10-K 1 a2015122910k.htm FORM 10-K 10-K


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
_______________________________
Form 10-K
(Mark One)
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended December 29, 2015
or
o
 
TRANSACTION 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
(State or Other Jurisdiction of
Incorporation or Organization)
 
04-2723701
(I.R.S. Employer
Identification No.)
 
 
 
3630 South Geyer Road, Suite 100,
St. Louis, MO
(Address of Principal Executive Offices)
 
63127
(Zip Code)
(314) 984-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Exchange on Which Registered
Class A Common Stock, $.0001 par value per share
 
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 and 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. Yes þ No o
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). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
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 þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o




(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 Act). Yes o No þ
The aggregate market value of the registrant’s voting common equity held by non-affiliates of the registrant, based on the last sale price of the registrant’s Class A Common Stock at the close of business on June 30, 2015, was $2,725,304,483.

As of February 17, 2016, the registrant had 22,995,342 shares of Class A Common Stock ($.0001 par value per share) and 1,381,730 shares of Class B Common Stock ($.0001 par value per share) outstanding.

Part III of this Annual Report incorporates by reference certain information from the registrant’s definitive proxy statement for the 2016 annual meeting of shareholders, which the registrant intends to file pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year end of December 29, 2015.
 



TABLE OF CONTENTS




Forward-Looking Statements

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, regarding our intention to repurchase shares from time to time under the share repurchase program and the source of funding of such repurchases, our refranchising activities, 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”, “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. 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.

PART I

ITEM 1. BUSINESS
General
Panera Bread Company and its subsidiaries, referred to as “Panera Bread,” “Panera,” the “Company,” “we,” “us,” and “our,” is a national bakery-cafe concept with 1,972 Company-owned and franchise-operated bakery-cafe locations in 46 states, the District of Columbia, and Ontario, Canada. We have grown from serving approximately 60 customers per day at our first bakery-cafe to currently serving nearly 8.3 million customers per week system-wide. We are currently one of the largest food service companies in the United States. We believe our success is based on our ability to create long-term concept differentiation. We operate under the Panera Bread®, Saint Louis Bread Co.® and Paradise Bakery & Café® trademark names.
Our bakery-cafes are located in urban, suburban, strip mall, and regional mall locations. We feature high-quality food in a warm, inviting, and comfortable environment. With our identity rooted in handcrafted artisan bread, we bake fresh bread every day. We are committed to providing great tasting, quality food that people can trust. In 2014, we formalized our Food Policy, which is an articulation of Panera's long held values that expresses a commitment to clean ingredients, transparency, and a positive impact on the food system. Our bakery-cafes have a menu highlighted by flavorful, wholesome offerings, including select proteins raised without antibiotics, grass-fed beef, whole grain bread, and select organic ingredients, with zero grams of artificial trans fat per serving. We strive to create new standards in everyday food choices, and our menu includes a wide variety of year-round favorites complemented by new items introduced seasonally. In neighborhoods across the United States and in Ontario, Canada, our customers are drawn to our warm and welcoming environment, which features comfortable gathering areas, relaxing decor, and free Internet access. Our bakery-cafes routinely donate bread and baked goods to community organizations in need.
We operate as three business segments: Company bakery-cafe operations, franchise operations, and fresh dough and other product operations. As of December 29, 2015, our Company bakery-cafe operations segment consisted of 901 Company-owned bakery-cafes and our franchise operations segment consisted of 1,071 franchise-operated bakery-cafes, located throughout the United States and in Ontario, Canada. As of December 29, 2015, our fresh dough and other product operations segment, which supplies fresh dough and other products daily to most Company-owned and franchise-operated bakery-cafes, consisted of 24 fresh dough facilities (22 Company-owned and two franchise-operated), located throughout the United States and one in Ontario, Canada. In the fiscal year ended December 29, 2015, or fiscal 2015, our revenues were $2,682 million, consisting of $2,359 million of Company-owned net bakery-cafe sales, $139 million of franchise royalties and fees, and $184 million of fresh dough and other product sales to franchisees. Franchise-operated net bakery-cafe sales, as reported by franchisees, were $2,478 million in fiscal 2015. See Note 19 to our consolidated financial statements for further segment information.
Our fiscal year ends on the last Tuesday in December. The fiscal years ended December 29, 2015 and December 30, 2014, or fiscal 2014, each had 52 weeks. The fiscal year ended December 31, 2013, or fiscal 2013, had 53 weeks with the fourth quarter comprising 14 weeks.

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Concept and Strategy

Thirty years ago, at a time when quick service often meant low quality, Panera set out to challenge this expectation. We believed that food that was good and that you could feel good about, served in a warm and welcoming environment by people who cared, could bring out the best in all of us. To us, that is food as it should be and that is why we exist.
    
So we began with a simple commitment: to bake fresh bread from fresh dough in our bakery-cafes. No short cuts, just bakers with simple ingredients and hot ovens. Each night, any unsold bread and baked goods were shared with neighbors in need.

These traditions carry on today, as we have continued to find ways to be an ally to our guests. That means crafting a menu of soups, salads and sandwiches that we are proud to feed our families. Like poultry and pork raised without antibiotics on our salads and sandwiches. A commitment to transparency and options that empower our guests to eat the way they want. Seasonal flavors and whole grains. And a commitment to removing artificial additives (flavors, colors, sweeteners and preservatives) from our food in all of our bakery-cafes in the United States by the end of 2016.

We’re also focused on improving quality and convenience. With investments in technology and operations, we now offer new ways to enjoy your Panera favorites - including mobile ordering, Rapid Pick-Up for to-go orders, delivery and consumer packaged goods available at various grocers throughout the country - all designed to make things easier for our guests.
We believe our competitive strengths include more than just great food and superior customer service. We are committed to creating an ambiance in our bakery-cafes and a culture within Panera that is warm, inviting, and embracing, and focus our investments on elevating this experience. We design each bakery-cafe to provide a distinctive environment, in many cases using fixtures and materials complementary to the neighborhood location of the bakery-cafe as a way to engage customers. The distinctive design and environment of our bakery-cafes are intended to offer an oasis from the rush of daily life, where our associates are trained to greet our customers by name and have the skills, expertise, and personalities to make each visit a delight. Many of our bakery-cafes incorporate the warmth of a fireplace and cozy seating areas or outdoor cafe seating, which facilitate the use of our bakery-cafes as a gathering spot. Our bakery-cafes are designed to visually reinforce the distinctive difference between our bakery-cafes and other bakery-cafes and restaurants. In addition, we believe that our MyPanera® loyalty program allows us to build deeper relationships with our customers and entice them to return to our bakery-cafes.
Our menu, operating systems, design, and real estate strategy allow us to compete successfully in several segments of the restaurant business: breakfast, lunch, gathering place, dinner, and take home, through both on-premise sales and off-premise Panera® Catering. We compete with specialty food, casual dining, and quick-service restaurant retailers, including national, regional, and locally-owned restaurants. Our competitors vary across different dayparts. We understand people choose restaurants depending on individual food preferences, mood, and price. Our goal is to be the place worth crossing the street for to enjoy Panera food. Because of that goal, we are working to drive increased customer desire through Concept Essence 2015, our blueprint for attracting and retaining our customers that we believe differentiates us from our competitors, which includes innovations in food, marketing, and store design.
In addition to our in-bakery-cafe dining experience, we offer Panera Catering, a nation-wide catering service that provides breakfast assortments, sandwiches, salads, soups, pasta dishes, drinks, and bakery items using the same high-quality, fresh ingredients enjoyed in our bakery-cafes. Panera Catering is supported by a national sales infrastructure that includes an on-line ordering system. To support our bakery-cafes in servicing small-, medium- and large-order catering markets, we operate catering-only units, referred to as delivery hubs. As of December 29, 2015, there were 27 Company-owned and one franchise-operated delivery hubs.
Menu
Our menu is designed to provide a variety of food products our customers crave, along with transparency to empower them to choose how they want to eat. Panera was the first national restaurant company to voluntarily add calories to its menu boards in 2010 and currently includes this information on menu boards at all of our Company-owned bakery-cafes. We feature a menu which includes proprietary items prepared with high-quality, fresh ingredients, including our fresh-from-the-field romaine lettuce and tomatoes and our chicken raised without antibiotics, as well as unique recipes and toppings designed to provide appealing, flavorful products. Our menu embodies a comprehensive set of commitments formally articulated in our Food Policy and consistent with our long held values. The Food Policy outlines our advocacy for a commitment to clean ingredients and a positive impact on the food system. In May 2015, we announced our “No No List” of artificial additives that will be removed from our food in all of our bakery-cafes in the United States by the end of 2016.
Our key menu groups are daily baked goods, including a variety of freshly baked bagels, breads, muffins, scones, rolls, and sweet goods; made-to-order sandwiches on freshly baked breads; hearty, unique soups; freshly prepared and hand-tossed salads; pasta

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dishes; and custom roasted coffees and cafe beverages, such as hot or cold espresso and cappuccino drinks and smoothies. We regularly review and innovate our menu offerings to feature new taste profiles we believe our customers crave.
Operational Excellence
We believe that operational excellence is the most important element of Panera Warmth, a concept that reflects the totality of the experience that our customers receive and can take home to share with friends and family, and without strong execution and operational skills, it is difficult to build and maintain a long-lasting relationship with our customers. As a result, we are concentrating efforts and resources on our Panera 2.0 initiative, a strategic initiative intended to enhance the experience for both our dine-in and to-go guests. This enhanced guest experience is enabled by technology and operational improvements designed to keep up with high transaction volumes and to deliver unrestrained production demand. Panera 2.0 is part of a broader set of initiatives designed to make Panera a better competitive alternative and to enable expanded growth through not only Panera 2.0 but also through innovation in operations, food, and marketing, utilization of delivery hubs, expanded small-order delivery and our investments in technology to create the capabilities needed to support these initiatives.
To develop a strong connection with our customers, our bakery-cafes are staffed by skilled and engaging associates. Additionally, we believe high-quality restaurant management is critical to our long-term success and, as such, we provide detailed operations manuals and hands-on training to each of our associates. We train our associates both in small group and individual settings. Our systems have been created to educate our associates so each one is well prepared to respond to a customer’s questions and create a better dining experience. Furthermore, we believe our commitment to investing in staffing levels necessary to service growth in revenues, along with maintaining competitive compensation for our associates, is fundamental to our future success.
We believe in providing bakery-cafe operators the opportunity to share in the success of the bakery-cafe. Through our Joint Venture Program, selected general managers and multi-unit managers may participate in a bonus program, which is based upon a percentage of the store profit of the bakery-cafes they operate, generally over a period of five years (subject to annual minimums and maximums). We believe the program’s multi-year approach improves operator quality and management retention, and creates team stability, which generally results in a higher level of consistency and customer service for a particular bakery-cafe. It also leads to stronger associate engagement and customer loyalty. Currently, approximately 45 percent of our Company-owned bakery-cafe operators participate in the Joint Venture Program. We believe this program is a fundamental underpinning of our low rate of management turnover and operational improvements.
Management Information Systems
We believe technology is a differentiator in the restaurant business. We are committed to being a leader in technology that makes a difference to our customers by providing a greater degree of access and convenience. As a result, we are concentrating efforts and resources on our Panera 2.0 initiative, which is intended to enhance the experience for both our dine-in and to-go guests. The enhanced guest experience is enabled by technology, including the convenience of digital ordering and Rapid Pick-Up, and operational improvements. We expect to continue to make substantial investments in technology designed to provide greater access for customers, increased operational capabilities including improved labor and inventory management tools, and improvements in core enterprise systems. We also continue to modernize and make investments in our information technology networks and infrastructure, specifically in our physical and technological security measures to anticipate cyber-attacks and prevent breaches, and to provide improved control, security and scalability. Enhancing the security of our financial data, customer information and other personal information remains a priority for us.
Each of our Company-owned bakery-cafes have programmed point-of-sale registers which collect transaction data used to generate pertinent information, including, among other things, transaction counts, product mix, and average check. All Company-owned bakery-cafe product prices are programmed into the point-of-sale registers from our support centers. We allow franchisees access to certain of our proprietary bakery-cafe systems and systems support. Franchisees are responsible for providing the appropriate menu prices, discount rates, and tax rates for system programming.
We use in-store enterprise application tools to assist in labor scheduling and food cost management, to provide corporate and retail operations management with quick access to retail data, to allow on-line ordering with distributors, and to reduce managers’ administrative time. We are also investing in enhanced back-of-house forecasting and labor scheduling systems to improve the effectiveness of these capabilities. We use retail data to generate daily and weekly consolidated reports regarding sales and other key metrics, as well as detailed profit and loss statements for our Company-owned bakery-cafes. Additionally, we monitor the transaction counts, product mix, average check, and other sales trends. We also use this retail data in our “exception-based reporting” tools to safeguard our cash, protect our assets, and train our associates. Our fresh dough facilities have information systems which accept electronic orders from our bakery-cafes and monitor delivery of the ordered product back to our bakery-cafes. We also use proprietary on-line tools, such as eLearning, to provide on-line training for our retail and fresh dough facility associates and on-line baking instructions for our bakers.

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Marketing
We are committed to improving the customer experience in ways we believe few in our industry have done. We use our scale to execute a broader marketing strategy, not simply to build brand recognition and awareness, but also to build deeper relationships with our customers who we believe will help advocate for our brand.
To reach our target customer group, we advertise through a mix of mediums, including radio, billboards, social networking, and the Internet. In addition, we market through a national cable television campaign as a way to reach a broader audience. We believe our shift to a greater emphasis on national and digital advertising will help us improve and increase recognition of our brand and competitive differentiation. More recently, in the second quarter of fiscal 2015, Panera unveiled a new campaign: Food as it should be. We believe the campaign speaks to our values and achievements, including our commitment to be an ally for the wellness of our guests.
Our MyPanera® customer loyalty program allows our customers to earn rewards based on registration in the program and purchases from our bakery-cafes. We believe MyPanera has allowed us to build deeper relationships with our customers by enhancing their experience with us through their receipt of rewards and enticing them to return to our bakery-cafes. Further, MyPanera offers us valuable insight into the preferences of our customers to help us further refine our marketing message and menu design. We believe MyPanera is the largest customer loyalty program in the industry, with approximately 22 million customers enrolled in MyPanera at the end of fiscal 2015. During fiscal 2015, approximately 50 percent of our transactions in our bakery-cafes were attached to a MyPanera loyalty program card.
Our franchise agreements generally require our franchisees to contribute to advertising expenses. In fiscal 2015, our franchise-operated bakery-cafes contributed 2.6 percent of their net sales to a national advertising fund, paid us a marketing administration fee of 0.4 percent of their net sales, and were required to spend 0.8 percent of their net sales on advertising in their respective markets. The national advertising fund and marketing administration contributions from our franchise-operated bakery-cafes are consolidated in our financial statements with amounts contributed by us. We contributed the same net sales percentages from Company-owned bakery-cafes towards the national advertising fund and marketing administration fee.
Capital Resources and Deployment of Capital
We finance our activities through cash flow generated through operations and term loan borrowings. We also have the ability to borrow up to $250 million under a credit facility. Our capital requirements, including development costs related to the opening or acquisition of additional Company-owned bakery-cafes and fresh dough facilities, maintenance and remodel expenditures, and for other capital needs such as enhancements to information systems and other infrastructure to support ongoing operational initiatives have been and will continue to be significant. However, 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 for the foreseeable future.
We believe the best use of our capital is to invest in our core business, either through the development of new bakery-cafes or the enhancement of the guest experience in existing bakery-cafes.
In evaluating potential new bakery-cafe locations, we study the surrounding trade area and demographics and publicly available information on competitors. Based on this review and the use of proprietary, predictive modeling, we estimate projected sales and a targeted return on investment. We also employ a disciplined capital expenditure process in which we focus on occupancy and development costs in relation to the market. This process is designed to ensure we have an appropriate size bakery-cafe and deploy capital in the right market to generate desired returns.
Our concept has proved successful in different types of locations, such as in-line or end-cap locations in strip or power centers, regional malls, and free-standing units. The average Company-owned bakery-cafe size was approximately 4,500 square feet as of December 29, 2015. We lease nearly all of our bakery-cafe locations and all of our fresh dough facilities. 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 facility leases is the initial non-cancelable lease term plus one to two renewal 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. Certain of our lease agreements provide for scheduled rent increases during the lease term or for rental payments commencing at a date other than the date of initial occupancy.
The average construction, equipment, furniture and fixtures, and signage cost excluding capitalized development overhead for the 57 Company-owned bakery-cafes that opened in fiscal 2015 was approximately $1.4 million per bakery-cafe.

