Panera Bread Case AnalysisExecutive SummaryPanera Bread Compan.docx

Panera Bread Case Analysis
Executive Summary
Panera Bread Company is a bakery café, and it engages in
providing a meal and dining environment with high quality for
customers. The company had more than 1,000 bakery-cafes in
46 states by the end of 2006. From 2003 to 2006, the company
had strong margin, and it could finance its rapid growth through
retained earnings. However, the company was expected to have
tighter margins in 2007 because of rising commodity costs.
Furthermore, the company’s stock price significantly dropped
by 10% as a result of forecast growth in 2007. If the company
wanted to continue to improve margins, it could not increase the
prices or rely on internal channel generating funds to finance
the growth. Increasing prices would decrease sales and possibly
make stock price further decline. Also, it would limit the ability
of internal funding to achieve the firm’s expected growth due to
tighter margins. Therefore, Panera should use both short-term
and long-term debt to finance the growth. Furthermore, the
company should repurchase $75 million stock in 2008, because
repurchasing stock can reduce the supply of stock so that the
stock price increases again. Also, reducing the supply of stock
can send a positive signal to the market that the firm is doing
well. For long-term debt borrowing, the firm should
respectively borrow $60,984,000, $188,019,000, $277,600,000,
$250,004,000, $219,460,000, $185,762,000 in 2007, 2008,
2009, 2010, 2011 and 2012. In the short run, the firm can
increase its liability by $166,688 in 2008, $208,359 in 2009,
$218,777 in 2010, $229,716 in 2011 and $241,202 in 2012.
Also, the firm can increase its deferred rent and other liability
by $56,438 in 2008, $70547 in 2009, $74,074 in 2010, $77,778
in 2011 and $81,667 in 2012.
Analysis and Recommendation
First of all, Panera had tighter margin because of low
transaction growth and uncertain cost. In other words, Panera’s

low net income cannot help business continue operating
comfortably and cannot avoid potential financial problems. In
addition, Panera’s stock price decreased quickly in the past
years, which means Panera cannot issue new stocks anymore. In
the stock market, if Panera increase the supply of their stocks,
the stock prices will drop faster, because the supply of stock is
greater than the demand of the stock. Thus, Panera has to
increase the stock price. And Panera chose to repurchase stock
from market because they want to decrease the shares of
outstanding stock in the market. According to law of supply,
when the quantity of supply going down, the price of supply
going up. Besides, Panera can send a positive signal to the
market that the firm is doing well, to attract new customers and
new investors’ attention. The way to repurchase stocks would
cause a result in increasing the demand of the stocks and the
stock price. Therefore, Panera can repurchase stocks and
increase the stock price later.
Secondly, we assume that the interest rate on all kinds of debt
borrowing is 6%, and that the stock repurchase only occurs in
2008. Assume sales growth of 25% for 2008 and 2009 and 5%
thereafter.
All the items are measured as a fixed percentage of its revenue
of the same year. The fixed percentage is assumed as following.
Bakery Café
72.00%
Dough Sold to Franchisees
8.20%
Depreciation
5.30%
General and Administrative
7.40%
Current Assets
14.00%
Property, Plant, and Equip.

41.00%
Goodwill and Other
9.50%
Current Liabilities
12.70%
Deferred Rent and Other
4.30%
Tax Rate
37.00%
YEAR
2007
2008
2009
2010
2011
2012
current ratio
1.15
1.10
1.10
1.10
1.10
1.10
Based on the forecasting, the firm should increase its current
liability by $166,688 in 2008, $208,359 in 2009, $218,777 in
2010, $229,716 in 2011 and $241,202 in 2012. Since the
company’s forecast of current ratio is 1.15 in 2007, 1.10 in
2008, 1.10 in 2009, 1.10 in 2010, 1.10 in 2011, and 1.10 in
2012, which are greater than 1.0, it means Panera’s current asset
can cover its current liabilities, and it has an efficient use of
cash. Thus, Panera should use short-term debt to finance the
growth.
YEAR

