strategy maintains a balance between high-quality food and competitive pricing.

Financial Overview and Vertical Analysis

Over the three years prior to 2010, Panera Bread continuously improved its revenues, driven largely by store expansion. Revenue grew approximately 19% from 2009 to 2010, and net income increased by 25%. In 2010, earnings per share (EPS) were $1.21, and revenues rose 19%. Due to rising prices across the industry, the company's operating performance also improved. The company announced diluted EPS of $1.09, representing a 33% increase over the prior year. For the first quarter of fiscal 2011, net income reached $33 million, sales increased by 3.3%, and the company opened 8 new company-owned stores and 11 franchised locations.

Analysts regard Panera Bread as having strong growth potential with continued improvement in sales. However, investors should note that the company has historically offered lower returns relative to the broader market (Madanoglu, Lee, and Kwansa, 2008). Panera Bread is generally classified as a value company rather than a growth company, and analysts predict sound future performance.

Assets

Current Assets (2010):
Cash and cash equivalents: $229,299 — 32.37%
Trade accounts receivable, net: $20,378 — 2.20%
Other accounts receivable: $17,962 — 1.94%
Inventories: $14,345 — 1.55%
Prepaid expenses: $23,905 — 2.59%
Deferred income taxes: $24,796 — 2.68%
Total Current Assets: $330,685 — 35.77%

Property and equipment, net: $444,094 — 48.03%

Other Assets:
Goodwill: $94,442 — 10.21%
Other intangible assets, net: $48,402 — 5.24%
Deposits and other: $6,958 — 0.75%
Total Other Assets: $149,802 — 16.20%

Total Assets: $924,581

Liabilities

Current Liabilities:
Accounts payable: $7,346 — 0.79%
Accrued expenses: $204,170 — 22.08%
Total Current Liabilities: $211,516 — 22.88%

Deferred rent: $47,974 — 5.19%
Deferred income taxes: $30,264 — 3.27%
Other long-term liabilities: $39,219 — 4.24%
Total Liabilities: $328,973 — 35.58%

Equity

Treasury stock: ($78,990) — (8.54%)
Additional paid-in capital: $130,005 — 14.06%
Accumulated other comprehensive income: — 0.03%
Retained earnings: $544,315 — 58.87%
Total Equity: $595,608 — 64.42%

Total Equity and Liabilities: $924,581

Revenues (2010):
Bakery-café sales, net: $1,321,162 — 85.65%
Franchise royalties and fees: $86,195 — 5.59%
Fresh dough and other product sales to franchisees: $135,132 — 8.76%
Total Revenues: $1,542,489

Costs and Expenses:
Cost of food and paper products: $374,816 — 24.30%
Labor: $419,140 — 27.17%
Occupancy: $100,970 — 6.55%
Other operating expenses: $177,059 — 11.48%
Total Bakery-Café Expenses: $1,071,985 — 69.50%

Fresh dough and other product cost of sales to franchisees: $110,986 — 7.20%
Depreciation and amortization: $68,673 — 4.45%
General and administrative expenses: $101,494 — 6.58%
Pre-opening expenses: $4,282 — 0.28%
Total Costs and Expenses: $1,357,420 — 88.00%

Operating Profit: $185,069 — 12.00%
Interest expense: — 0.04%
Other expense, net: $4,232 — 0.27%
Income before income taxes: $180,162 — 11.68%
Income taxes: $68,563 — 4.44%
Net income: $111,599 — 7.23%
Less: net loss attributable to non-controlling interest: ($267) — (0.02%)
Net Income Attributable to Panera Bread Company: $111,866 — 7.25%

Earnings per common share — Basic: $3.65 | Diluted: $3.62
Weighted average shares outstanding — Basic: 30,614 | Diluted: 30,922