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We also return cash to stockholders in the form of share repurchases under our publicly announced share repurchase authorizations. During fiscal 2015, we repurchased 2,201,719 shares of our Class A common stock for an aggregate purchase price of approximately $399.9 million. During fiscal 2014, we repurchased 941,878 shares of our Class A common stock for an aggregate purchase price of approximately $154.1 million. During fiscal 2013, we repurchased 1,992,250 shares of our Class A common stock for an aggregate purchase price of approximately $332.1 million.
Franchise Operations
Our franchisees, which as of December 29, 2015 operated approximately 54 percent of our bakery-cafes, are comprised of 33 franchise groups with an average of approximately 32 bakery-cafes per group. We are selective in granting franchises, and applicants must meet specific criteria in order to gain consideration for a franchise. Generally, our franchisees must be well-capitalized to open bakery-cafes, meet a negotiated development schedule, and have a proven track record as a multi-unit restaurant operator. Additional qualifications include minimum net worth and liquidity requirements, infrastructure and resources to meet our development schedule, and a commitment to the development of our brand. If all of these qualifications are not met, we may still consider granting a franchise depending on the market and the particular circumstances.
As of December 29, 2015, we had 1,071 franchise-operated bakery-cafes operating throughout the United States and in Ontario, Canada, and we have received commitments to open 128 additional franchise-operated bakery-cafes. The timetables for opening these bakery-cafes are generally established in our Area Development Agreements, or ADAs, with franchisees, which provide for the majority of these planned bakery-cafes to open within the next five years. The ADAs require a franchisee to develop a specified number of bakery-cafes on or before specified dates. If a franchisee fails to develop bakery-cafes on schedule, we have the right to terminate the ADA and develop Company-owned locations or develop locations through new franchisees in that market. We may exercise one or more alternative remedies to address defaults by area developers, including not only development defaults, but also defaults in complying with our operating and brand standards and other covenants under the ADAs and franchise agreements. We may waive compliance with certain requirements under our ADAs and franchise agreements if we determine such action is warranted under the particular circumstances.
Pursuant to a typical ADA, we receive a franchise fee of $35,000 per bakery-cafe (of which we generally receive $5,000 at the signing of the ADA and $30,000 at or before the bakery-cafe opening) and continuing royalties, which are generally five percent of net sales per bakery-cafe. Franchise royalties and fees in fiscal 2015 were $138.6 million, or 5.2 percent of our total revenues. Our franchise-operated bakery-cafes follow the same protocol for in-store operating standards, product quality, menu, site selection, and bakery-cafe construction as Company-owned bakery-cafes. Generally, franchisees are required to purchase all of their fresh dough and other products from us or sources approved by us. Our fresh dough facility system supplies fresh dough and other products to substantially all franchise-operated bakery-cafes. We do not generally finance franchisee construction or ADA payments. From time to time and on a limited basis, we may provide certain development or real estate services to franchisees in exchange for a payment equal to the total costs of the services plus an additional fee. We also provide to our franchise-operated bakery-cafes, for a fee, limited information technology services and access to information technology infrastructure supporting operational initiatives. As of December 29, 2015, we did not hold an equity interest in any of our franchise-operated bakery-cafes.
Bakery-Cafe Supply Chain
We believe our fresh dough facility system and supply chain function provide us with a competitive advantage. We have a unique supply-chain operation in which our regional fresh dough facilities supply dough for our fresh bread on a daily basis, along with tuna, cream cheese, and certain produce to substantially all of our Company-owned and franchise-operated bakery-cafes. As of December 29, 2015, we had 24 fresh dough facilities, 22 of which were Company-owned, including one located in Ontario, Canada, to support the 17 bakery-cafes located within that market.
Fresh dough is the key to our high-quality, artisan bread, and fresh produce is essential to our high-quality salads and sandwiches. We distribute fresh dough and produce through a leased fleet of temperature controlled trucks operated by our associates. As of December 29, 2015, we leased 254 trucks. The optimal maximum distribution range is approximately 300 miles; however, when necessary, the distribution ranges may be up to 500 miles.
Our bakers bake through the night, shaping, scoring, and finishing the dough by hand to bring our customers fresh-baked loaves, bagels, and sweet goods every morning. In addition, our bakers bake high volume products throughout the day to continue to deliver abundant amounts of the highest quality and freshest bread possible. We believe our fresh dough facilities have helped us and will continue to help us to maintain consistent food quality at our bakery-cafes.
We focus our growth in areas we believe allow us to continue to gain efficiencies through leveraging the fixed cost of the fresh dough facility structure. There are opportunities we may not be able to currently address with our traditional fresh dough facility

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structure. As a result, we may be required to construct additional fresh dough facilities or utilize alternative manufacturing and distribution processes consistent with our quality standards to address these needs.
Our supply chain management system is intended to provide bakery-cafes with high-quality food from reliable sources. We are committed to having a positive impact on the food system by sourcing responsibly raised livestock and poultry, as well as high-quality ingredients without artificial additives, including added MSG and artificial trans fats.
We contract externally for the manufacture of the remaining baked goods in the bakery-cafes, referred to as sweet goods. Sweet goods products are completed at each bakery-cafe by our professionally trained bakers. Completion includes finishing with fresh toppings and other ingredients and baking to established artisan standards utilizing unique recipes.
We use independent distributors to distribute our proprietary sweet goods products and other materials to bakery-cafes. With the exception of products supplied directly by the fresh dough facilities, virtually all other food products and supplies for our bakery-cafes, including paper goods, coffee, and smallwares, are contracted by us and delivered by vendors to an independent distributor for delivery to the bakery-cafes. We maintain a list of approved suppliers and distributors from which we and our franchisees must select. We leverage our size and scale to improve the quality of our ingredients, improve purchasing efficiency, and negotiate purchase agreements, which includes purchasing commodities under agreements with terms generally ranging from one month to one year, usually at a fixed price, with most of our approved suppliers to achieve cost reduction for both us and our customers.
Food quality and safety has been and will continue to be a priority for us. We have rigorous processes in place and follow industry standard practices for quality and safety. We monitor evolving best practices in food safety and work with our vendors to implement them. We believe these processes help to ensure we serve safe, wholesome food at our bakery-cafes.
Competition
We compete with a variety of national, regional and locally-owned food service companies, including specialty food, casual dining and quick-service restaurants, bakeries, and restaurant retailers. Our bakery-cafes compete in several segments of the restaurant business: breakfast, lunch, gathering place, dinner, take home, catering, delivery, and consumer packaged goods. We believe we are able to compete favorably against other food service providers through our convenient bakery-cafe locations, appealing environment, high-quality food, beverages, customer service, and marketing. Some of our competitors are larger than we are and have substantially greater financial resources than we do. For further information regarding competition, see Item 1A. Risk Factors.
Employees
As of December 29, 2015, we had approximately 47,200 total associates of whom 23,800 work, on average, at least 25 hours per week. Approximately 44,400 associates were employed in our bakery-cafe operations as bakers, managers, and associates, approximately 1,500 were employed in our fresh dough facility operations, and approximately 1,300 were employed in general or administrative functions, principally in our support centers. We do not have any collective bargaining agreements with our associates and we consider our employee relations to be good. We place a priority on staffing our bakery-cafes, fresh dough facilities, and support center operations with skilled associates and invest in training programs to maintain the quality of our operations.
Proprietary Rights
Our brand, intellectual property, and our confidential and proprietary information are very important to our business and competitive position. We protect these assets through a combination of trademark, copyright, trade secret, unfair competition, and contract laws.
The Panera®, Panera Bread®, Saint Louis Bread Co.®, Panera® Catering, You Pick Two®, Paradise Bakery®, Paradise Bakery & Café®, the Mother Bread® design, MyPanera®, and Panera to You® trademarks are some of the trademarks we have registered with the United States Patent and Trademark Office. In addition, we have filed to register other trademarks with the United States Patent and Trademark Office. We have also registered some of our trademarks in a number of foreign countries. In addition, we have registered and maintain numerous Internet domain names.
Corporate History and Additional Information
We are a Delaware corporation, formed in 1981. Our principal offices are located at 3630 South Geyer Road, Suite 100, St. Louis, Missouri, 63127, and our telephone number is (314) 984-1000.
We are subject to the informational requirements of the Exchange Act, and, accordingly, we file reports, proxy statements, and other information with the SEC. Such reports, proxy statements, and other information are publicly available and can be read and

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copied at the reference facilities maintained by the SEC at the Public Reference Room, 100 F Street, NE, Room 1580, Washington, D.C., 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Our Internet address is www.panerabread.com. We make available at this address, free of charge, press releases, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC. In addition, we provide periodic investor relations updates and our corporate governance materials at our Internet address. The information contained on, or that can be accessed through, our website is not part of this Annual Report on Form 10-K. We have included our website address solely as an inactive textual reference.

ITEM 1A. RISK FACTORS
The following risk factors could materially affect our business, consolidated financial condition and results of operations. The risks and uncertainties described below are those that we have identified as material, but are not the only risks and uncertainties we face. Our business is also subject to general risks and uncertainties that affect many other companies, including overall economic and industry conditions. Additional risks and uncertainties not currently known to us or that we currently believe are not material also may impair our business, consolidated financial condition and results of operations.
Disruptions in our bakery-cafe supply chain could adversely affect our profitability and operating results.
Our Company-owned and franchise-operated bakery-cafes depend on frequent deliveries of ingredients and other products. We rely on one distribution partner to deliver the majority of our non-dough ingredients and other products to our bakery-cafes two or three times per week, and we supply our bakery-cafes with fresh dough and certain other products, including produce, on a daily basis. There are many factors which could cause shortages or interruptions in the supply of our ingredients and products, including adverse weather, unanticipated demand, labor or distribution problems, food safety issues by our suppliers or distributors, cost, and the financial health of our suppliers. Additionally, we currently depend on a limited number of suppliers for several of our proteins, such as selected proteins raised without antibiotics, which are sold in most Company-owned and franchise-operated bakery-cafes. As there are few producers of proteins raised without antibiotics, it may be difficult or more costly for us to find alternative suppliers, if necessary. If we have to seek new suppliers or service providers, we may be subject to pricing or other terms less favorable than those we currently enjoy. If we cannot replace or engage distributors or suppliers who meet our specifications in a short period of time, this could increase our expenses and cause shortages of food and other items at our bakery-cafes, which could cause a bakery-cafe to remove items from its menu. If such actions were to occur, customers could change their dining habits, and affected bakery-cafes could experience significant reductions in sales during the shortage or thereafter.
The market in which we compete is highly competitive, and we may not be able to compete effectively.
The restaurant industry is highly competitive with respect to location, customer service, price, value, food quality, ambiance, and overall customer experience. We compete with national, regional, and locally owned food service companies, including specialty food, casual dining and quick-service restaurants, coffee chains, bakeries, and restaurant retailers. Many of our competitors or potential competitors have greater financial and other resources than we do, which may allow them to react to changes in pricing, marketing, and trends in the restaurant industry more quickly or effectively than we can.
We may also compete with companies outside the fast casual and quick service and casual dining segments of the restaurant industry. For example, competitive pressures can come from deli sections and in-store cafés of several major grocery store chains, including those targeted at customers who want higher-quality food. These competitors may have, among other things, a more diverse menu, lower operating costs, better locations, facilities or management, more effective marketing or more efficient operations than we have.
If we are unable to successfully compete in these markets, we may be unable to sustain or increase our revenues and profitability.
Our financial results could be negatively impacted if we fail to generate expected revenue and profits from substantial investments in our bakery-cafes to enable a better customer experience.
Operational excellence and the continued improvement of our customer experience are among our highest priorities and as such we have made significant investments in our bakery-cafes over the past several years. We expect to continue to make significant investments during fiscal 2016 and going forward in technology, operational tools, and related systems, as well as the labor necessary to support this technology, in areas which include, but are not limited to, the ordering process, food production and the delivery of food to the customer. Our inability to accurately predict the costs and rollout of such initiative across our system or

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our failure to generate expected revenue and profits from such activities and investments could negatively impact our financial results.
Changes in customer tastes and preferences may reduce the frequency of their visits to our bakery-cafes or may cause them to cease paying our prices for high-quality food.
Our success depends in large part on our customers' continued belief that food made with high-quality ingredients, including selected proteins raised without antibiotics, our artisan breads, and food items made without artificial preservatives, colors, sweeteners or flavors is worth the prices charged at our bakery-cafes relative to the lower prices offered by some of our competitors, particularly those in the quick-service segment. Our inability to successfully educate customers about the quality of our food or our customers’ rejection of our pricing approach could result in decreased demand for our products or require us to change our pricing, marketing, or promotional strategies, which could materially and adversely affect our consolidated financial results or the brand identity that we have created.
Changes in food and supply costs could adversely affect our consolidated results of operations.
Our profitability depends in part on our ability to anticipate and react to changes in food and supply costs. In the past, we have generally been able to recover inflationary cost and commodity price increases for, among other things, fuel, proteins, dairy, produce, wheat, tuna, and cream cheese through increased menu prices. There have been, and there may be in the future, delays in implementing such menu price increases, and economic factors and competitive pressures may limit our ability to recover fully such cost increases. Historically, the effects of inflation on our consolidated results of operations have not been materially adverse. However, increased volatility in certain commodity markets, including those for wheat, proteins, or produce, could have an adverse effect on our consolidated results of operations if we are unable to increase menu prices to cover such ingredient price increases. We could also be adversely affected by price increases specific to proteins we have chosen due to their specific quality profile or related criteria (e.g. proteins raised without antibiotics), the markets for which are generally smaller and more concentrated than the markets for other commodity food products.
We may not be successful in implementing important strategic initiatives, which may have an adverse impact on our business and consolidated financial results.
Our business depends upon our ability to continue to grow and evolve through various important strategic initiatives. There can be no assurance that we will be able to implement these important strategic initiatives or that these strategic initiatives will deliver on their intended results, which could in turn adversely affect our business.
These strategic initiatives include:
introducing new menu items and improving existing items consistent with customer tastes and expectations and our commitment to food that customers can trust through our food policy initiatives;
generating increased sales through catering and small order delivery, including through our Panera® Catering and Panera to You® initiatives;
our ability to achieve the benefits of our refranchising initiative, which will depend on various factors including the returns we realize from such transactions and whether the resulting ownership mix supports our financial objectives;
balancing unit growth while meeting target returns on invested capital for locations;
generating additional revenue and corresponding profits through the retail sale of consumer packaged goods through alternative channels of distribution;
identifying alternative formats for our bakery-cafes to enable us to open locations in more diverse locations;
investing in technology and systems designed to enable our managers to focus their energy on improving the customer experience in our bakery-cafes;
increasing brand awareness through greater investment in marketing and advertising, including increased national television advertising and digital advertising and continued leveraging of our MyPanera® loyalty program;
investing in labor and the related management tools to meet the demands necessary to maximize throughput and capacity in our bakery-cafes;

