10-K 1 a2016122710k.htm FORM 10-K Document



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 27, 2016
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from                        to                       
Commission file number 0-19253
____________________________
Panera Bread Company
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(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 28, 2016, was $3,389,849,256.

As of February 21, 2017, the registrant had 21,341,550 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 2017 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 27, 2016.
 




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 anticipated growth, operating results, future earnings per share, plans, objectives, the impact of our investments in sales-building initiatives and operational capabilities on future sales and earnings, our intention to repurchase shares from time to time under the share repurchase program and our refranchising activities, 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," "target," "plan," "goal," "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 2,036 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 approximately 9 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 in a variety of locations including, urban, suburban, shopping centers, college campuses, and hospitals. 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, an articulation of Panera's long held values, which expresses a commitment to clean ingredients and products by removing items identified on our “No No List”, 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. As of the beginning of 2017, our food menu met the requirements of our Food Policy and is “clean,” meaning that all of our products contain no artificial preservatives, no artificial sweeteners, no artificial flavors and no colors from artificial sources.
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 27, 2016, our Company bakery-cafe operations segment consisted of 902 Company-owned bakery-cafes and our franchise operations segment consisted of 1,134 franchise-operated bakery-cafes, located throughout the United States and in Ontario, Canada. As of December 27, 2016, 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 27, 2016, or fiscal 2016, our revenues were $2,795 million, consisting of $2,434 million of Company-owned net bakery-cafe sales, $155 million of franchise royalties and fees, and $206 million of fresh dough and other product sales to franchisees. Franchise-operated net bakery-cafe sales, as reported by franchisees, were $2,744 million in fiscal 2016. See Note 19 to our consolidated financial statements for further segment information.


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Our fiscal year ends on the last Tuesday in December. Each of our fiscal years ended December 27, 2016, December 29, 2015, or fiscal 2015, and December 30, 2014, or fiscal 2014, had 52 weeks.

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 every day 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 for the wellness of 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 our commitment to serve clean food by removing artificial flavors, sweeteners, preservatives, and colors from artificial sources from our food in all of our bakery-cafes in the United States.

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, 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 27, 2016, 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 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 fiscal 2016, we announced our Kids Meal Promise, which expresses our commitment to offer kids meals that are clean,

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worthy of trust, full of delicious options, nutritionally paired, and served with water, organic milk or juice, rather than a sugary beverage. At the beginning of 2017, we completed the removal of all artificial additives on our “No No List”.
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 and flatbreads; hearty, unique soups; freshly prepared and hand-tossed salads; pasta dishes; and custom roasted coffees and cafe beverages, such as hot or cold espresso and cappuccino drinks, smoothies, and hand-crafted non-carbonated beverages. We regularly review and innovate our menu offerings to feature new taste profiles we believe our customers crave.
Strategic Initiatives
We are concentrating efforts and resources on a broad set of initiatives designed to make Panera a better competitive alternative and to enable expanded growth through not only Panera 2.0, a strategic initiative intended to enhance the experience for both our dine-in and to-go guests, 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.
Specifically, our strategic Panera 2.0 and delivery initiatives are designed to enhance the experience for both our dine-in guests as well as those eating off premises. 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. As of December 27, 2016, we were constructively complete with the roll-out of Panera 2.0 to Company-owned bakery-cafes.
As of December 27, 2016, approximately 15 percent of system-wide bakery-cafes offered delivery. We believe an integrated approach to delivery, rooted in our fast casual paradigm, will enable us to fulfill a significant unmet need for an elevated delivery experience with high-quality food, ultimately enhancing the experience of our customers eating off premises.
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. 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 46 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 have concentrated efforts and resources on our Panera 2.0 initiative. The enhanced guest experience is enabled by technology, including the convenience of digital ordering and Rapid Pick-Up, and operational improvements. As of December 27, 2016, approximately 70 percent of our Company-owned bakery-cafes have transitioned to Panera 2.0. As a result of the Panera 2.0 transitions, as of December 27, 2016, digital utilization was approximately 24 percent in Company-owned bakery-cafes.
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,

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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 also continue to invest 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.
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. Our current advertising campaign, Panera Bread Food As It Should Be, 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 25 million customers enrolled in MyPanera at the end of fiscal 2016. At the end of fiscal 2016, approximately 51 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 2016, 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.

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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, college campuses, hospitals, and free-standing units. The average Company-owned bakery-cafe size was approximately 4,500 square feet as of December 27, 2016. 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 48 Company-owned bakery-cafes that opened in fiscal 2016 was approximately $1.3 million per bakery-cafe.
We also return cash to stockholders in the form of share repurchases under our publicly announced share repurchase authorizations. During fiscal 2016, we repurchased 1,815,432 shares of our Class A common stock for an aggregate purchase price of approximately $371.2 million. 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.
Franchise Operations
Our franchisees, which as of December 27, 2016 operated approximately 56 percent of our bakery-cafes, are comprised of 35 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 27, 2016, we had 1,134 franchise-operated bakery-cafes operating throughout the United States and in Ontario, Canada, and we have received commitments to open 153 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 2016 were $155.3 million, or 5.6 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 27, 2016, we did not hold an equity interest in any of our franchise-operated bakery-cafes.

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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 27, 2016, we had 24 fresh dough facilities, 22 of which were Company-owned, including one located in Ontario, Canada, to support the 19 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 27, 2016, we leased 268 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 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 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 flavors, sweeteners, preservatives or colors from artificial sources, including those identified on our No No List.
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 27, 2016, we had approximately 50,800 total associates of whom approximately 21,000 work, on average, at least 25 hours per week. Approximately 47,600 associates were employed in our bakery-cafe operations as bakers, managers, and associates, approximately 1,600 were employed in our fresh dough facility operations, and approximately 1,600 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

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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®, Panera to You®, and Panera. Food as it Should beTM trademarks are some of the trademarks we have registered or have applied to register 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 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. Due to our dependence on a limited number of suppliers, 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.