2007
2008
2009
2010
2011
2012
total debt ratio
0.34
0.49
0.53
0.49
0.45
0.42
According to the calculation, the firm should borrow long term
debt in following five years for $60,984 in 2007, $188,019 in
2008, $277,600 in 2009, $250,004 in 2010, $219,460 in 2011,
and $185,762 in 2012. Because the total debt ratio will be 0.34
in 2007, 0.49 in 2008, 0.53 in 2009, 0.49 in 2010, 0.45 in 2011,
and 0.42 in 2012, which means Panera has long term ability to
meet its debt obligations. Thus, Panera should use short term
debt and long term debt combination based on the analysis.
YEAR
2007
2008
2009
2010
2011
2012
times interest earned

586.67
25.47
10.33
7.34
8.56
10.24
Based on the external financing needed calculated from the
spreadsheet, the forecast of time interest earned ratio will be
586.67 in 2007, 25.47 in 2008, 10.33 in 2009, 7.34 in 2010,
8.56 in 2011, and 10.24 in 2012, which means Panera’s earnings
before interest and taxes can cover its interest obligation.
Lastly, by Panera forecast of its profit margin is 5.37% in 2007,
4.30% in 2008, 4.04% in 2009, 3.86% in 2010, 3.95% in 2011,
and 4.04% in 2012, which means Panera can still make profit in
the future, even though the profit is growing slowly. Panera’s
forecast of return on asset is 0.08 in 2007, 0.07 in 2008, 0.06 in
2009, 0.06 in 2010, 0.06in 2011, and 0.06 in 2012. These data
measure the profit or earing the firm makes for every dollar in
total assets are stable. And forecast of return on equity 0.12 in
2007, 0.13 in 2008, 0.13 in 2009, 0.12 in 2010, 0.11in 2011, and
011 in 2012, these data indicate the profit or earrings the firm
making for every dollar in total equity are stable. According to
these calculation results, the company has ability to pay for
both long-term and short-term debt when they use the short term
and long term debt combination.
Conclusion.
After the analysis, Panera should repurchase $75 million stock
and use short term and long term debt combination to finance its
growth. Panera should borrow $60,984,000, $188,019,000,
$277,600,000, $250,004,000, $219,460,000, $185,762,000 in
2007, 2008, 2009, 2010, 2011 and 2012 in the long term. And
the company can increase its liability by $166,688 in 2008,
$208,359 in 2009, $218,777 in 2010, $229,716 in 2011 and
$241,202 in 2012 in the short run.

UVA-F-1575
Rev. Sept. 3, 2009
This case was prepared by Associate Professor Marc Lipson. It
was written as a basis for class discussion rather than
to illustrate effective or ineffective handling of an
Virginia Darden School Foundation, Charlottesville, VA. All
rights reserved. To order copies, send an e-mail to
[email protected] No part of this publication may be
reproduced, stored in a retrieval system,
used in a spreadsheet, or transmitted in any form or by any
means—electronic, mechanical, photocopying,
recording, or otherwise—without the permission of the Darden
School Foundation. Rev. 9/09.

PANERA BREAD COMPANY
As the end of 2007 drew near, Panera Bread Company was
facing a brand-new challenge.
Until recently, strong margins had allowed Panera to finance its
rapid growth largely through
retained earnings and very minor equity infusions resulting
from compensation programs. The
company used no permanent debt financing and, in fact, had
allowed a $10 million dollar credit
facility to expire. But now Panera was facing a decline in
margins that would limit its ability to
rely on internal funds. With growth expected to continue and a
$75 million stock repurchase
under consideration, the company realized it would almost
surely need capital from external
markets—in both the short run and the long run.
History and Business Model
Panera Bread Company had its origins in another successful
bread venture, Au Bon Pain

Co., which was founded in 1981. The success of Au Bon Pain in
the 1980s gave rise to the 1993
purchase of Saint Louis Bread Company, a small bakery-café
company located in St. Louis,
Missouri. By the end of 1999, the Saint Louis Bread Company
concept was being expanded
under the Panera Bread name, Au Bon Pain had sold off all its
units except Panera Bread, and Au
Bon Pain itself had adopted the Panera name.
The goal of Panera Bread Company was to create a dining
experience centered on fresh-
baked bread in an environment where people “slowed down to
enjoy real food.”1 Its emphasis on
wholesome foods and a welcoming environment placed the
company in stark contrast to the fast-
food experience that dominated the multiunit restaurant
business. An essential element was a
commitment to high-quality bread. Panera breads were baked
fresh every day, at every location.
The bread was featured in virtually all the store offerings,
including such selections as made-to-
order sandwiches and soup served in a bread bowl.