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simplifying our operating procedures to facilitate the operation of high volume bakery-cafes; and
investing in technology designed to drive demand and increase transaction counts and frequency in our bakery-cafes.
Customer preferences and traffic could be adversely impacted by health concerns about certain food products, reports of food-borne illnesses or food safety issues, any of which could result in a decrease in demand for our products.
Customer preferences and traffic could be adversely impacted by health concerns or negative publicity about the consumption of particular food products, which could cause a decline in demand for those products and adversely impact our sales. Additionally, regardless of the source or cause, reports of food-borne illnesses or other food safety issues (including food tampering or contamination) in the food service industry could cause customers to shift their preferences, result in negative publicity regarding restaurants generally and adversely impact our sales. For example, recent outbreaks of E. coli in certain beef products or produce and outbreaks of salmonella in cantaloupes, jalapeños and spinach caused consumers to avoid these products. These problems, other food-borne illnesses (such as norovirus, hepatitis A or trichinosis), and injuries caused by food tampering have in the past, and could in the future, require us to temporarily close bakery-cafes. The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, resulting in higher costs and a decrease in customer traffic to our bakery-cafes. Furthermore, any instances of food contamination, whether or not at our bakery-cafes, could subject us or our suppliers to a food recall pursuant to the United States Food and Drug Administration's recently enacted Food Safety Modernization Act.
Security breaches of confidential customer information or personal employee information may adversely affect our business.
Each year, we engage in millions of transactions with our customers. Approximately 75 percent of our bakery-cafe sales are by credit or debit card. Additionally, as we continue to evolve our e-commerce initiatives we expect our credit card transactions, specifically online and mobile, to increase. In connection with credit card sales, including online and through mobile applications, we and our franchisees transmit confidential credit card information by way of secure private retail networks. Although we use private networks, third parties may have the technology or know-how to breach the security of the customer information transmitted in connection with credit card sales; we and our franchisees' security measures and those of our technology vendors may not effectively prohibit others from obtaining improper access to this information. If a third party is able to circumvent these security measures, information could be stolen or destroyed potentially causing a disruption of our operations. Significant capital investments and other expenditures could be required to remedy the problem and prevent future breaches, including costs associated with additional security technologies, personnel, experts and credit monitoring services for those whose data has been breached. These costs, which could be material, could adversely impact our results of operations in the period in which they are incurred and may not meaningfully limit the success of future attempts to breach our information technology systems. Media or other reports of existing or perceived security vulnerabilities in our systems or those of our third party business partners or service providers, regardless if a breach has been attempted or has occurred, can also adversely impact our brand and reputation and materially impact our business.
Like many other retail companies and because of the prominence of our brand, we have experienced frequent attempts to compromise our information technology systems, none of which have resulted in a material breach. Additionally, the techniques and sophistication used to conduct cyber-attacks and breaches of information technology systems, as well as the sources and targets of these attacks, change frequently and are often not recognized until such attacks are launched or have been in place for a period of time. While we continue to make significant investment in physical and technological security measures, employee training, and third party services, designed to anticipate cyber-attacks and prevent breaches, our information technology networks and infrastructure or those of our third party vendors and other service providers could be vulnerable to damage, disruptions, shutdowns, or breaches of confidential information due to criminal conduct, employee error or malfeasance, utility failures, natural disasters or other catastrophic events. Due to these scenarios we cannot provide assurance that we will be successful in preventing such breaches or data loss.
We also maintain certain personal information regarding our employees directly and through third party vendors. If a third party is able to circumvent the security measures intended by us or our vendors to protect our customer or employee private data, he or she could destroy or steal information or disrupt our operations, which could significantly harm our reputation and/or result in litigation against us or the imposition of penalties.
Disruptions or supply issues in our fresh dough facilities could adversely affect our business and consolidated results of operations.
We operate 22 Company-owned fresh dough facilities, which service substantially all of our Company-owned and franchise-operated bakery-cafes. Our fresh dough and other product distribution system delivers fresh dough and other products daily to

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the bakery-cafes through a leased fleet of temperature controlled vehicles. The optimal maximum distribution range is approximately 300 miles; although, when necessary, the distribution range may reach up to 500 miles. As a result, any prolonged disruption in the operations of, or distribution from any of our fresh dough facilities, including due to weather conditions, technical or labor difficulties, or destruction of, or damage to the vehicle fleet or facilities, could result in a shortage of fresh dough and other products at our bakery-cafes, and, depending on its extent and duration, have a material adverse effect on our business and consolidated results of operations.
Additionally, given that we rely on trucks for the delivery of items from our fresh dough facilities, any increased costs and distribution issues related to fuel could also materially adversely impact our business and consolidated results of operations.
Our Franklin, Massachusetts fresh dough facility manufactures and supplies through its distributors all of the cream cheese and tuna used in most of our Company-owned and franchise-operated bakery-cafes in the United States. Additionally, we distribute a number of fresh produce products provided from our suppliers through our fresh dough facility system. Although we believe we have adopted adequate quality assurance and other procedures to seek to ensure the production and distribution of quality products and ingredients, we may be subject to allegations regarding quality, health, or other similar concerns that could have a negative impact on our operations, whether or not the allegations are valid or we are liable. Additionally, defending against such claims or litigation could be costly and the results uncertain.
If we are not successful in our initiatives related to delivering food you can trust to our customers, our financial results could be negatively impacted.
Our commitment to serve food that customers can trust represents an important part of our business. We currently use a significant number of ingredients raised or manufactured with an emphasis on practices we believe to be more responsible than some conventional practices, such as selected proteins raised without antibiotics. We may encounter supply challenges for such ingredients, particularly proteins. We have also made a commitment to remove artificial colors, flavors, sweeteners and preservatives from our food in all of our bakery-cafes in the United States by the end of 2016. This commitment will increase our costs.
If, as a result of any of these factors we are unable to obtain a sufficient and consistent supply of such ingredients on a cost-effective basis, our food costs could increase, which could adversely affect our operating margins. We may also face adverse publicity or liability for false advertising claims if there is not adherence to all of the elements of our food policy and related initiatives, such as responsible animal welfare policies and similar criteria on which we base our purchasing decisions. A few of our markets temporarily served conventionally raised turkey for a brief period during fiscal 2014 due to supply shortages. These factors could also make it difficult to align our food policy initiatives, which could make us less popular among our customers and cause sales to decline. If any such supplier failures occur and are publicized, our reputation would be harmed and our sales may be adversely impacted.
Additionally, in response to increasing customer awareness and demand, some competitors have also begun to advertise their use of meats raised without the use of antibiotics and other ingredients similar to those we seek as part of our food policy and initiatives. If competitors become known for using these types of higher-quality or more sustainable ingredients, it could further limit our supply of these ingredients, and may make it more difficult for us to differentiate ourselves which could adversely impact our operating results.
Increased advertising and marketing costs could negatively impact our profitability.
We expect our advertising expenses to continue to increase and we intend to dedicate greater resources to national advertising and marketing in the future. If new advertising and other marketing programs, including our digital advertising or national television advertising, do not result in increased net bakery-cafe sales or if the costs of advertising, media, or marketing increase greater than expected, our profitability could be materially adversely affected.
Increased labor costs or difficulties in recruiting the right associates could adversely affect our future results.
Our success depends, in part, on our continuing ability to hire, train, motivate, and retain qualified associates in our bakery-cafes, fresh dough facilities, and support centers in a competitive labor market. We look to hire warm, friendly, motivated and caring associates, who are excited and committed to embodying our culture and actively growing themselves and our brand. A sufficient number of qualified individuals to fill these positions and qualifications may be in short supply in some communities. Competition in these communities for qualified staff could require us to pay higher wages and provide greater benefits, especially if there is significant improvement in regional or national economic conditions. We place a heavy emphasis on the qualification and training of our personnel and spend a significant amount of time and money on training our employees. Any inability to recruit and retain qualified individuals may result in higher turnover and increased labor costs, and could compromise the quality of our service, all

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of which could adversely affect our business.
Our ability to increase our revenues and operating profits could be adversely affected if we are unable to execute our bakery-cafe growth strategy or achieve sufficient returns on invested capital in bakery-cafe locations.
Our bakery-cafe growth strategy primarily consists of new market development and further penetration of existing markets, both by us and our franchisees, including the selection of sites which will achieve targeted returns on invested capital. The success of this strategy depends on numerous factors that are not completely controlled by us or involve risks that may impact the development, or timing of development, of our bakery-cafes. Our ability to grow the number of bakery-cafes successfully will depend on a number of factors, including:
obstacles to hiring and training qualified operating personnel in the local market;
identification and availability of suitable locations for new bakery-cafes on acceptable terms, including costs and appropriate delivery distances from our fresh dough facilities;
increased competition for restaurant sites from newer and increasing number of concepts in the fast casual segment;
variations in the number and timing of bakery-cafe openings as compared to our construction schedule;
management of the costs of construction of bakery-cafes, particularly factors outside our control, such as the timing of delivery of a leased location by the landlord;
our ability to negotiate favorable economic and business terms;
our ability to secure required governmental approvals and permits and comply with applicable zoning, land use, and environmental regulations; and
shortages of construction materials and labor.
Our bakery-cafe growth strategy also includes continued development of bakery-cafes through franchising. At December 29, 2015, approximately 54 percent of our bakery-cafes were operated by franchisees (1,071 franchise-operated bakery-cafes out of a total of 1,972 bakery-cafes system-wide). The opening and successful operation of bakery-cafes by franchisees depends on a number of factors, including those identified above, as well as the availability of suitable franchise candidates and the financial and other resources of our franchisees such as our franchisees’ ability to receive financing from banks and other financial institutions, which may become more challenging in the current economic environment.
As noted above, identifying and securing an adequate supply of suitable new bakery-cafe sites presents significant challenges because of the intense competition for those sites in our target markets, and increasing development and leasing costs. This may be especially true as we continue to expand into more urban locations. Further, any restrictions or limitations of credit markets may require developers to delay or be unable to finance new projects. Delays or failures in opening new restaurants due to any of the reasons set forth above could materially and adversely affect our growth strategy and our expected results.
Our success in part depends on the success of our franchisees business.
Our success depends in part on the operations of our franchisees. While we provide training and support to, and monitor the operations of, our franchisees, the product quality and service they deliver may be diminished by any number of factors beyond our control, including financial pressures and their own business operations, such as employment related matters. We strive to provide our customers with the same experience at Company-owned bakery-cafes and franchise-operated bakery-cafes. Our customers may attribute to us problems which originate with one of our franchisees, particularly those affecting the quality of the service experience, food safety, litigation or compliance with laws and regulations, thus damaging our reputation and brand value and potentially adversely affecting our results of operations.
Furthermore, our consolidated results of operations include revenues derived from royalties on sales from, and revenues from sales by our fresh dough facilities to, franchise-operated bakery-cafes. As a result, our growth expectations and revenues could be negatively impacted by a material downturn in sales at and to franchise-operated bakery-cafes or if one or more key franchisees becomes insolvent and unable to pay us royalties.

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Economic conditions in the United States and globally could adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources as well as that of our suppliers.
As our business depends upon consumer discretionary spending, our financial results are sensitive to broader macroeconomic conditions. Our customers may make fewer discretionary purchases as a result of, for example, unemployment, increased fuel and energy costs, foreclosures, bankruptcies, reduced access to credit and falling home prices. Because a key point in our business strategy is maintaining our transaction counts, average check amount and margin growth, any significant decrease in customer traffic or average profit per transaction resulting from fewer purchases by our customers or our customers' preferences to trade down to lower priced products on our menu will negatively impact our financial performance. If negative economic conditions persist for an extended period of time or worsen, consumers may make long-lasting changes to their discretionary purchasing behavior, including less frequent discretionary purchases on a more permanent basis. Additionally, financial difficulties experienced by our suppliers could result in product delays or shortages. Although the economy is showing signs of a recovery, the ability of the United States economy to sustain this recovery is likely to be affected by several national and global factors that are outside of our control.
Damage to our brands or reputation could negatively impact our business.
Our success depends substantially on the value of our brands and our reputation for offering high-quality food and a memorable experience with superior customer service. Our brands have been highly rated in annual consumer surveys and have received high recognition in industry publications. We believe that we must protect and grow the value of our brands through our Concept Essence 2015 to differentiate ourselves from our competitors and continue our success. Any incident that erodes consumer trust in or affinity for our brands could significantly reduce their value and have an adverse effect on our business.
Loss of senior management could adversely affect our future success.
Our success depends on the services of our senior management, all of whom are “at will” employees. The loss of a member of senior management could have an adverse impact on our business or the financial market’s perception of our ability to continue to grow.
We may be exposed to uncertainties and risks in Canada that could negatively impact our consolidated results of operations.
We expanded our Company-owned and franchise-operated operations into Canadian markets. Our expansion into Canada has made us subject to Canadian economic conditions, particularly currency exchange rate fluctuations, increased regulations, quotas, tariffs, and political factors, any of which could have a material adverse effect on our consolidated financial condition and results of operations as our Canadian operations continue to expand. Further, we may be exposed to new forms of competition not present in our domestic markets, as well as subject to potentially different demographic tastes and preferences for our products.
If we fail to comply with governmental laws or regulations or if these laws or regulations change, our business could suffer.
In connection with the operation of our business, we are subject to extensive federal, state, local, and foreign laws and regulations that are complex and vary from location to location, including those related to:
franchise relationships;
building construction and zoning requirements;
nutritional content labeling and disclosure requirements;
management and protection of the personal data of our employees and customers; and
environmental matters.
Our bakery-cafes and fresh dough facilities are licensed and subject to regulation under federal, state, local and foreign laws, including business, health, fire, and safety codes. For example, we are subject to the U.S. Americans with Disabilities Act, or ADA, and similar state laws that give civil rights protections to individuals with disabilities in the context of employment, public accommodations and other areas.
In addition, various federal, state, local and foreign labor laws govern our operations and our relationship with our associates, including minimum wage requirements, overtime, accommodation and working conditions, benefits, work authorization requirements, insurance matters, workers’ compensation, disability laws such as the ADA discussed above, child labor laws, and anti-discrimination laws.