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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. Finally, as we implement new initiatives and expand our offerings we will compete with companies with longer track records and more experience in food service segments. For example, as we expand our small-order delivery strategy, we will compete with businesses in the highly competitive pizza delivery marketplace and with providers who offer ordering and meal delivery services from unaffiliated restaurants.
If we are unable to successfully compete in these markets, we may be unable to sustain or increase our revenues and profitability.
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, flavors, sweeteners or colors from artificial sources 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.
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 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.
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:
generating increased sales through catering and small-order delivery through our Panera to You® initiatives;

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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;
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;
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;
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.
Instances or reports, whether verified or not, of food-safety issues, such as food-borne illnesses, food tampering, food contamination or mislabeling, either during growing, manufacturing, packaging, storing or preparation, have in the past severely injured the reputations of companies in the food processing, grocery and quick service and fast casual restaurant sectors and could affect us as well. Any report linking us to food-borne illnesses or food tampering, contamination, mislabeling or other food-safety issues could damage our brand value and severely hurt sales of our food products and possibly lead to product liability claims, litigation (including class actions) or damages.
These problems, other food-borne illnesses (such as norovirus or hepatitis A), and injuries caused by the presence of foreign material 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.
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 investments during the fiscal year ended December 26, 2017, or fiscal 2017, 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 delivery of food to the customer, both inside the bakery-cafe and directly to customers at their home or business. Our inability to accurately predict the costs and rollout of such initiatives across our system or our failure to generate expected revenue and profits from such activities and investments could negatively impact our financial results.


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The unauthorized access, theft or destruction of customer or employee personal, financial or other data or of our proprietary or confidential information that is stored in our information systems or by third parties on our behalf could adversely affect our business.
Each year, we engage in millions of transactions with our customers. Approximately 78 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 continue 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. As a result, our information technology systems, such as those we use for our point-of-sale, web and mobile platforms, including online and mobile payment systems and rewards programs, contain personal, financial or other information that is entrusted to us by our customers. 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 private information through our administrative functions, including human resources, payroll, accounting and internal and external communications, as well as the information technology systems of our third party business partners and service providers. If a third party is able to circumvent the security measures intended by us or our vendors to protect this 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 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, food safety concerns, 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 experience concerns, including allegations regarding quality, health, or other similar concerns

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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 customers can trust, 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 and with a concern for animal welfare generally. We may encounter supply challenges for such ingredients, particularly proteins. We have also removed all artificial additives on our "No No List" from our food in all of our bakery-cafes in the United States as of the beginning of 2017. 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 continue to dedicate 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 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;

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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 due to 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. As of December 27, 2016, approximately 56 percent of our bakery-cafes were operated by franchisees (1,134 franchise-operated bakery-cafes out of a total of 2,036 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.
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.
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.

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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.
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. Additionally, our expansion into the food delivery business could increase our exposure to claims related to injuries relating to accidents involving our delivery drivers. In addition, from time to time, we are subject to litigation by employees, investors, franchisees, and others through private actions, class actions

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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.
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. 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.
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:
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;

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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;
fluctuations in supply costs, shortages or interruptions;
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; and
delays in new bakery-cafe openings.
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.
Changes in accounting standards or the recognition of impairment or other charges may adversely affect our future operations and results.

New accounting standards or changes in financial reporting requirements, accounting principles or practices, including with respect to our critical accounting estimates, could adversely affect our future results. We may also be affected by the nature and timing of decisions about underperforming markets or assets, including decisions that result in impairment or other charges that reduce our earnings. In assessing the recoverability of our long-lived assets, we consider changes in economic conditions and make assumptions regarding estimated future cash flows and other factors. These estimates are highly subjective and can be significantly impacted by many factors such as global and local business and economic conditions, operating costs, inflation, competition, and consumer and demographic trends. If our estimates or underlying assumptions change in the future, we may be required to record impairment charges. If we experience any such changes, they could have a significant adverse effect on our reported results for the affected periods.
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

15



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.
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.
Major developments on trade relations resulting from the recent elections could have a material adverse effect on our business.

The 2016 United States presidential and congressional elections have introduced uncertainty with respect to trade policies, tariffs and government regulations impacting trade between the United States and other countries.  We source several of our ingredients, paper products and other materials used within our business from suppliers outside of the United States, including Asia and Central America.  Significant developments in trade relations, such as the imposition of tariffs on items imported by us, could increase our costs and materially and adversely affect our consolidated financial results. 

ITEM 1B. UNRESOLVED STAFF COMMENTS
None.


16



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 27, 2016 is set forth below:
 
 
Square
Facility
 
Footage
Albuquerque, NM
 
1,800

Atlanta, GA
 
26,000

Beltsville, MD
 
35,700

Chandler, AZ
 
18,000

Chicago, IL
 
52,000

Cincinnati, OH
 
32,000

Denver, CO
 
19,600

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.


17



The average size of our Company-owned bakery-cafes as of December 27, 2016 was approximately 4,500 square feet. As of December 27, 2016, 2,036 bakery-cafes operated in the following locations:
Location
 
Company-Owned
Bakery-Cafes
 
Franchise-Operated
Bakery-Cafes
 
Total
Bakery-Cafes
Alabama
 
22

 
3

 
25

Arizona
 
33

 
8

 
41

Arkansas
 

 
9

 
9

California
 
68

 
117

 
185

Colorado
 

 
39

 
39

Connecticut
 
16

 
17

 
33

Delaware
 

 
6

 
6

Florida
 
71

 
111

 
182

Georgia
 
24

 
30

 
54

Idaho
 
6

 

 
6

Illinois
 
72

 
39

 
111

Indiana
 
35

 
1

 
36

Iowa
 
2

 
19

 
21

Kansas
 

 
21

 
21

Kentucky
 
27

 
4

 
31

Louisiana
 

 
12

 
12

Maine
 

 
6

 
6

Maryland
 

 
55

 
55

Massachusetts
 
2

 
67

 
69

Michigan
 
55

 
23

 
78

Minnesota
 
25

 
3

 
28

Mississippi
 

 
5

 
5

Missouri
 
44

 
24

 
68

Nebraska
 
13

 
2

 
15

Nevada
 

 
7

 
7

New Hampshire
 

 
12

 
12

New Jersey
 
55

 
14

 
69

New Mexico
 
6

 

 
6

New York
 
55

 
58

 
113

North Carolina
 
46

 
16

 
62

North Dakota
 
4

 

 
4

Ohio
 
8

 
130

 
138

Oklahoma
 

 
17

 
17

Oregon
 

 
13

 
13

Pennsylvania
 
33

 
66

 
99

Rhode Island
 

 
8

 
8

South Carolina
 
10

 
16

 
26

South Dakota
 
3

 

 
3

Tennessee
 
18

 
20

 
38

Texas
 
33

 
58

 
91

Utah
 

 
5

 
5

Vermont
 
5

 

 
5

Virginia
 
70

 
13

 
83

Washington
 
2

 
28

 
30

West Virginia
 

 
11

 
11

Wisconsin
 
30

 
3

 
33

District of Columbia
 
8

 

 
8

Ontario, Canada
 
1

 
18

 
19

 
 
902

 
1,134

 
2,036

Included in the number of Company-owned bakery-cafes are 13 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, and six Company-owned Tatte units.