Ensuring high-quality bread required the best ingredients,
specialized equipment, and
careful training. For example, Panera baked its breads on heated
stone slabs in European-style
1
Panera Bread Company annual report, 2006.
DardenBusinessPublishing:228197
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Page 1 of 8
-2- UVA-F-1575
ovens. Customers appreciated the results—Panera consistently
earned recognition for the quality
of its offerings, often attaining the top position in customer-
satisfaction surveys. The essential
business model, therefore, was to provide a meal and dining
environment of sufficient high
quality that customers would gladly pay for that quality—at a
price that would also make the
company financially successful.
The success of this business model was readily apparent.
Starting with just 20 stores in
1993, the firm had more than 1,000 locations across 38 states by
the end of 2006 operating under

the Panera Bread and Saint Louis Bread Co. names.2 During
2006 alone, the company increased
its number of outlets by 17% and attained more than 4% same-
store sales growth. For the three
years ending in 2006, total revenues grew an average of 32% a
year with operating profit to sales
averaging 12%.3
Recent Challenges
A key measure of success in the restaurant business was
transaction growth—the increase
in same-store sales ignoring the effect of price increases.
Transaction growth at the start of 2007,
continuing a trend from the very end of 2006, was lower than
anticipated. In addition, margins
for 2006, while strong, were down slightly from the previous
two years (financial statements for
2003 to 2006 are presented in Exhibits 1 and 2 with a forecast
of operating results for 2007
presented in Exhibit 3) and were expected to be lower in 2007.
These problems were not unique
to Panera. Commodity costs, particularly wheat, had risen, and
cost uncertainty was a concern

for the entire restaurant industry.4 To drive transaction growth
for the future, the company might
need to back off on price increases even in the face of rising
costs. In other words, to sustain the
firm’s growth, Panera might have to operate at tighter margins.
Furthermore, as a result of tightening margins, uncertain costs,
and a softening in
transaction growth in 2007, Panera’s stock price had dropped a
precipitous 10% on the
announcement of third-quarter results and was down almost
40% over the past year (Exhibit 4
presents recent stock price data). In response, the firm was
considering a $75 million dollar stock
repurchase. As JPMorgan analyst Steven Rees observed, the
repurchase would signal
management’s position on the “long-term potential of the
business as well as many company-
specific near-term initiatives to drive sales and margin
improvements.”5
2
http://www.panerabread.com/about/press/kit/ (accessed October

7, 2008).
3
Panera Bread Company annual report, 2006.
4
Melanie Lindner, “Panera: This Bread is Not
Rising,”Forbes.com Market Scan, October 24, 2007 (accessed
October 6, 2008).
5
Melanie Lindner, “Panera Bread Leavening,” Forbes.com,
Market Scan, November 28, 2007.
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-3- UVA-F-1575
Financing
In the past, Panera had financed growth through retained
earnings and through the modest
increases in equity capital that resulted from the exercise of
stock options and employee stock
ownership plans. In effect, there had been little reliance on
external capital.
6
This reluctance to
assume debt was typical of some, but not all, competitors
(Exhibit 5 presents capital structure

information for a variety of dining companies). As 2007 drew to
a close, however, Panera Bread
Company was clearly stuck between a rock and a hard place.
Raising prices to improve margins
would stymie company growth and likely precipitate a further
decline in the firm’s stock price.
Accepting tighter margins would allow growth but limit the
ability of internally generated funds
to finance that growth. Adding to this conflict was the need to
raise funds to make the stock
repurchase. In the end, it was clear that Panera would have to
consider, for the first time,
accessing external capital markets. The real question was how
much, what kind, and when.
6
The company did have small, occasional borrowings. These
were not outstanding at year end and were the
reason the company showed small amounts of interest expense.
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-4- UVA-F-1575
Exhibit 1