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Although we believe that compliance with these laws has not had a material adverse effect on our operations to date, we may experience material difficulties or failures with respect to compliance with such laws in the future. Our failure to comply with these laws could result in required renovations to our facilities, litigation, fines, penalties, judgments, or other sanctions including the temporary suspension of bakery-cafe or fresh dough facility operations or a delay in construction or opening of a bakery-cafe, any of which could adversely affect our business and our reputation.
In addition, new government initiatives or changes to existing laws, such as the adoption and implementation of national, state, or local government proposals relating to increases in minimum wage rates, may increase our costs of doing business and adversely affect our results of operations.
Regulatory changes in and customer focus on nutrition and advertising practices could adversely affect our business.
There continues to be increased consumer emphasis on and regulatory scrutiny of restaurants operating in the quick-service and fast-casual segments with respect to nutrition and advertising practices. While we have responded to these developments by updating our menu boards and printed menus in all of our Company-owned bakery-cafes to include caloric information, we may become subject to other regulations in the area of nutrition disclosure or advertising which would require us to make certain additional nutritional information available to our customers or restrict the sales of certain types of ingredients. We may experience higher costs associated with the implementation and oversight of such changes that could have an adverse impact on our business.
Rising insurance costs could negatively impact our profitability.
We self-insure a significant portion of potential losses under our workers’ compensation, medical, general, auto, and property liability programs. The liabilities associated with the risks that are retained by us are estimated, in part, by considering our historical claims experience and data from industry and other actuarial sources. The estimated accruals for these liabilities could be affected if claims differ from these assumptions and historical trends. Unanticipated changes in the actuarial assumptions and management estimates underlying our reserves of these losses could result in materially different amounts of expense under these programs, which could have a material adverse effect on our consolidated financial condition and results of operations.
We are subject to complaints and litigation that could have an adverse effect on our business.
In the ordinary course of our business, we have been, and we expect that in the future we will be, subject to complaints and litigation alleging that we are responsible for customer illness or injury suffered during or after a visit to one of our Company-owned bakery-cafes or franchise-operated bakery-cafes, including allegations of poor food quality, food-borne illness, adverse health effects, nutritional content or allergens, advertising claims or personal injury claims. In addition, from time to time, we are subject to litigation by employees, investors, franchisees, and others through private actions, class actions or other forums, including those alleging violations of various federal and state wage and hour laws regarding, among other things, overtime eligibility and failure to pay for all hours worked. The outcome of litigation, particularly class actions and regulatory actions, is inherently difficult to assess or quantify, and the defense against such claims or actions can be costly. In addition to decreasing sales and profitability and diverting financial and management resources, we may suffer from adverse publicity that could harm our brand, regardless of whether the allegations are valid or whether we are liable. Moreover, we are subject to the same risks of adverse publicity resulting from allegations even if the claim involves one of our franchisees. A judgment significantly in excess of our insurance coverage for any claims could materially and adversely affect our consolidated financial condition or results of operations.
Our failure or inability to protect our trademarks or other proprietary rights could adversely affect our business and competitive position.
We believe that our intellectual property and confidential and proprietary information are essential to our business and competitive position. Our trademarks, copyrights, service marks, trade secrets, confidential and proprietary information, and other intellectual property rights, are key components of our operating and marketing strategies. Although we have taken steps to protect our brand, intellectual property, and confidential and proprietary information, these steps may not be adequate. Unauthorized usage or imitation by others could harm our image, brand, or competitive position and, if we commence litigation to enforce our rights, cause us to incur significant legal fees.
We do not believe that our trademarks, menu offerings or newly developed technology platforms related to our initiatives designed to improve bakery-cafe throughput, customer experience and greater access for our customers, infringe upon the proprietary rights of third parties.  An infringement claim, whether or not it has merit, could be time-consuming to defend against, result in costly litigation, cause delays or suspensions in marketing or introducing new menu items in the future or the rollout of initiatives such as those noted above, or require us to enter into royalty or licensing agreements.  As a result, any such claim could have a material adverse effect on our business, consolidated financial condition and results of operations.

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We try to ensure that our franchisees maintain and protect our brand and our confidential and proprietary information. However, since our franchisees are independent third parties that we do not control, if they do not operate their bakery-cafes in a manner consistent with their agreements with us, our brand and reputation or the value of our confidential and proprietary information could be harmed. If this occurs, our business and operating results could be adversely affected.
We rely heavily on information technology and any material failure, interruption, or security breach in our systems could adversely affect our business.
We rely heavily on information technology systems across our operations, including for the order and delivery of fresh dough from our fresh dough facilities, point-of-sale processing in our bakery-cafes, gift and loyalty cards, online business, and various other processes and transactions, including the storage of employee and customer information. Our ability to effectively manage our business and coordinate the production, distribution, and sale of our products depends significantly on the reliability and capacity of these systems. The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, or a breach in security of these systems could cause delays in product sales and reduced efficiency of our operations, and significant capital investments could be required to remediate the problem.
We periodically acquire existing bakery-cafes from our franchisees or ownership interests in other restaurant or bakery-cafe concepts, which could adversely affect our consolidated results of operations.
Periodically, we have acquired existing bakery-cafes from our franchisees either by negotiated agreement or exercise of our rights of first refusal under the franchise and area development agreements. Any acquisition that we undertake involves risk, including:
our ability to successfully achieve anticipated synergies, accurately assess contingent and other liabilities as well as potential profitability;
failure to successfully integrate the acquired entity’s operational and support activities;
unanticipated changes in business and economic conditions;
limited or no operational experience in the acquired bakery-cafe market;
future impairment charges related to goodwill and other acquired intangible assets; and
risks of dispute and litigation with the seller, the seller’s landlords, and vendors and other parties.
Any of these factors could strain our financial and management resources as well as negatively impact our consolidated results of operations.
The effect of changes to healthcare laws in the United States may increase our healthcare costs and negatively impact our financial results.
The Affordable Care Act was enacted in March 2010. We have continued to evaluate the potential impacts of this law on our business and accommodate various parts of the law and related rules and regulations as they take effect. Changes in the law that took effect in 2014, including the imposition of a penalty on individuals who do not obtain healthcare coverage, may result in employees who are currently eligible but elect not to participate in our healthcare plans increasingly finding it advantageous to do so, which may increase our healthcare costs in the future. The costs and other effects of these new healthcare requirements cannot be determined with certainty, but they may have a material adverse effect on our financial and operating results.
Unforeseen weather may disrupt our business.
Unforeseen natural events, such as earthquakes, hurricanes, or other adverse weather and climate conditions, could disrupt our operations or those of our franchisees, or suppliers. These events could reduce traffic in our bakery-cafes, make it difficult or impossible for bakery-cafes to receive deliveries of ingredients or other products, and otherwise impede our or our franchisees’ ability to continue business operations in a manner consistent with the level and extent of business activities prior to the occurrence of the unexpected weather, which in turn may materially and adversely impact our business and operating results.
Our operating results fluctuate due to a number of factors, some of which may be beyond our control, and any of which may adversely affect our consolidated financial condition.
Our operating results may fluctuate significantly from our forecasts, targets, or projections because of a number of factors, including the following:

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changes in average weekly net sales and comparable net bakery-cafe sales due to:
lower customer traffic or average check per transaction, including as a result of the introduction or removal of new menu items;
changes in demographics, consumer preferences, and discretionary spending;
negative publicity about the ingredients we use or the occurrence of food-borne illnesses or other problems at our bakery-cafes; and
seasonality, including as a result of inclement weather.
cost increases due to:
changes in our operating costs;
labor availability and increased labor costs, including wages and other compensation of management and associates, insurance, and health care; and
changes in business strategy including concept evolution and new designs.
profitability of new bakery-cafes, especially in new markets;
delays in new bakery-cafe openings; and
fluctuations in supply costs, shortages, or interruptions.
As a result of these factors, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year. Average weekly sales or comparable bakery-cafe sales in any particular future period may decrease. In the future, operating results may fall below the expectations of securities analysts and investors, which could cause our stock price to fall. We believe the market price of our common stock reflects high market expectations for our future operating results. As a result, if we fail to meet market expectations for our operating results in the future, any resulting decline in the price of our common stock could be significant.
Our federal, state, and local tax returns have been, and may in the future be, selected for audit by the tax authorities, which may result in tax assessments or penalties that could have a material adverse impact on our consolidated financial position and results of operations.
We are subject to federal, state, and local taxes in the United States and Canada, including income, sales, use, and other applicable taxes. Significant judgment is required in determining the provision for taxes. Additionally, sales and use tax requirements are often fact-specific, complex and vary from jurisdiction to jurisdiction, which complicates monitoring and compliance. Although we believe our tax estimates are reasonable and our procedures for collecting sales taxes are appropriate, from time to time, federal, state, and local tax authorities have challenged, and may in the future challenge, positions we have taken on our tax returns or our sales tax collection policies. If we are unable to resolve these challenges favorably, we could incur additional tax liability, including interest and penalties. If material, payment of such additional amounts upon final adjudication, or resolution of any disputes, could have a material impact on our consolidated financial position and results of operations.
A regional or global health pandemic could severely affect our business.
A health pandemic is a disease outbreak that spreads rapidly and widely by infection and affects many individuals in an area or population at the same time. If a regional or global health pandemic occurs, depending upon its duration, location, and severity, our business could be severely affected. Generally, we are viewed by our customers as a high-quality, friendly, all day destination where people can gather with family, friends, and business colleagues. Customers may avoid public gathering places in the event of a health pandemic, and local, regional, or national governments might limit or ban public gatherings to halt or delay the spread of disease. A regional or global health pandemic might also adversely impact our business by disrupting or delaying production and delivery of ingredients and products in our supply chain and by causing staffing shortages in our bakery-cafes.
Regional factors could negatively impact our consolidated results of operations.
There are several states in which we, our franchisees, or both, own and operate a significant number of bakery-cafes. As a result, the economic conditions, state and local laws, government regulations, and weather conditions affecting those particular states, or a geographic region generally, may have a material impact upon our consolidated results of operations.

15


If we are unable to continue to repurchase our stock consistent with investor expectations, our earnings per share growth rate and stock price may be negatively affected.
Our stock repurchase program could require the use of a significant portion of or exceed our cash flow. Our ability to repurchase stock will depend on our ability to generate sufficient cash flows from operations in the future or to borrow money from available lending sources. Any failure to repurchase stock following an announcement of our intention to do so could negatively impact our earnings per share growth rate and potentially our stock price.

ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

ITEM 2. PROPERTIES
We lease nearly all of our bakery-cafe locations, fresh dough facilities, and support centers.
The square footage of our Company-owned leased fresh dough facilities as of December 29, 2015 is set forth below:
 
 
Square
Facility
 
Footage
Albuquerque, NM
 
1,800

Atlanta, GA
 
26,000

Beltsville, MD
 
35,700

Chandler, AZ
 
7,500

Chicago, IL
 
52,000

Cincinnati, OH
 
32,000

Denver, CO
 
10,000

Detroit, MI
 
19,600

Fairfield, NJ
 
39,900

Franklin, MA (1)
 
50,300

Greensboro, NC
 
19,200

Houston, TX
 
20,700

Kansas City, KS
 
17,500

Minneapolis, MN
 
10,300

Miramar, FL
 
15,100

Ontario, CA
 
27,800

Orlando, FL
 
27,000

Seattle, WA
 
16,600

St. Louis, MO
 
30,000

Stockton, CA
 
15,800

Warren, OH
 
23,800

Ontario, Canada
 
16,000


(1)
Total square footage includes approximately 20,000 square feet utilized for tuna and cream cheese production.


16


The average size of our Company-owned bakery-cafes as of December 29, 2015 was approximately 4,500 square feet. As of December 29, 2015, 1,972 bakery-cafes operated in the following locations:
Location
 
Company-Owned
Bakery-Cafes
 
Franchise-Operated
Bakery-Cafes
 
Total
Bakery-Cafes
Alabama
 
19

 
3

 
22

Arizona
 
34

 
9

 
43

Arkansas
 

 
9

 
9

California
 
62

 
111

 
173

Colorado
 

 
38

 
38

Connecticut
 
19

 
16

 
35

Delaware
 

 
6

 
6

Florida
 
68

 
109

 
177

Georgia
 
21

 
29

 
50

Idaho
 
1

 

 
1

Illinois
 
73

 
38

 
111

Indiana
 
38

 
1

 
39

Iowa
 
3

 
18

 
21

Kansas
 

 
21

 
21

Kentucky
 
25

 
4

 
29

Louisiana
 
1

 
9

 
10

Maine
 

 
6

 
6

Maryland
 

 
53

 
53

Massachusetts
 
4

 
67

 
71

Michigan
 
53

 
22

 
75

Minnesota
 
24

 
3

 
27

Mississippi
 

 
4

 
4

Missouri
 
47

 
24

 
71

Nebraska
 
13

 
2

 
15

Nevada
 

 
7

 
7

New Hampshire
 

 
12

 
12

New Jersey
 
51

 
14

 
65

New Mexico
 
5

 

 
5

New York
 
54

 
57

 
111

North Carolina
 
44

 
16

 
60

North Dakota
 
4

 

 
4

Ohio
 
8

 
124

 
132

Oklahoma
 

 
17

 
17

Oregon
 
13

 

 
13

Pennsylvania
 
33

 
65

 
98

Rhode Island
 

 
8

 
8

South Carolina
 
10

 
11

 
21

South Dakota
 
2

 

 
2

Tennessee
 
18

 
20

 
38

Texas
 
28

 
55

 
83

Utah
 

 
6

 
6

Vermont
 
5

 

 
5

Virginia
 
71

 
12

 
83

Washington
 
4

 
25

 
29

West Virginia
 

 
11

 
11

Wisconsin
 
27

 
3

 
30

District of Columbia
 
8

 

 
8

Ontario, Canada
 
11

 
6

 
17

 
 
901

 
1,071

 
1,972

Included in the number of Company-owned bakery-cafes are 12 takeout and delivery concept units. Excluded from the number of total bakery-cafes are 28 catering-only units (27 Company-owned and one franchise-operated), referred to as delivery hubs.

17


ITEM 3. 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. In addition, more recently, several other purported class action lawsuits based on similar claims and seeking similar damages were filed against the subsidiary: on October 30, 2015 in the California Superior Court, County of San Bernardino by Jazmin Dabney, a former subsidiary employee; on November 3, 2015, in the United States District Court, Eastern District of California by Clara Manchester, a former subsidiary employee; and on November 30, 2015 in the California Superior Court, County of Yolo by Tanner Maginnis, a current subsidiary assistant manager.  We believe our subsidiary has meritorious defenses to each of the claims in these lawsuits and we are prepared to vigorously defend the allegations therein.  There can be no assurance, however, that our subsidiary will be successful, and an adverse resolution of any one of these lawsuits could have a material adverse effect on our consolidated financial position and results of operations in the period in which one or all of these lawsuits are resolved.  We are not presently able to reasonably estimate potential losses, if any, related to the lawsuits.

In addition to the legal matters 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 4. MINE SAFETY DISCLOSURES

Not applicable.


18


PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Dividend Policy
Our Class A common stock is listed on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “PNRA.” There is no established public trading market for our Class B common stock. For the periods indicated, the following table sets forth the quarterly high and low sale prices per share of our Class A common stock as reported by Nasdaq.