18



ITEM 3. LEGAL PROCEEDINGS

On July 2, 2014, a purported class action lawsuit was filed against one of the Company's subsidiaries by Jason Lofstedt, a former employee of one of the Company's subsidiaries. The lawsuit was filed in the California Superior Court, County of Riverside. The complaint alleges, among other things, violations of the California Labor Code, failure to pay overtime, failure to provide meal and rest periods, and violations of California's Unfair Competition Law. The complaint seeks, among other relief, collective and class certification of the lawsuit, unspecified damages, costs and expenses, including attorneys’ fees, and such other relief as the Court might find just and proper. In addition, several other purported class action lawsuits based on similar claims and seeking similar relief 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. On May 6, 2016, the parties of all four pending cases reached a Memorandum of Understanding For Three Settlement Classes regarding the class action lawsuits. Under the terms of the agreement, we agreed to pay an immaterial amount to purported class members, plaintiffs' attorneys' fees, Private Attorney General Act payments, and costs of administering the settlement. The Memorandum of Agreement contains no admission of wrongdoing. The terms and conditions of the parties’ settlement agreement have received preliminary approval from California Superior Courts. We maintained an appropriate accrual in accrued expenses for this settlement in our Consolidated Balance Sheets as of December 27, 2016.

On June 26, 2016, a purported class action lawsuit was filed against the Company by Jacqueline Friscia, an employee of one of the Company’s subsidiaries.  The lawsuit was filed in the United States District Court for the District of New Jersey.  The complaint alleges, among other things, violations of the Fair Labor Standards Act and the New Jersey Wage and Hour Law on behalf of the plaintiff and all similarly situated non-exempt assistant managers.  The complaint seeks, among other relief, collective and class certification of the lawsuit, unspecified damages, costs and expenses, including attorneys’ fees, and such other relief as the Court might find just and proper.  We have retained counsel to represent us in this matter and believe that we have meritorious defenses to the allegations asserted in the case.

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 believe accruals for these matters are adequately provided for in our consolidated financial statements. We do not believe the ultimate resolution of these actions will have a material adverse effect on our consolidated financial position and results of operations. 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.


19



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 27, 2016
 
December 29, 2015
 
High
 
Low
 
High
 
Low
First Quarter
$
215.32

 
$
179.07

 
$
176.62

 
$
153.68

Second Quarter
$
221.25

 
$
204.83

 
$
186.80

 
$
162.52

Third Quarter
$
221.70

 
$
193.51

 
$
204.48

 
$
174.51

Fourth Quarter
$
217.90

 
$
186.74

 
$
197.68

 
$
166.26


On February 21, 2017, the last sale price for our Class A common stock, as reported on the Nasdaq Global Select Market, was $232.10. As of February 21, 2017, we had 927 holders of record of our Class A common stock and 24 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 2016:

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 28, 2016 - October 25, 2016
174,330

 
$
192.86

 
174,330

 
$
447,413,164

October 26, 2016 - November 29, 2016
179,495

 
$
200.74

 
178,200

 
$
411,631,285

November 30, 2016 - December 27, 2016
65,162

 
$
213.34

 
65,162

 
$
397,729,625

Total
418,987

 
$
199.42

 
417,692

 
 

(1)
Includes 1,295 shares of Class A common stock surrendered by participants under the Panera Bread Company 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 such plan 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 May 19, 2016, 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.


20



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 27, 2016
 
December 29, 2015
 
December 30, 2014
 
December 31, 2013
 
December 25, 2012
Revenues:
 
 
 
 
 
 
 
 
 
Bakery-cafe sales, net
$
2,433,945

 
$
2,358,794

 
$
2,230,370

 
$
2,108,908

 
$
1,879,280

Franchise royalties and fees
155,271

 
138,563

 
123,686

 
112,641

 
102,076

Fresh dough and other product sales to franchisees
206,149

 
184,223

 
175,139

 
163,453

 
148,701

Total revenues
$
2,795,365

 
$
2,681,580

 
$
2,529,195

 
$
2,385,002

 
$
2,130,057

Costs and expenses:
 
 
 
 
 
 
 
 
 
Bakery-cafe expenses:
 
 
 
 
 
 
 
 
 
Cost of food and paper products
$
709,251

 
$
715,502

 
$
669,860

 
$
625,622

 
$
552,580

Labor
790,238

 
754,646

 
685,576

 
625,457

 
559,446

Occupancy
167,717

 
169,998

 
159,794

 
148,816

 
130,793

Other operating expenses
359,609

 
334,635

 
314,879

 
295,539

 
256,029

Total bakery-cafe expenses
2,026,815

 
1,974,781

 
1,830,109

 
1,695,434

 
1,498,848

Fresh dough and other product cost of sales to franchisees
178,585

 
160,706

 
152,267

 
142,160

 
131,006

Depreciation and amortization
154,355

 
135,398

 
124,109

 
106,523

 
90,939

General and administrative expenses
179,876

 
142,904

 
138,060

 
123,335

 
117,932

Pre-opening expenses
6,899

 
9,089

 
8,707

 
7,794

 
8,462

Refranchising loss
9,072

 
17,108

 

 

 

Total costs and expenses
2,555,602

 
2,439,986

 
2,253,252

 
2,075,246

 
1,847,187

Operating profit
239,763

 
241,594

 
275,943

 
309,756

 
282,870

Interest expense
8,884

 
3,830

 
1,824

 
1,053

 
1,082

Other (income) expense, net
1,380

 
1,192

 
(3,175
)
 
(4,017
)
 
(1,208
)
Income before income taxes
229,499

 
236,572

 
277,294

 
312,720

 
282,996

Income taxes
84,258

 
87,247

 
98,001

 
116,551

 
109,548

Net income
$
145,241

 
$
149,325

 
$
179,293

 
$
196,169

 
$
173,448

Less: Net income (loss) attributable to noncontrolling interest
(333
)
 
(17
)
 

 

 

