Panera Bread's CEO Discusses F4Q11 Results - Earnings Call Transcript

Panera Bread Co (

PNRA

)

F4Q11 Earnings Call

February 8, 2012, 8:30 am ET

Executives

Michele Harrison – Vice President, Investor Relations

William W. Moreton – President and Chief Executive Officer

Jeffrey Kip – Executive Vice President and Chief Financial Officer

Analysts

Matthew DiFrisco – Lazard Capital Markets

John Glass – Morgan Stanley

Peter Saleh – Telsey Advisory Group

Michael Kelter – Goldman Sachs

Jeffrey Bernstein – Barclays Capital

Jason West – Deutsche Bank

Joseph Buckley – Bank of America/Merrill Lynch

David Tarantino – Robert W. Baird

Mitch Speiser – Buckingham Research

Alexander Slagle – Jefferies

Robert M. Derrington – Morgan, Keegan & Company, Inc.

Nick Setyan – Wedbush Securities Inc.

Bart Glenn – D.A. Davidson & Co.

Bryan Elliott – Raymond James

Presentation

Operator

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Good day, everyone and welcome to today’s Panera Bread Company 2011 Fourth Quarter Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the call over to Michele Harrison. Please go ahead.

Michele Harrison

Thanks, (inaudible). Good morning to everyone, and welcome to Panera Bread’s fourth quarter 2011 earnings call. Here with me on the call this morning is Bill Moreton, our CEO and President; and Jeff Kip, our Executive Vice President and Chief Financial Officer.

Before we begin this morning, let me cover a few regulatory matters. I’d like to note that during our opening remarks and our responses to your questions, certain items will be discussed, which are not based on historical fact.

Any such items, including targeted 2012 results and conditions and details relating to 2012 performance, should be considered forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995. As such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Additionally, reconciliation’s from any non-GAAP numbers can be found in schedule four of our press release.

I’d like to now turn the call over to Bill now. Bill?

William Moreton

Thanks, Michele. Good morning, everyone. I’m pleased to announce another strong quarter. We are in the $0.42 per share in the fourth quarter, which represents 17% EPS growth over the prior year, excluding the impact of the one time charge of $5 million that we took related to the proposed settlement of the California litigation.

For the year, we are in $4.65 before charges, which represents a 28% EPS growth rate. This marks the fourth consecutive year that we’ve delivered 24% or greater EPS growth.

Our performance in 2011 was driven by our strong, both by our strong operating performance as well as our ability to generate EPS growth through deployment of our excess capital. Approximately 20% of our earnings growth in 2011 was driven by core operations, which was above our long-term operating earnings growth target of 12% to 17%. Additionally, an incremental 8% earnings growth was driven by the capital that we‘ve deployed over the last 12 months.

Looking first at our operating performance, there are many indicators that our investments in the quality of our concept and our competitive positioning are paying off. We’re very pleased to report we experienced transaction growth and gross profit growth in every day part again last year, marking the second consecutive year this has happened. This really speaks to one of Panera’s key competitive advantages that is that we compete in multiple day parts breakfast, lunch, chill, dinner and catering on a seven day a week basis.

Let’s now discuss sales in a little more detail. Our fourth quarter company comparable bakery-cafe sales increased 5.9%. This results in the two-year comp of 11.1%, which we believe is among the best in our industry. So far in 2012, our first quarter to-date company comparable store sales are up 8.9%. This includes approximately 350 basis points of positive weather impact as we roll over the storms in Q1 of last year.

For the first quarter, we are now targeting 7% to 7.5% comps, which includes an estimated 200 basis points of positive weather impact as the weather moderated last February and March. We’re now raising our comp guidance for the full year from 4% to 5%, to 4.5% to 5.5% based on the strength of our sales driving initiatives.

I would now like to quickly update you on our five key areas of investment that we’re making to drive continuous improvement in the quality of our customer experience and competitive differentiation. This has been at the heart of our success over the last several years and will be again in 2012.

First, the investments in our food. We’re continuing our strategy of category ownership. We will continue to bring new innovative products to our menu, while improving quality of ingredients we use in our existing menu items. One of the key focus areas in 2011 was the rollout of our new Panini program, highlighted by our new proprietor Panini grill, and the introduction of several new proteins using the sous-vide cooking method.

Our Panini sandwich sales have increased 16%, since the rollout of the grills in the second quarter of 2011, and our hot breakfast sandwich sales increased 15% in 2011. While we are appreciative of this success, we recognized that it takes time to truly cement yourself in the consumer’s minds as the place to go for quality hot sandwiches at breakfast and lunch. As a result, Panini sandwiches and breakfast sandwiches are again going to be a focus for us in 2012.

In the first quarter, we rolled out our new Mediterranean Egg White Breakfast Sandwich that is performing very well, and we will be rolling out our new roasted turkey cranberry Panini later this year that tested very well in the Chicago market in the fourth quarter of last year.

We believe that the quality of our hot sandwiches in concert with our increased messaging will again drive significant growth in this category in 2012. Another key focus area for us this year will be the continued improvement of our [produce]. We’re now focusing on tomatoes. And just as we did with lettuce, by controlling the quality from the field to the fork, we expect to be able to bring a considerably higher quality, fresher tomato product to our customers that will noticeably improve both our salad and sandwich offerings.

The second key area of investment that I’d like to touch upon is marketing. As we've mentioned previously, we continue to be early on in our advertising journey and spend relatively less money on advertising than most of our national competitors. In 2011, our advertising spending increased 32% over 2010 levels. However, that only equates to our spending going from 1.1% of system wide sales to 1.3%. In 2012, we intent to grow our advertising spending by 26% over 2011 levels and go from 1.3% to 1.5% of sales.

As we carefully increase our spending, we continue to monitor its effectiveness and continue to believe that we’re getting more than $1 of profit for each $1 of media that we’re spending. Even more importantly, we’re continuing to increase consumers’ quality awareness of Panera’s key points of differentiation. I would also like to note that we’ll be running our first national cable advertising at the end of the first quarter.

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