 
For the fiscal year ended
 
December 29, 2015
 
December 30, 2014
 
High
 
Low
 
High
 
Low
First Quarter
$
176.62

 
$
153.68

 
$
190.38

 
$
164.46

Second Quarter
$
186.80

 
$
162.52

 
$
173.67

 
$
147.94

Third Quarter
$
204.48

 
$
174.51

 
$
162.72

 
$
143.35

Fourth Quarter
$
197.68

 
$
166.26

 
$
176.19

 
$
159.89


On February 17, 2016, the last sale price for our Class A common stock, as reported on the Nasdaq Global Select Market, was $207.03. As of February 17, 2016, we had 985 holders of record of our Class A common stock and 22 holders of record of our Class B common stock.
We periodically evaluate various options for the use of our capital, including the potential issuance of dividends. We have never paid cash dividends on our capital stock and we do not have current plans to do so.
Issuer Purchases of Equity Securities
The following table provides information regarding repurchases of our Class A common stock during the fourth quarter of fiscal 2015:

Period
Total Number of Shares Purchased (1)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
September 30, 2015 - October 27, 2015
228,114

 
$
189.41

 
228,100

 
$
365,244,708

October 28, 2015 - December 1, 2015
331,888

 
$
176.21

 
330,700

 
$
306,972,892

December 2, 2015 - December 29, 2015
124,255

 
$
189.17

 
124,251

 
$
283,468,868

Total
684,257

 
$
182.96

 
683,051

 
 

(1)
Includes 1,206 shares of Class A common stock surrendered by participants under the Panera Bread 2006 Stock Incentive Plan, as amended, as payment of applicable tax withholding on the vesting of restricted stock. Shares so surrendered by the participants are repurchased by us pursuant to the terms of those plans and the applicable award agreements and not pursuant to publicly announced share repurchase authorizations.

(2)
Share repurchase authorization of up to $600 million of our Class A common stock approved by the Board of Directors and announced on June 5, 2014 and increased to $750 million on April 15, 2015, 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 share repurchase authorization may be modified, suspended or discontinued by our Board of Directors at any time.


19


ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from our consolidated financial statements. The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto.

 
 For the fiscal year ended (1)
 
(in thousands, except per share and percentage information)
 
December 29, 2015
 
December 30, 2014
 
December 31, 2013
 
December 25, 2012
 
December 27, 2011
Revenues:
 
 
 
 
 
 
 
 
 
Bakery-cafe sales, net
$
2,358,794

 
$
2,230,370

 
$
2,108,908

 
$
1,879,280

 
$
1,592,951

Franchise royalties and fees
138,563

 
123,686

 
112,641

 
102,076

 
92,793

Fresh dough and other product sales to franchisees
184,223

 
175,139

 
163,453

 
148,701

 
136,288

Total revenues
2,681,580

 
2,529,195

 
2,385,002

 
2,130,057

 
1,822,032

Costs and expenses:
 
 
 
 
 
 
 
 
 
Bakery-cafe expenses:
 
 
 
 
 
 
 
 
 
Cost of food and paper products
$
715,502

 
$
669,860

 
$
625,622

 
$
552,580

 
$
470,398

Labor
754,646

 
685,576

 
625,457

 
559,446

 
484,014

Occupancy
169,998

 
159,794

 
148,816

 
130,793

 
115,290

Other operating expenses
334,635

 
314,879

 
295,539

 
256,029

 
216,237

Total bakery-cafe expenses
1,974,781

 
1,830,109

 
1,695,434

 
1,498,848

 
1,285,939

Fresh dough and other product cost of sales to franchisees
160,706

 
152,267

 
142,160

 
131,006

 
116,267

Depreciation and amortization
135,398

 
124,109

 
106,523

 
90,939

 
79,899

General and administrative expenses
142,904

 
138,060

 
123,335

 
117,932

 
113,083

Pre-opening expenses
9,089

 
8,707

 
7,794

 
8,462

 
6,585

Refranchising loss
17,108

 

 

 

 

Total costs and expenses
2,439,986

 
2,253,252

 
2,075,246

 
1,847,187

 
1,601,773

Operating profit
241,594

 
275,943

 
309,756

 
282,870

 
220,259

Interest expense
3,830

 
1,824

 
1,053

 
1,082

 
822

Other (income) expense, net
1,192

 
(3,175
)
 
(4,017
)
 
(1,208
)
 
(466
)
Income before income taxes
236,572

 
277,294

 
312,720

 
282,996

 
219,903

Income taxes
87,247

 
98,001

 
116,551

 
109,548

 
83,951

Net income
149,325

 
179,293

 
196,169

 
173,448

 
135,952

Less: Net loss attributable to noncontrolling interest
(17
)
 

 

 

 

Net income attributable to Panera Bread Company
$
149,342

 
$
179,293

 
$
196,169

 
$
173,448

 
$
135,952

Earnings per common share attributable to Panera Bread Company:
 
 
 
 
 
 
 
 
 
Basic
$
5.81

 
$
6.67

 
$
6.85

 
$
5.94

 
$
4.59

Diluted
$
5.79

 
$
6.64

 
$
6.81

 
$
5.89

 
$
4.55

Weighted average shares of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
25,685

 
26,881

 
28,629

 
29,217

 
29,601

Diluted
25,788

 
26,999

 
28,794

 
29,455

 
29,903

Consolidated balance sheet data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
241,886

 
$
196,493

 
$
125,245

 
$
297,141

 
$
222,640

Trade and other accounts receivable
115,786

 
106,653

 
84,602

 
86,262

 
54,709

Property and equipment, net
776,248

 
787,294

 
669,409

 
571,754

 
492,022

Total assets
1,475,318

 
1,390,686

 
1,180,862

 
1,268,163

 
1,027,322

Current liabilities
399,443

 
352,712

 
303,325

 
277,540

 
238,334

Long-term liabilities
574,594

 
301,790

 
177,645

 
168,704

 
133,912

Redeemable noncontrolling interest
3,981

 

 

 

 

Stockholders’ equity
497,300

 
736,184

 
699,892

 
821,919

 
655,076

Franchisee revenues (2)
$
2,477,963

 
$
2,281,755

 
$
2,175,155

 
$
1,981,674

 
$
1,828,188

Comparable net bakery-cafe sales percentage for (2)(3):
 
 
 
 
 
 
 
 
 
Company-owned bakery-cafes
3.0
%
 
1.4
%
 
2.6
%
 
6.5
%
 
4.9
%
Franchise-operated bakery-cafes
1.0
%
 
0.9
%
 
2.0
%
 
5.0
%
 
3.4
%
Bakery-cafe data:
 
 
 
 
 
 
 
 
 
Company-owned bakery-cafes open
901

 
925

 
867

 
809

 
740

Franchise-operated bakery-cafes open
1,071

 
955

 
910

 
843

 
801

Total bakery-cafes open
1,972

 
1,880

 
1,777

 
1,652

 
1,541


(1)
The fiscal year ended December 31, 2013, or fiscal 2013, was a 53 week year consisting of 371 days. All other fiscal years presented contained 52 weeks consisting of 364 days.
(2)
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 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 sales, and provides information that is relevant for comparison within the industry.
(3)
Comparable net bakery-cafe sales information above for the fiscal year ended December 30, 2014, or fiscal 2014, reflects a calendar basis comparison. We believe that calendar basis comparable net bakery-cafe sales percentages better reflects the performance of the business as it eliminates the impact of the extra week in fiscal 2013 and compares consistent calendar weeks. Comparable net bakery-cafe sales information above for fiscal 2013 reflects a comparative 53 week period in fiscal 2012 (52 weeks in fiscal 2012 plus week one of fiscal 2013).

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
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 include 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.
Our fiscal year ends on the last Tuesday in December. The fiscal years ended December 29, 2015 and December 30, 2014 each had 52 weeks. The fiscal year ended December 31, 2013 had 53 weeks with the fourth quarter comprising 14 weeks.

20


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
Overview
Total revenues increased 6.0 percent to $2,682 million in fiscal 2015 compared to $2,529 million in fiscal 2014.
Fiscal 2015 Company-owned comparable net bakery-cafe growth of 3.0 percent comprised of year-over-year average check growth of 2.2 percent and transaction growth of 0.8 percent.
Earnings per diluted share for fiscal 2015 was $5.79 compared to earnings per diluted share of $6.64 in fiscal 2014. Included in earnings per diluted share for fiscal 2015 were charges related to our refranchising initiative of $0.42 per diluted share. Included in earnings per diluted share for fiscal 2014 was a total benefit of $0.16 per diluted share from the favorable resolution of an insurance coverage matter, additional federal tax credits, and an increased deduction for domestic production activities, and a goodwill impairment charge of $0.05 per diluted share.
Completed the conversion of 304 bakery-cafes to Panera 2.0 during fiscal 2015, bringing the total number of conversions to 410.
Completed the refranchising of 75 Company-owned bakery-cafes during fiscal 2015 for proceeds of $47 million.
We returned $400 million to our stockholders in fiscal 2015 through share repurchases compared to $154 million in fiscal 2014.

21


Consolidated Statements of Income Margin Analysis
The following table sets forth the percentage relationship to total revenues, except where otherwise indicated, of certain items included in our Consolidated Statements of Income for the periods indicated. Percentages may not add due to rounding:
 
For the fiscal year ended
 
December 29, 2015
 
December 30, 2014
 
December 31, 2013
Revenues:
 
 
 
 
 
Bakery-cafe sales, net
88.0
%
 
88.2
 %
 
88.4
 %
Franchise royalties and fees
5.2

 
4.9

 
4.7

Fresh dough and other product sales to franchisees
6.9

 
6.9

 
6.9

Total revenue
100.0
%
 
100.0
 %
 
100.0
 %
Costs and expenses:
 
 
 
 
 
Bakery-cafe expenses (1):
 
 
 
 
 
Cost of food and paper products
30.3
%
 
30.0
 %
 
29.7
 %
Labor
32.0

 
30.7

 
29.7

Occupancy
7.2

 
7.2

 
7.1

Other operating expenses
14.2

 
14.1

 
14.0

Total bakery-cafe expenses
83.7

 
82.1

 
80.4

Fresh dough and other product cost of sales to franchisees (2)
87.2

 
86.9

 
87.0

Depreciation and amortization
5.0

 
4.9

 
4.5

General and administrative expenses
5.3

 
5.5

 
5.2

Pre-opening expenses
0.3

 
0.3

 
0.3

Refranchising loss
0.6

 

 

Total costs and expenses
91.0

 
89.1

 
87.0

Operating profit
9.0

 
10.9

 
13.0

Interest expense
0.1

 
0.1

 

Other (income) expense, net

 
(0.1
)
 
(0.2
)
Income before income taxes
8.8

 
11.0

 
13.1

Income taxes
3.3

 
3.9

 
4.9

Net income
5.6
%
 
7.1
 %
 
8.2
 %

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

22


Bakery-cafe Composition
The following table sets forth certain bakery-cafe data relating to Company-owned and franchise-operated bakery-cafes for the periods indicated:
 
For the fiscal year ended
 
December 29, 2015
 
December 30, 2014
 
December 31, 2013
Number of bakery-cafes:
 
 
 
 
 
Company-owned:
 
 
 
 
 
Beginning of period
925

 
867

 
809

Bakery-cafes opened
57

 
65

 
63

Bakery-cafes closed
(6
)
 
(7
)
 
(6
)
Bakery-cafes acquired from franchisees (1)

 

 
1

Bakery-cafes refranchised (2)
(75
)
 

 

End of period
901

 
925

 
867

Franchise-operated:
 
 
 
 
 
Beginning of period
955

 
910

 
843

Bakery-cafes opened
55

 
49

 
70

Bakery-cafes closed
(14
)
 
(4
)
 
(2
)
Bakery-cafes acquired by Company (1)

 

 
(1
)
Bakery-cafes refranchised (2)
75

 

 

End of period
1,071

 
955

 
910

System-wide:
 
 
 
 
 
Beginning of period
1,880

 
1,777

 
1,652

Bakery-cafes opened
112

 
114

 
133

Bakery-cafes closed
(20
)
 
(11
)
 
(8
)
End of period (3)
1,972

 
1,880

 
1,777


(1)
In April 2013, we acquired one bakery-cafe from a Florida franchisee.
(2)
In March 2015, we refranchised one bakery-cafe to an existing franchisee. In July 2015, we refranchised 29 bakery-cafes to an existing franchisee. In October 2015, we refranchised 45 bakery-cafes to a new franchisee.
(3)
Excluded from the number of total bakery-cafes were 28, 22, and six catering-only units, referred to as delivery hubs, as of the fiscal years ended December 29, 2015, December 30, 2014, and December 31, 2013, respectively.

Comparable Net Bakery-cafe Sales
Comparable net bakery-cafe sales growth for the periods indicated was as follows:
 
For the fiscal year ended
 
December 29, 2015
 
December 30, 2014 (1)
 
December 31, 2013 (2)
Company-owned
3.0
%
 
1.4
%
 
2.6
%
Franchise-operated
1.0
%
 
0.9
%
 
2.0
%
System-wide
1.9
%
 
1.1
%
 
2.3
%

(1) Comparable net bakery-cafe sales for fiscal 2014 reflects a calendar basis comparison. We believe that calendar basis comparable net bakery-cafe sales percentages better reflects the performance of the business as it eliminates the impact of the extra week in fiscal 2013 and compares consistent calendar weeks.

(2) Comparable net bakery-cafe sales for fiscal 2013 adjusted to reflect a comparative 53 week period in fiscal 2012 (52 weeks in fiscal 2012 plus week one of fiscal 2013).

23


The following table summarizes the composition of comparable Company-owned net bakery-cafe sales growth for the periods indicated:
 
For the fiscal year ended
 
December 29, 2015
 
December 30, 2014
 
December 31, 2013
Price
1.9
%
 
1.0
%
 
1.8
 %
Mix
0.3
%
 
0.3
%
 
2.0
 %
Average check
2.2
%
 
1.3
%
 
3.8
 %
 
 
 
 
 
 
Transactions
0.8
%
 
0.1
%
 
(1.2
)%
Company-owned comparable net bakery-cafe sales growth
3.0
%
 
1.4
%
 
2.6
 %
The increase in transactions during fiscal 2015 was due to a variety of factors, including, but not limited to, the effectiveness of our new marketing campaign and momentum from our strategic initiatives, partially offset by severe weather. Price growth in fiscal 2015 was 1.9%, as retail prices were adjusted in anticipation of labor and food cost inflation. The increase in mix in fiscal 2015 was primarily due to higher catering sales growth, more items per check, and increased sales of higher-priced items.

Fiscal 2016 Outlook

We are targeting full year fiscal 2016 diluted earnings per share growth of 2% to 5% when compared to full year fiscal 2015, excluding the impact of one-time charges. The diluted earnings per share target range is based on anticipated Company-owned comparable net bakery-cafe sales growth for fiscal 2016 of 3.5% to 4.5%. We also expect operating margin will be down 50 to 100 basis points when compared to fiscal 2015 which reflects startup and transition costs associated with our initiatives, excluding the impact of one-time charges.