Net income attributable to Panera Bread Company
$
145,574

 
$
149,342

 
$
179,293

 
$
196,169

 
$
173,448

Earnings per common share attributable to Panera Bread Company:
 
 
 
 
 
 
 
 
 
Basic
$
6.21

 
$
5.81

 
$
6.67

 
$
6.85

 
$
5.94

Diluted
$
6.18

 
$
5.79

 
$
6.64

 
$
6.81

 
$
5.89

Weighted average shares of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
23,444

 
25,685

 
26,881

 
28,629

 
29,217

Diluted
23,565

 
25,788

 
26,999

 
28,794

 
29,455

Consolidated balance sheet data (2):
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
105,529

 
$
241,886

 
$
196,493

 
$
125,245

 
$
297,141

Trade and other accounts receivable, net
112,923

 
115,786

 
106,653

 
84,602

 
86,262

Property and equipment, net
802,759

 
776,248

 
787,294

 
669,409

 
571,754

Total assets
1,301,611

 
1,440,839

 
1,362,065

 
1,152,973

 
1,234,661

Current liabilities
448,321

 
399,443

 
352,712

 
303,325

 
277,540

Long-term debt
410,594

 
388,971

 
99,784

 

 

Other long-term liabilities
150,306

 
151,144

 
173,385

 
149,756

 
135,202

Redeemable noncontrolling interest
3,603

 
3,981

 

 

 

Stockholders’ equity
288,787

 
497,300

 
736,184

 
699,892

 
821,919

Franchisee revenues (3)
$
2,743,794

 
$
2,477,963

 
$
2,281,755

 
$
2,175,155

 
$
1,981,674

Comparable net bakery-cafe sales percentage for (3)(4):
 
 
 
 
 
 
 
 
 
Company-owned bakery-cafes
4.2
%
 
3.0
%
 
1.4
%
 
2.6
%
 
6.5
%
Franchise-operated bakery-cafes
0.7
%
 
1.0
%
 
0.9
%
 
2.0
%
 
5.0
%
Bakery-cafe data:
 
 
 
 
 
 
 
 
 
Company-owned bakery-cafes open
902

 
901

 
925

 
867

 
809

Franchise-operated bakery-cafes open
1,134

 
1,071

 
955

 
910

 
843

Total bakery-cafes open
2,036

 
1,972

 
1,880

 
1,777

 
1,652


(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)
Balance sheet data for fiscal 2012 through fiscal 2015 has been adjusted for the adoption of accounting guidance related to the classification of deferred income taxes as discussed in Note 2, Summary of Significant Accounting Policies.
(3)
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.
(4)
Comparable net bakery-cafe sales information above 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. 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).


21



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. Each of our fiscal years ended December 27, 2016, December 29, 2015 and December 30, 2014 had 52 weeks.
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 4.2 percent to $2,795 million in fiscal 2016 compared to $2,682 million in fiscal 2015.
Fiscal 2016 Company-owned comparable net bakery-cafe growth of 4.2 percent comprised of year-over-year average check growth of 4.1 percent and transaction growth of 0.1 percent.
Earnings per diluted share for fiscal 2016 was $6.18 compared to earnings per diluted share of $5.79 in fiscal 2015. Included in earnings per diluted share for fiscal 2016 were charges related to our refranchising initiative of $0.35 per diluted share and amounts reserved for legal matters of $0.21 per diluted share. Included in earnings per diluted share for fiscal 2015 were charges related to our refranchising initiative of $0.42 per diluted share.
We returned $371 million to our stockholders in fiscal 2016 through share repurchases.

22



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 27, 2016
 
December 29, 2015
 
December 30, 2014
Revenues:
 
 
 
 
 
Bakery-cafe sales, net
87.1
 %
 
88.0
 %
 
88.2
 %
Franchise royalties and fees
5.6

 
5.2

 
4.9

Fresh dough and other product sales to franchisees
7.4

 
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
29.1
 %
 
30.3
 %
 
30.0
 %
Labor
32.5

 
32.0

 
30.7

Occupancy
6.9

 
7.2

 
7.2

Other operating expenses
14.8

 
14.2

 
14.1

Total bakery-cafe expenses
83.3

 
83.7

 
82.1

Fresh dough and other product cost of sales to franchisees (2)
86.6

 
87.2

 
86.9

Depreciation and amortization
5.5

 
5.0

 
4.9

General and administrative expenses
6.4

 
5.3

 
5.5

Pre-opening expenses
0.2

 
0.3

 
0.3

Refranchising loss
0.3

 
0.6

 

Total costs and expenses
91.4

 
91.0

 
89.1

Operating profit
8.6

 
9.0

 
10.9

Interest expense
0.3

 
0.1

 
0.1

Other (income) expense, net

 

 
(0.1
)
Income before income taxes
8.2

 
8.8

 
11.0

Income taxes
3.0

 
3.3

 
3.9

Net income
5.2

 
5.6

 
7.1

Less: Net income (loss) attributable to noncontrolling interest

 

 

Net income attributable to Panera Bread Company
5.2
 %
 
5.6
 %
 
7.1
 %

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

23



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 27, 2016
 
December 29, 2015
 
December 30, 2014
Number of bakery-cafes:
 
 
 
 
 
Company-owned:
 
 
 
 
 
Beginning of period
901

 
925

 
867

Bakery-cafes opened
48

 
57

 
65

Bakery-cafes closed
(20
)
 
(6
)
 
(7
)
Bakery-cafes refranchised (1)
(27
)
 
(75
)
 

End of period (2)
902

 
901

 
925

Franchise-operated:
 
 
 
 
 
Beginning of period
1,071

 
955

 
910

Bakery-cafes opened
45

 
55

 
49

Bakery-cafes closed
(9
)
 
(14
)
 
(4
)
Bakery-cafes refranchised (1)
27

 
75

 

End of period
1,134

 
1,071

 
955

System-wide:
 
 
 
 
 
Beginning of period
1,972

 
1,880

 
1,777

Bakery-cafes opened
93

 
112

 
114

Bakery-cafes closed
(29
)
 
(20
)
 
(11
)
End of period (3)
2,036

 
1,972

 
1,880


(1)
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. In May 2016, we refranchised 15 bakery-cafes to an existing franchisee. In September 2016, we refranchised 12 bakery-cafes to a new franchisee.
(2)
Excluded from the number of Company-owned bakery-cafes were six Tatte units as of the fiscal year ended December 27, 2016 and five Tatte units as of the fiscal year ended December 29, 2015.
(3)
Excluded from the number of total bakery-cafes were 28 catering-only units, referred to as delivery hubs, for each of the fiscal years ended December 27, 2016 and December 29, 2015, and 22 delivery hubs as of the fiscal year ended December 30, 2014.