Historic Income Statements
(in thousands of dollars)
2003 2004 2005 2006
Number of bakery cafés
(a)
602 741 877 1,027
Revenue 363,702 479,139 640,275 828,971
Costs of goods sold
Bakery-café 210,822 288,706 399,760 542,916
Dough sold to franchisees 54,967 65,627 75,036 85,618
Depreciation 18,304 25,298 33,011 44,166
General and administrative
(b)
31,502 38,735 50,240 63,502
315,595 418,366 558,047 736,202
Operating profit 48,107 60,773 82,228 92,769

Interest expense 48 18 50 92
Pretax profit 48,059 60,755 82,178 92,677
Tax 17,629 22,175 29,995 33,827
Net income 30,430 38,580 52,183 58,850
(a)
Includes both company-owned and franchised bakery-cafés.
(b)
Includes preopening expenses and other expenses.
Data source: Panera Bread Company annual reports, 2003–06.
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-5- UVA-F-1575
Exhibit 2
Historic Balance Sheets
Historic Balance Sheets:

2003 2004 2005 2006
Cash and short-term investments 51,421 58,054 60,651 72,122
Accounts receivable 12,394 17,256 25,158 30,919
Inventory 4,350 5,398 7,358 8,714
Prepaid expenses and deferred taxes 3,887 3,905 9,607 15,863
Current assets 72,052 84,613 102,774 127,618
Property, plant, and equipment 146,362 201,725 268,809
345,977
Goodwill and other assets 38,421 38,334 66,084 69,014
Total assets 256,835 324,672 437,667 542,609
Accounts payable 8,072 5,840 4,422 5,800
Accrued expenses and deferred revenue 37,571 49,865 82,443
103,810
Current liabilities 45,643 55,705 86,865 109,610
Deferred rent and other liabilities 13,616 27,604 33,824 35,333
Total liabilities 59,259 83,309 120,689 144,943

Equity 197,576 241,363 316,978 397,666
256,835 324,672 437,667 542,609
Data source: Panera Bread Company annual reports, 2003–06.
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-6- UVA-F-1575
Exhibit 3
2007 Operating Forecast
(a)
Number of Bakery Cafés
(b)
1,230
Revenue 1,050,000

Costs of goods sold
Bakery-café 738,000
Dough sold to franchisees 86,000
Depreciation 60,000
General and administrative
(c)
78,000
962,000
Operating profit 88,000
Interest expense 150
Pretax profit 87,850
Tax 31,500
Net income 56,350
Current assets 150,000
Property, plant, and equipment 430,000
Goodwill and other assets 110,000
Total assets 690,000

Current liabilities 130,000
Deferred rent and other liabilities 45,000
Total liabilities 175,000
(a)
Case writer estimate based on third quarter results.
(b)
Includes both company-owned and franchised bakery-cafés.
(c)
Includes preopening expenses and other expenses.
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Exhibit 4
Stock Price History
Data source: Datastream.
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Exhibit 5
Data on Comparable Firm Capital Structure
Estimates for Year-End 2007 11/30/2007
Revenue EBIT LT Debt Price Shares
Quick Service Restaurants
McDonald’s Corp 22,786,600 3,879,000 8,174,500 56.32
1,165,300
Wendy’s Group Inc. 1,263,717 19,900 739,333 8.10 28,884
Burger King Holdings Inc. 2,234,000 290,000 943,000 25.90
135,000
Domino’s Pizza, Inc. 1,462,870 193,910 1,720,083 13.86
59,665
Jack in the box Inc. 2,513,431 216,996 433,303 29.95 59,736
Casual Dining
Darden Restaurants Inc. 5,567,100 574,400 491,600 38.25
141,400
Ruby Tuesday Inc. 1,410,227 154,855 514,338 13.11 53,240

PF Chang’s China Bistro Inc. 1,084,193 53,312 191,195
25.59 24,152
The Cheesecake Factory Inc. 1,511,577 110,803 175,000
23.29 69,152
California Pizza Kitchen Inc. 632,884 21,517 0 15.91 28,358
Fast Casual
Chipotle Mexican Grill, Inc. 1,085,782 113,706 0 133.15
32,805
Starbucks Corp. 9,411,497 1,053,945 550,000 23.39 727,600
Buffalo Wild Wings Inc. 329,652 28,518 12,585 28.91
17,657
Data sources: Investex, Onesource, Yahoo! Finance, and
individual firm 10-K filings.
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Panera Bread Case AnalysisExecutive SummaryPanera Bread Compan.docx

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