In fiscal 2016, we anticipate opening 90 to 100 bakery-cafes system-wide and expect average weekly net sales for new Company-owned bakery-cafes of $45,000 to $47,000.

Results of Operations

Revenues

The following table summarizes revenues for the periods indicated (dollars in thousands):
 
For the fiscal year ended
 
 
 
December 29, 2015
 
December 30, 2014
 
December 31, 2013
 
% Change in 2015
 
% Change in 2014
Bakery-cafe sales, net
$
2,358,794

 
$
2,230,370

 
$
2,108,908

 
5.8
%
 
5.8
%
Franchise royalties and fees
138,563

 
123,686

 
112,641

 
12.0
%
 
9.8
%
Fresh dough and other product sales to franchisees
184,223

 
175,139

 
163,453

 
5.2
%
 
7.1
%
Total revenue
$
2,681,580

 
$
2,529,195

 
$
2,385,002

 
6.0
%
 
6.0
%
 
 
 
 
 
 
 
 
 
 
System-wide average weekly net sales
$
48,357

 
$
47,655

 
$
47,403

 
1.5
%
 
0.5
%
The growth in total revenues in fiscal 2015 compared to the prior fiscal year was primarily due to the opening of 112 new bakery-cafes system-wide and the 1.9 percent increase in system-wide comparable net bakery-cafe sales in fiscal 2015, partially offset by the refranchising of 75 bakery-cafes and the closure of 20 bakery-cafes system-wide in fiscal 2015.
The growth in total revenues in fiscal 2014 compared to the prior fiscal year was primarily due to the opening of 114 new bakery-cafes system-wide and the 1.1 percent increase in system-wide comparable net bakery-cafe sales in fiscal 2014 on a calendar basis, partially offset by the closure of 11 bakery-cafes system-wide in fiscal 2014 and the impact of the additional week in fiscal 2013, which contributed total revenues of approximately $35.0 million.

24


Bakery-cafe sales, net

The following table summarizes net bakery-cafe sales for the periods indicated (dollars in thousands):
 
For the fiscal year ended
 
 
 
 
 
December 29, 2015
 
December 30, 2014
 
December 31, 2013
 
% Change in 2015
 
% Change in 2014
Bakery-cafe sales, net
$
2,358,794

 
$
2,230,370

 
$
2,108,908

 
5.8
%
 
5.8
%
As a percentage of total revenue
88.0
%
 
88.2
%
 
88.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company-owned average weekly net sales
$
49,090

 
$
48,114

 
$
47,741

 
2.0
%
 
0.8
%
Company-owned number of operating weeks
48,041

 
46,356

 
44,173

 
3.6
%
 
4.9
%

The increase in net bakery-cafe sales in fiscal 2015 compared to the prior fiscal year was primarily due to the opening of 57 new Company-owned bakery-cafes and the 3.0 percent increase in Company-owned comparable net bakery-cafe sales in fiscal 2015, partially offset by the refranchising of 75 bakery-cafes and the closure of six Company-owned bakery-cafes in fiscal 2015.

The increase in net bakery-cafe sales in fiscal 2014 compared to the prior fiscal year was primarily due to the opening of 65 new Company-owned bakery-cafes and the 1.4 percent increase in Company-owned comparable net bakery-cafe sales in fiscal 2014 on a calendar basis, partially offset by the closure of seven Company-owned bakery-cafes in fiscal 2014 and the impact of the additional week in fiscal 2013, which contributed net bakery-cafes sales of approximately $29.8 million.
 
The increase in average weekly net sales for Company-owned bakery-cafes in fiscal 2015 compared to the prior fiscal year was primarily due to the impact of new marketing initiatives and price increases in fiscal 2015, partially offset by modestly lower average weekly sales in fiscal 2015 for bakery-cafes opened in fiscal 2014.

The increase in average weekly net sales for Company-owned bakery-cafes in fiscal 2014 compared to the prior fiscal year was primarily due to average check growth that resulted from retail price increases and our category management initiatives, partially offset by lower average weekly sales in fiscal 2014 for bakery-cafes opened in fiscal 2013.
Franchise royalties and fees

The following table summarizes franchise royalties and fees for the periods indicated (dollars in thousands):
 
For the fiscal year ended
 
 
 
 
 
December 29, 2015
 
December 30, 2014
 
December 31, 2013
 
% Change in 2015
 
% Change in 2014
Franchise royalties
$
134,576

 
$
120,125

 
$
110,461

 
12.0
%
 
8.7
%
Franchise fees
3,987

 
3,561

 
2,180

 
12.0
%
 
63.3
%
Total
$
138,563

 
$
123,686

 
$
112,641

 
12.0
%
 
9.8
%
 
 
 
 
 
 
 
 
 
 
Franchise-operated average weekly net sales
$
47,680

 
$
47,215

 
$
47,079

 
1.0
%
 
0.3
%
Franchise-operated number of operating weeks
51,970

 
48,327

 
46,202

 
7.5
%
 
4.6
%

The increase in franchise royalty and fee revenues in fiscal 2015 compared to the prior fiscal year was primarily due to the opening of 55 franchise-operated bakery-cafes, the refranchising of 75 bakery-cafes, increased information technology fees, and the 1.0 percent increase in franchise-operated comparable net bakery-cafe sales in fiscal 2015, partially offset by the closure of 14 franchise-operated bakery-cafes in fiscal 2015.

The increase in franchise royalty and fee revenues in fiscal 2014 compared to the prior fiscal year was primarily due to the opening of 49 franchise-operated bakery-cafes, increased information technology fees, and the 0.9 percent increase in franchise-operated comparable net bakery-cafe sales in fiscal 2014 on a calendar basis, partially offset by the impact of the additional week in fiscal 2013, which contributed franchise royalties and fees of approximately $2.4 million.


25


As of December 29, 2015, there were 1,071 franchise-operated bakery-cafes open and we have received commitments to open 128 additional franchise-operated bakery-cafes. The timetables for opening these bakery-cafes are established in their respective Area Development Agreements, or ADAs, with franchisees, which provide for the majority of these bakery-cafes to open within the next 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 locations 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 requirements under its ADAs and franchise agreements if we determine that such action is warranted under the particular circumstances.

Fresh dough and other product sales to franchisees

The following table summarizes fresh dough and other product sales to franchisees for the periods indicated (dollars in thousands):
 
For the fiscal year ended
 
 
 
 
 
December 29, 2015
 
December 30, 2014
 
December 31, 2013
 
% Change in 2015
 
% Change in 2014
Fresh dough and other product sales to franchisees
$
184,223

 
$
175,139

 
$
163,453

 
5.2
%
 
7.1
%
The increase in fresh dough and other product sales to franchisees in fiscal 2015 compared to the prior fiscal year was primarily due to the opening of 55 franchise-operated bakery-cafes, the refranchising of 75 bakery-cafes, and the 1.0 percent increase in franchise-operated comparable net bakery-cafe sales in fiscal 2015.
The increase in fresh dough and other product sales to franchisees in fiscal 2014 compared to the prior fiscal year was primarily due to the opening of 49 franchise-operated bakery-cafes and the 0.9 percent increase in franchise-operated comparable net bakery-cafe sales on a calendar basis, partially offset by the impact of the additional week in fiscal 2013, which contributed fresh dough and other product sales to franchisees of approximately $2.8 million.
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 Income.

Cost of food and paper products

The following table summarizes cost of food and paper products for the periods indicated (dollars in thousands):
 
For the fiscal year ended
 
 
 
 
 
December 29, 2015
 
December 30, 2014
 
December 31, 2013
 
% Change in 2015
 
% Change in 2014
Cost of food and paper products
$
715,502

 
$
669,860

 
$
625,622

 
6.8
%
 
7.1
%
As a percentage of bakery-cafe sales, net
30.3
%
 
30.0
%
 
29.7
%
 
 
 
 
The increase in the cost of food and paper products in fiscal 2015 as a percentage of net bakery-cafe sales was primarily due to food cost inflation and a shift in product mix towards higher ingredient cost products, partially offset by improved leverage of our fresh dough manufacturing costs due to an increase in bakery-cafes per fresh dough facility.
The increase in the cost of food and paper products in fiscal 2014 as a percentage of net bakery-cafe sales was primarily due to higher ingredient costs, including, but not limited to, increases in the costs of butter, avocados, and bacon, partially offset by improved leverage of our fresh dough manufacturing costs due to an increase in bakery-cafes per fresh dough facility.

26



Labor

The following table summarizes labor expense for the periods indicated (dollars in thousands):
 
For the fiscal year ended
 
 
 
 
 
December 29, 2015
 
December 30, 2014
 
December 31, 2013
 
% Change in 2015
 
% Change in 2014
Labor expense
$
754,646

 
$
685,576

 
$
625,457

 
10.1
%
 
9.6
%
As a percentage of bakery-cafe sales, net
32.0
%
 
30.7
%
 
29.7
%
 
 
 
 
The increase in labor expense in fiscal 2015 as a percentage of net bakery-cafe sales was primarily a result of increased labor supporting ongoing operational initiatives and wage inflation.
The increase in labor expense in fiscal 2014 as a percentage of net bakery-cafe sales 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.

Occupancy

The following table summarizes occupancy cost for the periods indicated (dollars in thousands):
 
For the fiscal year ended
 
 
 
 
 
December 29, 2015
 
December 30, 2014
 
December 31, 2013
 
% Change in 2015
 
% Change in 2014
Occupancy
$
169,998

 
$
159,794

 
$
148,816

 
6.4
%
 
7.4
%
As a percentage of bakery-cafe sales, net
7.2
%
 
7.2
%
 
7.1
%
 
 
 
 
Occupancy costs in fiscal 2015 as a percentage of net bakery-cafe sales remained consistent compared to fiscal 2014 as modestly higher common area maintenance costs were offset by improved leverage from higher comparable net bakery-cafe sales.
The increase in occupancy costs in fiscal 2014 as a percentage of net bakery-cafe sales was primarily a result of modestly higher average occupancy costs in new bakery-cafes and higher real estate taxes.

Other operating expenses

The following table summarizes other operating expenses for the periods indicated (dollars in thousands):
 
For the fiscal year ended
 
 
 
 
 
December 29, 2015
 
December 30, 2014
 
December 31, 2013
 
% Change in 2015
 
% Change in 2014
Other operating expenses
$
334,635

 
$
314,879

 
$
295,539

 
6.3
%
 
6.5
%
As a percentage of bakery-cafe sales, net
14.2
%
 
14.1
%
 
14.0
%
 
 
 
 

The increase in other operating expenses in fiscal 2015 as a percentage of net bakery-cafe sales was primarily the result of increased credit card processing expenses, partially offset by a recovery received from a vendor.
The increase in other operating expenses in fiscal 2014 as a percentage of net bakery-cafe sales was primarily the result of increased marketing expense, partially offset by lower controllable expenses.

27



Fresh dough and other product cost of sales to franchisees

The following table summarizes fresh dough and other product cost of sales to franchisees for the periods indicated (dollars in thousands):
 
For the fiscal year ended
 
 
 
 
 
December 29, 2015
 
December 30, 2014
 
December 31, 2013
 
% Change in 2015
 
% Change in 2014
Fresh dough and other product cost of sales to franchisees
$
160,706

 
$
152,267

 
$
142,160

 
5.5
%
 
7.1
%
As a percentage of fresh dough and other product sales to franchisees
87.2
%
 
86.9
%
 
87.0
%
 
 
 
 
The increase in fresh dough and other product cost of sales to franchisees in fiscal 2015 as a percentage of fresh dough and other product sales to franchisees was primarily the result of higher year-over-year sales of zero margin fresh produce to franchisees, partially offset by modestly lower wheat and fuel costs.
The decrease in fresh dough and other product cost of sales to franchisees in fiscal 2014 as a percentage of fresh dough and other product sales to franchisees was primarily the result of modestly lower wheat costs, partially offset by higher year-over-year sales of zero margin fresh produce to franchisees.

Depreciation and amortization

The following table summarizes depreciation and amortization for the periods indicated (dollars in thousands):
 
For the fiscal year ended
 
 
 
 
 
December 29, 2015
 
December 30, 2014
 
December 31, 2013
 
% Change in 2015
 
% Change in 2014
Depreciation and amortization
$
135,398

 
$
124,109

 
$
106,523

 
9.1
%
 
16.5
%
As a percentage of total revenues
5.0
%
 
4.9
%
 
4.5
%
 
 
 
 
The increase in depreciation and amortization as a percentage of total revenues in fiscal 2015 was primarily the result of increased depreciation on investments in bakery-cafes and support centers to support ongoing operational initiatives, partially offset by the cessation of depreciation on assets classified as held for sale.
The increase in depreciation and amortization as a percentage of total revenues in fiscal 2014 was primarily the result of increased depreciation on investments in bakery-cafes and support centers to support ongoing operational initiatives.

General and administrative expenses

The following table summarizes general and administrative expenses for the periods indicated (dollars in thousands):
 
For the fiscal year ended
 
 
 
 
 
December 29, 2015
 
December 30, 2014
 
December 31, 2013
 
% Change in 2015
 
% Change in 2014
General and administrative expenses
$
142,904

 
$
138,060

 
$
123,335

 
3.5
%
 
11.9
%
As a percentage of total revenues
5.3
%
 
5.5
%
 
5.2
%
 
 
 
 
The decrease in general and administrative expenses in fiscal 2015 as a percentage of total revenues was primarily a result of lower corporate overhead expenses reflecting our previously announced initiative to reduce core general and administrative expenses in fiscal 2015.
The increase in general and administrative expenses in fiscal 2014 as a percentage of total revenues was primarily due to an increase in headcount to support ongoing operational initiatives, partially offset by lower incentive compensation.

28



Refranchising loss

In February 2015, we announced a plan to refranchise approximately 50 to 150 bakery-cafes by the end of fiscal 2015. As of December 29, 2015, we had completed the refranchising of 75 bakery-cafes and classified as held for sale the assets and certain liabilities of 35 bakery-cafes we expect to sell during the next 12 months.