Comparable Net Bakery-cafe Sales
Comparable net bakery-cafe sales growth for the periods indicated was as follows:
 
For the fiscal year ended
 
December 27, 2016
 
December 29, 2015
 
December 30, 2014 (1)
Company-owned
4.2
%
 
3.0
%
 
1.4
%
Franchise-operated
0.7
%
 
1.0
%
 
0.9
%
System-wide
2.4
%
 
1.9
%
 
1.1
%

(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.

Historically, we have disaggregated comparable net bakery-cafe sales growth into change in transactions and change in average check, with change in average check further disaggregated into change in price and change in mix. We refer to this disaggregation method as the “Historical View.” However, the Company does not believe that this view serves investors well as its business is undergoing structural change in channel mix. Digitally enabled, larger-party sized channels, such as delivery, catering, and Rapid Pick-Up have larger checks and more entrées per transaction and are growing disproportionately quicker.


24



To ease the confusion, and to reflect the growth of digitally-enabled, larger party-size channels, we have, in this report, also disaggregated comparable net bakery-cafe sales growth into change in price, change in entrées sold (a measure of customers served), and change in mix, and will continue to do so in the future. We refer to this disaggregation method as the “Omni-Channel View” and believe it is currently the best representation of comparable net bakery-cafe sales.

The following table summarizes the composition of Company-owned comparable net bakery-cafe sales growth for the periods indicated using the Historical View:
 
Historical composition for the fiscal year ended
 
December 27, 2016
 
December 29, 2015
 
December 30, 2014
Price
2.3
%
 
1.9
%
 
1.0
%
Mix
1.8
%
 
0.3
%
 
0.3
%
Average check
4.1
%
 
2.2
%
 
1.3
%
 
 
 
 
 
 
Transactions
0.1
%
 
0.8
%
 
0.1
%
Company-owned comparable net bakery-cafe sales growth
4.2
%
 
3.0
%
 
1.4
%
Transactions increased slightly in fiscal 2016 as momentum from our strategic initiatives was largely offset by a continued challenging consumer environment. Price growth in fiscal 2016 was 2.3 percent, as retail prices were adjusted in anticipation of labor and food cost inflation. The increase in mix during fiscal 2016 was primarily due to more entrées per transaction as a result of strategic initiatives.

The following table summarizes the composition of Company-owned comparable net bakery-cafe sales growth for the periods indicated using the Omni-Channel View:
 
Omni-channel composition for the fiscal year ended
 
December 27, 2016
 
December 29, 2015
 
December 30, 2014
Entrée Growth
2.0
 %
 
1.3
 %
 
1.7
 %
Price
2.3
 %
 
1.9
 %
 
1.0
 %
Mix
(0.1
)%
 
(0.2
)%
 
(1.3
)%
Company-owned comparable net bakery-cafe sales growth
4.2
 %
 
3.0
 %
 
1.4
 %

Entrée growth during the fiscal year ended December 27, 2016 reflects the sale of more entrées per transaction through digitally-enabled, larger party-size channels, such as delivery, catering, and Rapid Pick-Up. Price growth in fiscal 2016 was 2.3 percent, as retail prices were adjusted in anticipation of labor and food cost inflation.

Fiscal 2017 Outlook

We are targeting non-GAAP diluted earnings per share growth of 11 percent to 14 percent for the fiscal year ended December 26, 2017, or fiscal 2017. The non-GAAP diluted earnings per share growth target range is based on anticipated Company-owned comparable net bakery-cafe sales growth for fiscal 2017 of 3.5 percent to 4.5 percent. For fiscal 2017, we expect non-GAAP operating margin will be flat to up 50 basis points when compared to fiscal 2016. We also anticipate opening 70 to 80 bakery-cafes system-wide and expect average weekly net sales for new Company-owned bakery-cafes of $47,000 to $49,000.

The non-GAAP diluted earnings per share growth target range and non-GAAP operating margin growth target range for fiscal 2017 are financial measures not calculated in accordance with generally accepted accounting principles in the United States of America, or GAAP. We exclude certain items from the non-GAAP diluted earnings per share growth target range and non-GAAP operating margin growth target range, such as our refranchising charges, to provide additional information, facilitate the comparison of past and present operations, and analyze future periods. A reconciliation of non-GAAP diluted earnings per share and non-GAAP operating margin to the most comparable GAAP financial measures on a forward-looking basis is not available without unreasonable effort due to the uncertainty and variability of the nature and amount of these future charges and costs.


25



Results of Operations

Revenues

The following table summarizes revenues for the periods indicated (dollars in thousands):
 
For the fiscal year ended
 
 
 
December 27, 2016
 
December 29, 2015
 
December 30, 2014
 
% Change in 2016
 
% Change in 2015
Bakery-cafe sales, net
$
2,433,945

 
$
2,358,794

 
$
2,230,370

 
3.2
%
 
5.8
%
Franchise royalties and fees
155,271

 
138,563

 
123,686

 
12.1
%
 
12.0
%
Fresh dough and other product sales to franchisees
206,149

 
184,223

 
175,139

 
11.9
%
 
5.2
%
Total revenue
$
2,795,365

 
$
2,681,580

 
$
2,529,195

 
4.2
%
 
6.0
%
 
 
 
 
 
 
 
 
 
 
System-wide average weekly net sales
$
49,508

 
$
48,357

 
$
47,655

 
2.4
%
 
1.5
%
The growth in total revenues in fiscal 2016 compared to the prior fiscal year was primarily due to the opening of 93 new bakery-cafes system-wide and the 2.4 percent increase in system-wide comparable net bakery-cafe sales in fiscal 2016, partially offset by the closure of 29 bakery-cafes system-wide and the refranchising of 27 bakery-cafes in fiscal 2016.
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.
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 27, 2016
 
December 29, 2015
 
December 30, 2014
 
% Change in 2016
 
% Change in 2015
Bakery-cafe sales, net
$
2,433,945

 
$
2,358,794

 
$
2,230,370

 
3.2
 %
 
5.8
%
As a percentage of total revenue
87.1
%
 
88.0
%
 
88.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company-owned average weekly net sales
$
51,416

 
$
49,090

 
$
48,114

 
4.7
 %
 
2.0
%
Company-owned number of operating weeks
47,127

 
48,041

 
46,356

 
(1.9
)%
 
3.6
%

The increase in net bakery-cafe sales in fiscal 2016 compared to the prior fiscal year was primarily due to the opening of 48 new Company-owned bakery-cafes and the 4.2 percent increase in Company-owned comparable net bakery-cafe sales in fiscal 2016, partially offset by the refranchising of 27 bakery-cafes and the closure of 20 Company-owned bakery-cafes in fiscal 2016.

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 average weekly net sales for Company-owned bakery-cafes in fiscal 2016 compared to the prior fiscal year was primarily due to the impact of new marketing initiatives and price increases in fiscal 2016.

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.


26



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 27, 2016
 
December 29, 2015
 
December 30, 2014
 
% Change in 2016
 
% Change in 2015
Franchise royalties
$
153,102

 
$
134,576

 
$
120,125

 
13.8
 %
 
12.0
%
Franchise fees
2,169

 
3,987

 
3,561

 
(45.6
)%
 
12.0
%
Total
$
155,271

 
$
138,563

 
$
123,686

 
12.1
 %
 
12.0
%
 
 
 
 
 
 
 
 
 
 
Franchise-operated average weekly net sales
$
47,938

 
$
47,680

 
$
47,215

 
0.5
 %
 
1.0
%
Franchise-operated number of operating weeks
57,237

 
51,970

 
48,327

 
10.1
 %
 
7.5
%

The increase in franchise royalty and fee revenues in fiscal 2016 compared to the prior fiscal year was primarily due to the opening of 45 franchise-operated bakery-cafes, the refranchising of 27 bakery-cafes, increased information technology service revenues, and the 0.7 percent increase in franchise-operated comparable net bakery-cafe sales in fiscal 2016, partially offset by the closure of nine franchise-operated bakery-cafes in fiscal 2016.

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 service revenues, 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.

As of December 27, 2016, there were 1,134 franchise-operated bakery-cafes open and we have received commitments to open 153 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 27, 2016
 
December 29, 2015
 
December 30, 2014
 
% Change in 2016
 
% Change in 2015
Fresh dough and other product sales to franchisees
$
206,149

 
$
184,223

 
$
175,139

 
11.9
%
 
5.2
%
The increase in fresh dough and other product sales to franchisees in fiscal 2016 compared to the prior fiscal year was primarily due to the opening of 45 franchise-operated bakery-cafes, the refranchising of 27 bakery-cafes, and the 0.7 percent increase in franchise-operated comparable net bakery-cafe sales in fiscal 2016, partially offset by the closure of nine franchise-operated bakery-cafes in fiscal 2016.
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, partially offset by the closure of 14 franchise-operated bakery-cafes in fiscal 2015.

27



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 27, 2016
 
December 29, 2015
 
December 30, 2014
 
% Change in 2016
 
% Change in 2015
Cost of food and paper products
$
709,251

 
$
715,502

 
$
669,860

 
(0.9
)%
 
6.8
%
As a percentage of bakery-cafe sales, net
29.1
%
 
30.3
%
 
30.0
%
 
 
 
 
The decrease in the cost of food and paper products in fiscal 2016 as a percentage of net bakery-cafe sales was primarily due to improved leverage from higher comparable net bakery-cafe sales, benign food cost inflation, and margin improvement efforts.
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.

Labor

The following table summarizes labor expense for the periods indicated (dollars in thousands):
 
For the fiscal year ended
 
 
 
 
 
December 27, 2016
 
December 29, 2015
 
December 30, 2014
 
% Change in 2016
 
% Change in 2015
Labor expense
$
790,238

 
$
754,646

 
$
685,576

 
4.7
%
 
10.1
%
As a percentage of bakery-cafe sales, net
32.5
%
 
32.0
%
 
30.7
%
 
 
 
 
The increase in labor expense in fiscal 2016 as a percentage of net bakery-cafe sales was primarily a result of structural wage increases and increased labor supporting ongoing operational initiatives, partially offset by improved leverage from higher comparable net bakery-cafe sales.
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.

Occupancy

The following table summarizes occupancy cost for the periods indicated (dollars in thousands):
 
For the fiscal year ended
 
 
 
 
 
December 27, 2016
 
December 29, 2015
 
December 30, 2014
 
% Change in 2016
 
% Change in 2015
Occupancy
$
167,717

 
$
169,998

 
$
159,794

 
(1.3
)%
 
6.4
%
As a percentage of bakery-cafe sales, net
6.9
%
 
7.2
%
 
7.2
%
 
 
 
 
The decrease in occupancy costs in fiscal 2016 as a percentage of net bakery-cafe sales was primarily the result of improved leverage from higher comparable net bakery-cafe sales.
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.

28





Other operating expenses

The following table summarizes other operating expenses for the periods indicated (dollars in thousands):
 
For the fiscal year ended
 
 
 
 
 
December 27, 2016
 
December 29, 2015
 
December 30, 2014
 
% Change in 2016
 
% Change in 2015
Other operating expenses
$
359,609

 
$
334,635

 
$
314,879

 
7.5
%
 
6.3
%
As a percentage of bakery-cafe sales, net
14.8
%
 
14.2
%
 
14.1
%
 
 
 
 

The increase in other operating expenses in fiscal 2016 as a percentage of net bakery-cafe sales was primarily the result of losses from asset disposals and impairments recorded during fiscal 2016 and increased other controllable expenses, partially offset by lower utility costs.
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.

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 27, 2016
 
December 29, 2015
 
December 30, 2014
 
% Change in 2016
 
% Change in 2015
Fresh dough and other product cost of sales to franchisees
$
178,585

 
$
160,706

 
$
152,267

 
11.1
%
 
5.5
%
As a percentage of fresh dough and other product sales to franchisees
86.6
%
 
87.2
%
 
86.9
%
 
 
 
 
The decrease in fresh dough and other product cost of sales to franchisees in fiscal 2016 as a percentage of fresh dough and other product sales to franchisees was primarily the result of lower wheat and fuel costs.
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.