The following table summarizes activity associated with the refranchising initiative for fiscal 2015 (dollars in thousands):
 
 
For the fiscal year ended December 29, 2015
Loss on assets held for sale
 
$
10,999

Impairment of long-lived assets and lease termination costs
 
5,461

Professional fees and severance
 
1,088

Gain on sale of bakery-cafes
 
(440
)
Refranchising loss
 
$
17,108


During fiscal 2015, we recorded losses on assets held for sale of $11.0 million. We also recognized impairment losses and lease termination costs totaling $5.5 million during fiscal 2015 related to certain under-performing bakery-cafes. On March 3, 2015, we sold substantially all of the assets of one bakery-cafe to an existing franchisee for cash proceeds of approximately $3.2 million, which resulted in a gain on sale of approximately $2.6 million. On July 14, 2015, we sold substantially all of the assets of 29 bakery-cafes in the Boston market to an existing franchisee for a purchase price of approximately $19.6 million, including $0.5 million for inventory on hand, with $2.0 million held in escrow for certain holdbacks, and recognized a loss on sale of $0.6 million. On October 7, 2015, we sold substantially all of the assets of 45 bakery-cafes in the Seattle and Northern California markets to a new franchisee for a purchase price of approximately $26.8 million, including $0.9 million for inventory on hand, and recognized a loss on sale of $1.6 million.
Other (income) expense, net
Other (income) expense, net in fiscal 2015 decreased to $1.2 million of expense from $3.2 million of income in fiscal 2014. Other (income) expense, net for fiscal 2015 was primarily comprised of immaterial items. Other (income) expense, net for fiscal 2014 was primarily comprised of a $3.2 million benefit from a favorable resolution of an insurance coverage matter and other immaterial items, partially offset by a goodwill impairment charge of $2.1 million.
Other (income) expense, net in fiscal 2014 decreased to $3.2 million of income from $4.0 million of income in fiscal 2013. Other (income) expense, net for fiscal 2014 was primarily comprised of a $3.2 million benefit from a favorable resolution of an insurance coverage matter and other immaterial items, partially offset by a goodwill impairment charge of $2.1 million. Other (income) expense, net for fiscal 2013 was primarily comprised of a $2.2 million benefit from favorable resolution of legal and sales and use tax matters, and immaterial items.
Income taxes

The following table summarizes income taxes for the periods indicated (dollars in thousands):
 
For the fiscal year ended
 
 
 
 
 
December 29, 2015
 
December 30, 2014
 
December 31, 2013
 
% Change in 2015
 
% Change in 2014
Income taxes
$
87,247

 
$
98,001

 
$
116,551

 
(11.0
)%
 
(15.9
)%
Effective tax rate
36.9
%
 
35.3
%
 
37.3
%
 
 
 
 
The increase in the effective tax rate from fiscal 2014 to fiscal 2015 was primarily driven by certain discrete income tax benefits reported during fiscal 2014 related to additional federal and state tax credits and an increased deduction for domestic production activities. The decrease in the effective tax rate from fiscal 2013 to fiscal 2014 was primarily driven by certain discrete income tax benefit items reported during fiscal 2014 related to additional federal and state tax credits and an increased deduction for domestic production activities.


29


Liquidity and Capital Resources
Cash and cash equivalents were $241.9 million at December 29, 2015 compared to $196.5 million at December 30, 2014. This $45.4 million increase was primarily a result of cash generated from operations of $318.0 million, proceeds from the issuance of long-term debt of $299 million, and proceeds from refranchising, sale-leaseback transactions, and the sale of property and equipment totaling $58.5 million, partially offset by the use of $405.5 million to repurchase shares of our Class A common stock and capital expenditures of $223.9 million. 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 Class A 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 to support ongoing operational initiatives.
Excluding assets held for sale and liabilities associated with assets held for sale, we had positive working capital of $77.6 million at December 29, 2015 compared to positive working capital of $53.5 million at December 30, 2014. The increase in working capital resulted primarily from the previously described increase in cash and cash equivalents of $45.4 million, an increase in trade and other accounts receivable of $9.1 million, and an increase in prepaid expenses and other of $7.9 million, partially offset by an increase in accrued expenses of $26.3 million and the $17.2 million balance at December 29, 2015 of the current portion of long-term debt. 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 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 fiscal year ended
Cash provided by (used in):
 
December 29, 2015
 
December 30, 2014
 
December 31, 2013
Operating activities
 
$
318,045

 
$
335,079

 
$
348,417

Investing activities
 
(165,415
)
 
(211,317
)
 
(188,307
)
Financing activities
 
(107,237
)
 
(52,514
)
 
(332,006
)
Net increase (decrease) in cash and cash equivalents
 
$
45,393

 
$
71,248

 
$
(171,896
)

Operating Activities
Cash provided by operating activities was $318.0 million, $335.1 million, and $348.4 million in fiscal 2015, fiscal 2014, and fiscal 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 in fiscal 2015 consisted primarily of net income adjusted for non-cash expenses, including charges related to our refranchising initiative, and an increase in accrued expenses, partially offset by a decrease in the net deferred income tax liability and an increase in prepaid expenses and other. The increase in accrued expenses was primarily due to an increase in the balance of outstanding gift cards. The decrease in the net deferred income tax liability relates primarily to tax depreciation. The increase in prepaid expenses was primarily due to an increase in prepaid insurance amounts.
Cash provided by operating activities in fiscal 2014 consisted primarily of net income adjusted for non-cash expenses and an increase in accrued expenses, partially offset by an increase in trade and other accounts receivable. The increase in accrued expenses was primarily due to an increase in the balance of outstanding gift cards. The increase in trade and other accounts receivable was primarily due to an increase in refundable income taxes due to the timing of payments and an increase in other receivables.
Cash provided by operating activities in fiscal 2013 consisted primarily of net income adjusted for non-cash expenses and an increase in accrued expenses and accounts payable. The increase in accrued expenses was primarily due to an increase in the balance of outstanding gift cards. The increase in accounts payable was primarily due to the timing of payments.

30


Investing Activities
Cash used in investing activities was $165.4 million, $211.3 million, and $188.3 million in fiscal 2015, fiscal 2014, and fiscal 2013, respectively. Investing activities consists primarily of capital expenditures, proceeds from the refranchising of Company-owned bakery-cafes, the sale and leaseback of bakery-cafes, and the sale of property and equipment.
Capital Expenditures
Capital expenditures are the largest ongoing component of our investing activities. New and existing bakery-cafe expenditures include costs related to the opening of bakery-cafes and delivery hubs, to remodel and maintain bakery-cafes, and to upgrade systems and equipment in bakery-cafes. Fresh dough facility expenditures include costs related to the opening of new fresh dough facilities and costs to expand, remodel and maintain existing facilities. Support center expenditures primarily include investments in technology infrastructure to create the capabilities needed to support ongoing operational initiatives and costs related to enterprise systems and other capital needs. Capital expenditures, for the periods indicated, were as follows (in thousands):

 
 
For the fiscal year ended
 
 
December 29, 2015
 
December 30, 2014
 
December 31, 2013
New bakery-cafes
 
$
115,552

 
$
109,941

 
$
90,409

Existing bakery-cafes
 
59,081

 
57,915

 
63,175

Fresh dough facilities
 
12,175

 
12,178

 
11,461

Support centers and IT infrastructure
 
37,124

 
44,183

 
26,965

Total
 
$
223,932

 
$
224,217

 
$
192,010


Our capital requirements 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 pace of expansion, real estate markets, site locations, the nature of the arrangements negotiated with landlords, and the extent of operational initiatives. 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 currently anticipate capital expenditures of $200 million to $225 million in fiscal 2016.
Sale-Leaseback Transactions
During fiscal 2015, fiscal 2014, and fiscal 2013, we completed sale-leaseback transactions for four, six, and three Company-owned bakery-cafes, respectively, resulting in cash proceeds of $10.1 million, $12.9 million, and $6.1 million, respectively.
Financing Activities
Cash used in financing activities was $107.2 million, $52.5 million, and $332.0 million in fiscal 2015, fiscal 2014, and fiscal 2013, respectively. Financing activities in fiscal 2015 consisted primarily of $405.5 million used to repurchase shares of our Class A common stock, partially offset by $299.1 million of proceeds from term loan borrowings. Financing activities in fiscal 2014 consisted primarily of $159.5 million used to repurchase shares of our Class A common stock, partially offset by $100.0 million of proceeds from term loan borrowings. Financing activities in fiscal 2013 consisted primarily of $339.4 million used to repurchase shares of our Class A common stock and $4.1 million for the payment of deferred acquisition holdbacks, partially offset by $8.1 million related to the benefit from stock-based compensation.
Share Repurchases
On August 23, 2012, our Board of Directors 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 repurchased shares on the open market under a Rule 10b5-1 plan. During fiscal 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 $87.5 million. During fiscal 2013 we purchased 1,992,250 shares under the 2012 repurchase authorization, at an average price of $166.73 per share, for an aggregate purchase price of $332.1 million. On June 5, 2014, our Board of Directors terminated this repurchase authorization.
On June 5, 2014, our Board of Directors 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

31


treasury stock. The 2014 repurchase authorization may be modified, suspended, or discontinued by our Board at any time. During fiscal 2014, we repurchased 427,521 shares under the 2014 repurchase authorization, at an average price of $155.78 per share, for an aggregate purchase price of approximately $66.6 million. In total, during fiscal 2014, we repurchased 941,878 shares under the 2012 and 2014 repurchase authorizations, at an average price of $163.62 per share, for an aggregate purchase price of approximately $154.1 million.
On April 15, 2015, our Board of Directors approved an increase of the 2014 repurchase authorization to $750 million. During fiscal 2015, we repurchased 2,201,719 shares under the 2014 repurchase authorization, at an average price of $181.65 per share, for an aggregate purchase price of approximately $399.9 million. As of December 29, 2015, we had repurchased a total of 2,629,240 shares of our Class A common stock under this repurchase program, at an average price of $177.43 per share, for an aggregate purchase price of approximately $466.5 million. There was approximately $283.5 million available under the 2014 repurchase authorization as of December 29, 2015.
We have historically repurchased shares of our Class A common stock from participants of the Panera Bread 2006 Stock Incentive Plan, as amended, and the Panera Bread 2015 Stock Incentive Plan, 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 fiscal 2015, we repurchased 28,018 shares of Class A common stock surrendered by participants of the Plans at an average price of $196.78 per share for an aggregate purchase price of approximately $5.5 million. During fiscal 2014, we repurchased 35,461 shares of Class A common stock surrendered by participants of the Plans at an average price of $151.17 per share for an aggregate purchase price of approximately $5.4 million. During fiscal 2013, we repurchased 41,601 shares of Class A common stock surrendered by participants of the Plans at an average price of $172.79 per share for an aggregate purchase price of $7.2 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.
Term Loans
On June 11, 2014, we entered into a term loan agreement, or the 2014 Term Loan Agreement, with Bank of America, N.A., as administrative agent, and other lenders party thereto. The 2014 Term Loan Agreement provides for an unsecured term loan in the amount of $100 million, or the 2014 Term Loan. The 2014 Term Loan is scheduled to mature on June 11, 2019, subject to acceleration upon certain specified events of default, including breaches of representations or covenants, failure to pay other material indebtedness or a change of control, as defined in the 2014 Term Loan Agreement. The 2014 Term Loan Agreement also allows us from time to time to request that the 2014 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.
On July 16, 2015, we entered into a term loan agreement, or the 2015 Term Loan Agreement, with Bank of America, N.A., as administrative agent, and other lenders party thereto. The 2015 Term Loan Agreement provides for an unsecured term loan in the amount of $300 million, or the 2015 Term Loan. The 2015 Term Loan is scheduled to mature on July 16, 2020, subject to acceleration upon certain specified events of default, including breaches of representations or covenants, failure to pay other material indebtedness or a change of control, as defined in the 2015 Term Loan Agreement.
Each of the 2014 Term Loan and 2015 Term Loan bears interest at a rate equal to, at our option, (1) the Eurodollar rate 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) the Eurodollar rate 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 2014 Term Loan Agreement and the 2015 Term Loan Agreement are guaranteed by certain of our direct and indirect subsidiaries. As of December 29, 2015, there was $100.0 million and $296.3 million outstanding under the 2014 Term Loan Agreement and 2015 Term Loan Agreement, respectively.
On July 16, 2015, in order to hedge the variability in cash flows from changes in benchmark interest rates, we entered into two forward-starting interest rate swap agreements with an aggregate initial notional value of $242.5 million. The forward-starting interest rate swaps have been designated as cash flow hedging instruments.
Installment Payment Agreement
On September 15, 2015, we entered into a Master Installment Payment Agreement, or the Master IPA, with PNC Equipment Finance, LLC, or PNC, pursuant to which PNC financed our purchase of hardware, software, and services associated with new storage virtualization and disaster recovery systems. The Master IPA provides for a secured note payable in the amount of $12.7 million, or the 2015 Note Payable, payable in five annual installments beginning November 1, 2015 and each September 1st thereafter. As of December 29, 2015, there was $10.1 million outstanding under the Master IPA.

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Revolving Credit Agreements
On November 30, 2012, we entered into a credit agreement, or the 2012 Credit Agreement, with Bank of America, N.A. and other lenders party thereto. The 2012 Credit Agreement provided for an unsecured revolving credit facility of $250 million that would have become due on November 30, 2017. As of December 30, 2014, we had no balance outstanding under the 2012 Credit Agreement. On July 16, 2015, we terminated the 2012 Credit Agreement and entered into a new credit agreement, or the 2015 Credit Agreement, with Bank of America, N.A., as administrative agent, swing line lender and L/C issuer, and each lender from time to time party thereto. The 2015 Credit Agreement provides for an unsecured revolving credit facility of $250 million that will become due on July 16, 2020, subject to acceleration upon certain specified events of default, including breaches of representations or covenants, failure to pay other material indebtedness or a change of control, as defined in the 2015 Credit Agreement. We may select interest rates under the credit facility equal to, at our option, (1) the Eurodollar rate 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) the Eurodollar rate 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 2015 Credit Agreement are guaranteed by certain of our direct and indirect subsidiaries. The 2015 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. As of December 29, 2015, we had no balance outstanding under the 2015 Credit Agreement.
The 2014 Term Loan Agreement, 2015 Term Loan Agreement and 2015 Credit Agreement contain customary affirmative and negative covenants, including covenants limiting liens, dispositions, fundamental changes, investments, indebtedness, and certain transactions and payments. In addition, such term loan and credit agreements contain various financial covenants that, among other things, require us 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. As of December 29, 2015, we were, and expect to remain, in compliance with all covenant requirements.