Depreciation and amortization

The following table summarizes depreciation and amortization for the periods indicated (dollars in thousands):
 
For the fiscal year ended
 
 
 
 
 
December 27, 2016
 
December 29, 2015
 
December 30, 2014
 
% Change in 2016
 
% Change in 2015
Depreciation and amortization
$
154,355

 
$
135,398

 
$
124,109

 
14.0
%
 
9.1
%
As a percentage of total revenues
5.5
%
 
5.0
%
 
4.9
%
 
 
 
 
The increase in depreciation and amortization in fiscal 2016 as a percentage of total revenues was primarily the result of increased depreciation on investments in bakery-cafes and support centers, inclusive of technology, to support ongoing operational initiatives.
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, inclusive of technology, to support ongoing operational initiatives, partially offset by the cessation of depreciation on assets classified as held for sale.

29




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 27, 2016
 
December 29, 2015
 
December 30, 2014
 
% Change in 2016
 
% Change in 2015
General and administrative expenses
$
179,876

 
$
142,904

 
$
138,060

 
25.9
%
 
3.5
%
As a percentage of total revenues
6.4
%
 
5.3
%
 
5.5
%
 
 
 
 
The increase in general and administrative expenses in fiscal 2016 as a percentage of total revenues was primarily a result of higher incentive compensation expense, amounts reserved for legal matters, and increased costs to support ongoing strategic initiatives.
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.

Refranchising loss

In February 2015, we announced a plan to refranchise approximately 50 to 150 bakery-cafes. As of December 27, 2016, we had completed the refranchising of 102 Company-owned bakery-cafes.

The following table summarizes activity for the periods indicated (dollars in thousands):
 
For the fiscal year ended
 
December 27, 2016
 
December 29, 2015
Loss on assets held for sale
$
6,112

 
$
10,999

Lease termination costs and impairment of long-lived assets
2,858

 
5,461

Professional fees, severance, and other
795

 
1,088

Loss (gain) on sale of bakery-cafes
(693
)
 
(440
)
Refranchising loss
$
9,072

 
$
17,108


During fiscal 2016, we recognized lease termination costs totaling $1.8 million and impairment losses of $1.1 million. On May 3, 2016, we sold substantially all of the assets of 15 bakery-cafes for a purchase price of approximately $15.2 million, which resulted in a gain on sale of approximately $0.5 million. On September 13, 2016, Panera International Holdings, Inc., a subsidiary of Panera Bread Company, sold all of its shares of stock of Panera Bread Ltd., as successor to Panera Bread ULC, a Canadian subsidiary, to a new franchisee for a purchase price of approximately $5.0 million, which resulted in a gain on sale of approximately $0.2 million. Prior to the sale of the shares of stock of Panera Bread Ltd., we recognized a $6.1 million loss on assets held for sale related to the 12 bakery-cafes in Ontario, Canada whose ownership transferred in the sale.

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 a purchase price 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 approximately $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 was $1.4 million of expense in fiscal 2016 compared to $1.2 million of expense in fiscal 2015. Other (income) expense, net for both fiscal 2016 and fiscal 2015 was primarily comprised of immaterial items.

30




Other (income) expense, net was $1.2 million of expense in fiscal 2015 compared to $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.
Income taxes

The following table summarizes income taxes for the periods indicated (dollars in thousands):
 
For the fiscal year ended
 
 
 
 
 
December 27, 2016
 
December 29, 2015
 
December 30, 2014
 
% Change in 2016
 
% Change in 2015
Income taxes
$
84,258

 
$
87,247

 
$
98,001

 
(3.4
)%
 
(11.0
)%
Effective tax rate
36.7
%
 
36.9
%
 
35.3
%
 
 
 
 
The decrease in the effective tax rate from fiscal 2015 to fiscal 2016 was primarily a result of an increased charitable deduction as a result of the Tax Relief Extension Act of 2015, partially offset by the recognition of $7.0 million of refranchising charges for which we cannot currently realize the associated tax benefit.
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.

Liquidity and Capital Resources
Cash and cash equivalents were $105.5 million at December 27, 2016 compared to $241.9 million at December 29, 2015. This $136.4 million decrease was primarily a result of the use of $377.2 million to repurchase shares of our Class A common stock and capital expenditures of $200.1 million, partially offset by cash generated from operations of $387.5 million, proceeds from borrowings under our revolving credit facility of $40 million, and proceeds from refranchising, sale-leaseback transactions, and the sale of property and equipment totaling $25.3 million. 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 revolving 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.
We had negative working capital of $136.9 million as of December 27, 2016 compared to positive working capital of $43.1 million as of December 29, 2015, excluding assets held for sale and liabilities associated with assets held for sale as of December 29, 2015. The decrease in working capital resulted primarily from the previously described decrease in cash and cash equivalents of $136.4 million, an increase in accrued expenses of $49.2 million, partially offset by an increase in prepaid expenses and other of $9.7 million. We believe that cash provided by our operations, term loan borrowings, and available borrowings under our existing revolving 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 27, 2016
 
December 29, 2015
 
December 30, 2014
Operating activities
 
$
387,541

 
$
318,045

 
$
335,079

Investing activities
 
(174,516
)
 
(165,415
)
 
(211,317
)
Financing activities
 
(349,382
)
 
(107,237
)
 
(52,514
)
Net (decrease) increase in cash and cash equivalents
 
$
(136,357
)
 
$
45,393

 
$
71,248


31




Operating Activities
Cash provided by operating activities was $387.5 million, $318.0 million, and $335.1 million in fiscal 2016, fiscal 2015, and fiscal 2014, 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 2016 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 an increase in prepaid expenses and other. The increase in accrued expenses was primarily due to an increase in accrued compensation and related employment taxes, an increase in the balance of outstanding gift cards, and an increase in accrued advertising. The increase in prepaid expenses was primarily due to an increase in prepaid insurance amounts.
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.
Investing Activities
Cash used in investing activities was $174.5 million, $165.4 million, and $211.3 million in fiscal 2016, fiscal 2015, and fiscal 2014, 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 27, 2016
 
December 29, 2015
 
December 30, 2014
New bakery-cafes
 
$
84,001

 
$
115,552

 
$
109,941

Existing bakery-cafes
 
63,190

 
59,081

 
57,915

Fresh dough facilities
 
13,793

 
12,175

 
12,178

Support centers and IT infrastructure
 
39,079

 
37,124

 
44,183

Total
 
$
200,063

 
$
223,932

 
$
224,217


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 2017.

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Sale-Leaseback Transactions
During fiscal 2016, fiscal 2015, and fiscal 2014, we completed sale-leaseback transactions for three, four, and six Company-owned bakery-cafes, respectively, resulting in cash proceeds of $8.9 million, $10.1 million, and $12.9 million, respectively.
Financing Activities
Cash used in financing activities was $349.4 million, $107.2 million, and $52.5 million in fiscal 2016, fiscal 2015, and fiscal 2014, respectively. Financing activities in fiscal 2016 consisted primarily of $377.2 million used to repurchase shares of our Class A common stock, partially offset by $40.0 million of proceeds from borrowings under our revolving credit facility. 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.
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. On June 5, 2014, our Board terminated the 2012 repurchase authorization.
On June 5, 2014, 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 2014 repurchase authorization, pursuant to which we repurchased shares on the open market under a Rule 10b5-1 plan. On April 15, 2015, our Board approved an increase of the 2014 repurchase authorization to $750 million. On May 19, 2016, our Board terminated the 2014 repurchase authorization.
On May 19, 2016, 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 2016 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 the Company as treasury stock. The 2016 repurchase authorization may be modified, suspended, or discontinued by our Board at any time. There was approximately $397.7 million available under the 2016 repurchase authorization as of December 27, 2016.
The following table summarizes share repurchase activity for fiscal 2016, fiscal 2015, and fiscal 2014:

 
For the fiscal year ended
 
December 27,
2016
 
December 29,
2015
 
December 30,
2014
2016 Repurchase Authorization
 
 
 
 
 
Shares repurchased
975,673

 
 
 
 
Average price per share
$
207.31

 
 
 
 
Aggregate purchase price (in millions)
$
202.3

 
 
 
 
2014 Repurchase Authorization
 
 
 
 
 
Shares repurchased
839,759

 
2,201,719

 
427,521

Average price per share
$
201.15

 
$
181.65

 
$
155.78

Aggregate purchase price (in millions)
$
168.9

 
$
399.9

 
$
66.6

2012 Repurchase Authorization
 
 
 
 
 
Shares repurchased
 
 
 
 
514,357

Average price per share
 
 
 
 
$
170.15

Aggregate purchase price (in millions)
 
 
 
 
$
87.5

Total
 
 
 
 
 
Shares repurchased
1,815,432

 
2,201,719

 
941,878

Average price per share
$
204.46

 
$
181.65

 
$
163.62

Aggregate purchase price (in millions)
$
371.2

 
$
399.9

 
$
154.1


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In addition to repurchases under the 2016 repurchase authorization, 2014 repurchase authorization, and 2012 repurchase authorization, 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 2016, we repurchased 27,478 shares of Class A common stock surrendered by participants of the Plans at an average price of $216.42 per share for an aggregate purchase price of approximately $5.9 million. 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. 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.

On February 1, 2017, we entered into a term loan agreement, or the 2017 Term Loan Agreement, with Bank of America, N.A., as administrative agent, and other lenders party thereto. The 2017 Term Loan Agreement provides for up to two unsecured drawdowns of a term loan in the aggregate principal amount of up to $200 million, or the 2017 Term Loan. The 2017 Term Loan is scheduled to mature on February 1, 2022, 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 2017 Term Loan Agreement. On February 1, 2017, we made a $100 million drawdown on the 2017 Term Loan.
Each of the 2014 Term Loan, 2015 Term Loan, and 2017 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 27, 2016, there was $100.0 million and $281.3 million outstanding under the 2014 Term Loan Agreement and 2015 Term Loan Agreement, respectively.
The weighted-average interest rate for the 2014 Term Loan, including the amortization of lender fees and issuance costs and the impact of our interest rate swaps, was 2.24 percent, 1.21 percent, and 1.15 percent for fiscal 2016, fiscal 2015, and fiscal 2014, respectively. The weighted-average interest rate for the 2015 Term Loan, including the amortization of lender fees and issuance costs and the impact of our interest rate swaps, was 2.02 percent and 1.33 percent for fiscal 2016 and fiscal 2015, respectively. As of December 27, 2016, the carrying amounts of the 2014 Term Loan and 2015 Term Loan approximate fair value as the interest rates approximate current market rates (Level 2 inputs).
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. On January 9, 2017, we entered into consecutive forward-starting interest rate swaps agreements with an initial notional value of $200 million. The forward-starting interest rate swaps have been designated as cash flow hedging instruments.

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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 27, 2016, there was $7.6 million outstanding under the Master IPA.
Revolving Credit Agreement

On July 16, 2015, we entered into a 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 27, 2016, we had $40.0 million outstanding under the 2015 Credit Agreement.

The 2014 Term Loan Agreement, 2015 Term Loan Agreement, 2015 Credit Agreement, and 2017 Term Loan 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 27, 2016, 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 and estimates 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 2016.
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 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

35



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 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 $11.2 million for fiscal 2016, $6.9 million for fiscal 2015, and $4.9 million for fiscal 2014. 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 component of other operating expenses 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.
During the fourth quarter of fiscal 2016, we performed an assessment of qualitative factors to determine if the fair value of our reporting units was more-likely-than-not greater than their carrying amounts, evaluating factors including, but not limited to, macro-economic conditions, market and industry conditions, internal cost factors, competitive environment, share price fluctuations, the significance of the excess of the reporting unit's estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments, and the operational stability and the overall financial performance of the reporting units. We concluded it is more-likely-than-not that the fair value of our reporting units was greater than their carrying amounts on a reporting unit basis. Accordingly, we did not recognize any impairment charges during fiscal 2016.
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 differs from these assumptions and historical trends. Based on information known at December 27, 2016, we believe we have provided adequate reserves for our self-insurance exposure. We held self-insurance reserves of $41.7 million as of December 27, 2016 and $37.2 million as of December 29, 2015, which were included in accrued expenses in the Consolidated Balance Sheets.

36



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 $11.3 million and $5.3 million as of December 27, 2016 and December 29, 2015, respectively, against all Canadian deferred tax assets, including the net operating loss carryforwards of our 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
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.

37



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 $4.0 million, $3.8 million, and $0.9 million during fiscal 2016, fiscal 2015, and fiscal 2014, respectively, related to distinct under-performing Company-owned bakery-cafes. For fiscal 2016, $2.9 million of the impairment losses were recorded in other operating expenses and $1.1 million of the impairment losses were recorded in refranchising loss in the Consolidated Statements of Income. For fiscal 2015, the impairment losses were recorded in refranchising loss in the Consolidated Statements of Income. For fiscal 2014, the 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 term loan borrowings and borrowings under our revolving credit agreement; 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 27, 2016, 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):