Critical Accounting Policies & 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 generally accepted accounting principles in the United States of America, or 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. We consider our policies on accounting for revenue recognition, valuation of goodwill, self-insurance, income taxes, lease obligations, and 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 that occurred during fiscal 2015.
Revenue Recognition
We recognize revenues from net bakery-cafe sales upon delivery of the related food and other products to the customer. Revenues from fresh dough and other product sales to franchisees are recorded upon delivery of the fresh dough and other products to franchisees. Sales of soup and other branded products sold outside our bakery-cafes are recognized upon delivery to customers. Royalties are generally paid weekly based on a percentage of net franchisee sales specified in each ADA (generally five percent of net sales). Royalties are recognized as revenue in the period in which the sales are reported to have occurred based on contractual royalty rates applied to the net franchise sales. Franchise fees are generally the result of the sale of area development rights and the sale of individual franchise locations to third parties. The initial franchise fee is typically $35,000 per bakery-cafe to be developed under the ADA. Of this fee, $5,000 is generally paid at the time of signing of the ADA and is recognized as revenue when it is received as it is non-refundable and we have to perform no other service to earn this fee. The remainder of the fee is paid at the time an individual franchise agreement is signed and is recognized as revenue upon the opening of the corresponding bakery-cafe. Franchise fees also include information technology-related fees for access to and the usage of proprietary systems.
We maintain a customer loyalty program through which customers earn rewards based on registration in the program and purchases at our bakery-cafes. We record the full retail value of loyalty program rewards as a reduction of net bakery-cafe sales and a liability

33


is established within accrued expenses as rewards are earned while considering historical redemption rates. Fully earned rewards generally expire if unredeemed after 60 days. Partially earned awards generally expire if inactive for a period of one year. Costs associated with coupons are classified as a reduction of net bakery-cafe sales in the period in which the coupon is redeemed.
We sell gift cards which do not expire and from which we do not deduct non-usage fees from outstanding gift card balances. Gift cards are redeemable at both Company-owned and franchise-operated bakery-cafes. Gift cards sold by either Company-owned bakery-cafes or through wholesalers and redeemed at franchise-operated bakery-cafes reduce our gift card liability but do not result in the recognition of revenue. When gift cards are redeemed at Company-owned bakery-cafes, we recognize revenue and reduce the gift card liability. When we determine the likelihood of the gift card being redeemed by the customer is remote ("gift card breakage"), based upon our specific historical redemption patterns, and there is no legal obligation to remit the unredeemed gift card balance in the relevant jurisdiction, gift card breakage is recorded as a reduction of general and administrative expenses in the Consolidated Statements of Income; however, such gift cards will continue to be honored. We recognized gift card breakage as a reduction of general and administrative expenses of $6.9 million for fiscal 2015, $4.9 million for fiscal 2014, and $2.8 million for fiscal 2013. Incremental direct costs related to the sale of gift cards are deferred until the associated gift card is redeemed or breakage is deemed appropriate. These deferred incremental direct costs are reflected as a reduction of the unredeemed gift card liability, net which is a component of accrued expenses in the Consolidated Balance Sheets and, when recognized, as a reduction of bakery-cafe sales, net in the Consolidated Statements of Income.
Valuation of Goodwill
We evaluate goodwill for impairment on an annual basis during our fourth quarter, or more frequently if circumstances indicate impairment might exist. Goodwill is evaluated for impairment through the comparison of fair value of our reporting units to their carrying values. When evaluating goodwill for impairment, we may first perform an assessment of qualitative factors to determine if the fair value of the reporting unit is more-likely-than-not greater than its carrying amount. If, based on the review of the qualitative factors, we determine it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying value, we bypass the required two-step impairment test. If we do not perform a qualitative assessment or if the fair value of the reporting unit is not more-likely- than-not greater than its carrying value, we perform a quantitative assessment and calculate the estimated fair value of the reporting unit. If the carrying value of the reporting unit exceeds the estimated fair value, there is an indication that impairment may exist. The amount of impairment is determined by comparing the implied fair value of the reporting unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill is less than the recorded goodwill, we would record an impairment loss for the difference.
The fair value of a reporting unit is the price a willing buyer would pay for the reporting unit and is estimated using a discounted cash flow model. The discounted cash flow estimate is based upon, among other things, certain assumptions about expected future operating performance, such as revenue growth rates, operating margins, risk-adjusted discount rates, and future economic and market conditions.
Our decision to perform a qualitative assessment for an individual reporting unit in a given year is influenced by a number of factors, including the size of the reporting unit's goodwill, the significance of the excess of the reporting unit's estimated fair value over carrying value at the last quantitative assessment date, and the amount of time in between quantitative fair value assessments. During fiscal 2015, as part of our annual goodwill impairment analysis, we performed the quantitative assessment for our total goodwill balance.
The fair value of a reporting unit is the price a willing buyer would pay for the reporting unit and is estimated using a discounted cash flow model. Our discounted cash flow estimates are based upon, among other things, certain assumptions about expected future operating performance, such as revenue growth rates, operating margins, risk-adjusted discount rates, and future economic and market conditions.
For fiscal 2015, we determined the fair value of our reporting units were significantly in excess of their carrying values. Accordingly, we did not recognize any impairment charges during fiscal 2015.
Self-Insurance
We are self-insured for a significant portion of our workers’ compensation, group health, and general, auto, and property liability insurance, with varying levels of deductibles of as much as $0.8 million of individual claims, depending on the type of claim. We also purchase aggregate stop-loss and/or layers of loss insurance in many categories of loss. We utilize third party actuarial experts’ estimates of expected losses based on statistical analyses of our actual historical data and historical industry data to determine required self-insurance reserves. The assumptions are closely reviewed, monitored, and adjusted when warranted by changing circumstances. These estimated liabilities could be affected if actual experience related to the number of claims and cost per claim

34


differs from these assumptions and historical trends. Based on information known at December 29, 2015, we believe we have provided adequate reserves for our self-insurance exposure. We held self-insurance reserves of $37.2 million as of December 29, 2015 and $32.6 million as of December 30, 2014, which were included in accrued expenses in the Consolidated Balance Sheets.
Income Taxes
We are subject to income taxes in the United States and Canada. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. We assess the income tax position and record the liabilities for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date.
Our provision for income taxes is determined in accordance with the accounting guidance for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if we determine it is more likely than not that all or some portion of the deferred tax asset will not be recognized. Based on this assessment, we have recorded a valuation allowance of $5.3 million and $4.6 million as of December 29, 2015 and December 30, 2014, respectively, against all Canadian deferred tax assets, including the net operating loss carryforwards of the Company's Canadian operations.
Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, the refinement of an estimate or changes in tax laws. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact our provision for income taxes in the period in which such determination is made. Our provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.
Our effective tax rates have differed from the statutory tax rate primarily due to the impact of state taxes, partially offset by favorable U.S. rules related to donations of inventory to charitable organizations and domestic manufacturing. Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets, or changes in tax laws, regulations, accounting principles, or interpretations thereof. In addition, we are subject to the routine examination of our income tax returns and other tax filings by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our reserve for income taxes.
Lease Obligations
We lease nearly all of our bakery-cafes, fresh dough facilities and trucks, and support centers. Each lease is evaluated to determine whether the lease will be accounted for as an operating or capital lease. The term used for this evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty.
For leases that contain rent escalations, we record the total rent payable during the lease term, as described above, on a straight-line basis over the term of the lease, and record the difference between the minimum rent paid and the straight-line rent as a lease obligation. Many of our leases contain provisions that require additional rental payments based upon net bakery-cafe sales volume, which we refer to as contingent rent. Contingent rent is accrued each period as the liability is incurred, in addition to the straight-line rent expense noted above. This results in variability in occupancy expense over the term of the lease in bakery-cafes where we pay contingent rent.
In addition, we record landlord allowances and incentives received as deferred rent in the Consolidated Balance Sheets based on their short-term or long-term nature. These landlord allowances are amortized over the reasonably assured lease term as a reduction of rent expense. Additionally, payments made by us and reimbursed by the landlord for improvements deemed to be lessor assets have no impact on the Statements of Income. We consider improvements to be a lessor asset if all of the following criteria are met:
the lease specifically requires the lessee to make the improvement;
the improvement is fairly generic;
the improvement increases the fair value of the property to the lessor; and

35


the useful life of the improvement is longer than the lease term.
We report the period to period change in the landlord receivable within the operating activities section of the Consolidated Statements of Cash Flows.
Management makes judgments regarding the probable term for each lease, which can impact the classification and accounting for a lease as capital or operating, the rent holiday, and/or escalations in payments that are taken into consideration when calculating straight-line rent and the term over which leasehold improvements for each bakery-cafe, fresh dough facility, and support center is amortized. These judgments may produce materially different amounts of depreciation, amortization, and rent expense than would be reported if different assumed lease terms were used.
Impairment of Long-Lived Assets
We evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance of an asset may not be recoverable. When appropriate, we compare anticipated undiscounted cash flows from the related long-lived assets of a bakery-cafe or fresh dough facility with their respective carrying values to determine if the long-lived assets are recoverable. If the sum of the anticipated undiscounted cash flows for the long-lived assets is less than their carrying value, an impairment loss would be recognized for the difference between the anticipated discounted cash flows, which approximates fair value, and the carrying value of the long-lived assets. Our estimates of cash flow were based upon, among other things, certain assumptions about expected future operating performance, such as revenue growth rates, operating margins, risk-adjusted discount rates, and future economic and market conditions. Our estimates of cash flow may differ from actual cash flow due to, among other things, economic conditions, changes to our business model or changes in operating performance. The long-term financial forecasts that we utilize represent the best estimate that we have at this time and we believe that its underlying assumptions are reasonable.
We recognized impairment losses of $3.8 million, $0.9 million, and $0.8 million during fiscal 2015, fiscal 2014, and fiscal 2013, respectively, related to distinct under-performing Company-owned bakery-cafes. For fiscal 2015, the impairment loss was recorded in refranchising loss in the Consolidated Statements of Income. For fiscal 2014 and fiscal 2013, these impairment losses were recorded in other operating expenses in the Consolidated Statements of Income.

Contractual Obligations and Other Commitments
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; principal and interest payments related to the term loan borrowings; 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 terms 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 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 at a date other than the date of initial occupancy. As of December 29, 2015, we expect cash expenditures under these lease obligations, purchase obligations, term loan borrowings, and uncertain tax positions to be as follows for the periods indicated (in thousands):

 
 
Less than
1 year
 
1-3
years
 
3-5
years
 
More than
5 years
 
Total
Operating leases (1)
 
$
149,882

 
$
293,471

 
$
269,024

 
$
659,087

 
$
1,371,464

Capital lease obligations (1)
 
509

 
1,033

 
1,053

 
2,549

 
5,144

Purchase obligations (2)
 
294,344

 
632

 

 

 
294,976

Long-term debt (3)
 
15,000

 
30,000

 
352,397

 

 
397,397

Installment payment agreement (3)
 
2,536

 
5,072

 
2,536

 

 
10,144

Interest payments (4)
 
5,545

 
10,474

 
6,004

 

 
22,023

Uncertain tax positions (5)
 
1,933

 
2,406

 
1,568

 
165

 
6,072

Total
 
$
469,749

 
$
343,088

 
$
632,582

 
$
661,801

 
$
2,107,220


(1)
See Note 14, Commitments and Contingencies, to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information with respect to our operating and capital leases. Future minimum lease

36


payments have not been reduced by minimum sublease rentals to be received in the future under non-cancelable subleases. Sublease rentals are approximately $20.4 million for operating subleases.
(2)
Relates to certain commodity and service agreements pursuant to which we are committed as of December 29, 2015 to purchase a fixed quantity over a contracted time period.
(3)
See Note 11, Debt, to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information with respect to our term loan borrowings and installment payment agreement.
(4)
Represents estimated interest payments on the term loan borrowings. Interest payments are calculated based on Eurodollar plus the applicable margin in effect at December 29, 2015. The actual interest rates on our term loan borrowings could vary from that used to compute the above interest payments. See Note 11, Debt, to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information with respect to our term loan borrowings.
(5)
See Note 15, Income Taxes, to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information with respect to our uncertain tax positions.
Off-Balance Sheet Arrangements
As of December 29, 2015, we have guaranteed the operating leases of 75 franchisee 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, pursuant to which we exercised our right to assign the lease for the bakery-cafe but remain liable to the landlord in the event of a default by the assignee. These guarantees expire on various dates from July 15, 2020 to February 28, 2049, with a maximum potential amount of future rental payments of approximately $244.4 million as of December 29, 2015. Our obligation from these leases will decrease over time as these operating leases expire. We have not recorded a liability for these guarantees because the fair value of these lease guarantees was determined by us 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 we did not believe it was probable 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 obligation for these operating leases. As of December 29, 2015, future commitments under these leases were as follows (in thousands):
 
 
Less than
1 year
 
1-3
years
 
3-5
years
 
More than
5 years
 
Total
Lease Guarantees (1)
 
$
11,832

 
$
24,501

 
$
25,172

 
$
182,907

 
$
244,412


(1)
Represents aggregate maximum requirement — see Note 14, Commitments and Contingencies, to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information with respect to our lease guarantees.
Employee Commitments
We have confidential and proprietary information and non-competition agreements, referred to as non-compete agreements, with certain employees. These non-compete agreements contain a provision whereby employees would be due a certain number of weeks of their salary if their employment was terminated by us as specified in the non-compete agreement. We have not recorded a liability for these amounts potentially due to employees. Rather, we will record a liability for these amounts when an amount becomes due to an employee in accordance with the appropriate authoritative literature. As of December 29, 2015, the total amount potentially owed employees under these non-compete agreements was $24.8 million.
Impact of Inflation
Our profitability depends in part on our ability to anticipate and react to changes in food, supply, labor, occupancy, and other costs. In the past, we have been able to recover a significant portion of inflationary costs and commodity price increases, including price increases in fuel, proteins, dairy, wheat, tuna, and cream cheese among others, through increased menu prices. There have been, and there may be in the future, delays in implementing such menu price increases, and competitive pressures may limit our ability to recover such cost increases in their entirety. Historically, the effects of inflation on our consolidated results of operations have not been materially adverse. However, inherent volatility experienced in certain commodity markets, such as those for wheat, proteins, including chicken raised without antibiotics, and fuel may have an adverse effect on us in the future. The extent of the impact will depend on our ability and timing to increase food prices.
A majority of our associates are paid hourly rates regulated by federal and state minimum wage laws. Although we have and will continue to attempt to pass along any increased labor costs through food price increases, there can be no assurance that all such

37


increased labor costs can be reflected in our prices or that increased prices will be absorbed by consumers without diminishing to some degree consumer spending at the bakery-cafes.
Recent Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, 2015-17, “Balance Sheet Classification of Deferred Taxes”. This update requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This update is effective for annual and interim reporting periods beginning after December 15, 2016. Early adoption is permitted. We plan on adopting this guidance in the first quarter of fiscal 2016.
In September 2015, the FASB issued ASU, 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”. This update eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Acquirers would now recognize measurement-period adjustments during the period in which they determine the amount of the adjustment. This update is effective for annual and interim reporting periods beginning after December 15, 2015, including interim periods within those fiscal years, and should be applied prospectively to adjustments for provisional amounts that occur after the effective date with early adoption permitted for financial statements that have not been issued. The adoption of this guidance is not expected to have a material effect on our consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”. This update provides guidance on the subsequent measurement of inventory, which changes the measurement from lower of cost or market to lower of cost and net realizable value. This update is effective for annual and interim periods beginning after December 15, 2016. The adoption of this guidance is not expected to have a material effect on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”. This update requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this update. We early adopted ASU 2015-03 during the thirteen weeks ended June 30, 2015. As a result of the retrospective adoption, we reclassified unamortized debt issuance costs of $0.2 million as of December 30, 2014 from deposits and other to long-term debt on our Consolidated Balance Sheets. Adoption of this standard did not impact our results of operations or cash flows in the current or previous interim and annual reporting periods.
In August 2014, the FASB issued ASU 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 are currently evaluating the effect of the standard but its adoption is not expected to have an impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 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. In August 2015, the FASB issued ASU 2015-14 delaying the effective date for adoption. The update is now effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The 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 April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)”. This update was issued to clarify the reporting for discontinued operations and disclosures for disposals of components of an entity. This update is effective for annual and interim periods beginning after December 15, 2014. The adoption of this update did not have a material effect on our consolidated financial statements or related disclosures; however, it may impact the reporting of future discontinued operations if and when they occur.


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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Risk
We manage our commodity risk in several ways. We purchase certain commodities, such as flour, coffee, and proteins, for use in our business. These commodities are sometimes purchased under agreements with terms of one month to one year, usually at a fixed price. As a result, we are subject to market risk that current market prices may be above or below our contractual price. These agreements qualify as normal purchases and are not recorded at fair value on our Consolidated Balance Sheets. In fiscal 2015, 2014, and 2013, we did not utilize derivative instruments in managing commodity risk.
Interest Rate Risk