Panera Bread: Reports Q3-2016 Financial Results

St. Louis / MO. (pbc) Panera Bread Company reported in November financial results for fiscal Q3-2016. Highlights: Q3-2016 Company-owned comparable net bakery-cafe sales increased 3.4 percent, up 7.2 percent on a two-year basis. Q3-2016 GAAP Diluted EPS increased to 1.37 USD, up 8 percent. Q3-2016 Non-GAAP Diluted EPS (excluding refranchising charges) increased to 1.37 USD, up 4 percent. The Company raises its FY 2016 Non-GAAP EPS target; full year Non-GAAP EPS target range is now 6.67 USD to 6.72 USD, up 7 percent to 8 percent. Digital utilization rate of 22 percent in Company-owned bakery-cafes at the end of Q3-2016. Delivery now available in 13 percent of system-wide bakery-cafes, including 20 percent of Company-owned bakery-cafes.

Ron Shaich, Chairman and CEO, commented, «Many years ago we foresaw the forces reshaping the restaurant industry and conceived a strategic plan to capitalize on them. Recognizing the potential of digital, we built Panera 2.0, a comprehensive guest experience platform enabled by digital. Recognizing the increasingly omni-channel nature of commerce, we accelerated our growth of catering, delivery, Rapid Pick-Up and Panera at Home. Recognizing the changing nature of competition, we enabled innovation in food, marketing, operations and design. Consistent with that intent, we saw the growing importance of wellness and doubled down on our commitments to transparency, clean food and having a positive impact on the food system. Further, we recognized the power of loyalty and created a program that is now the industry’s largest and arguably most impactful. While others in the industry are just now recognizing and beginning to tap into these themes, I am pleased to say that Panera is years ahead in our efforts and we believe we are wellpositioned for long-term success».

Shaich continued, «The power of our multi-year strategic plan and the impact of our initiatives to transform Panera into a better competitive alternative with expanded runways for growth becomes clearer each quarter. Despite an industry slowdown, our Q3 comps rose 3.4 percent and our two-year comps were up 7.2 percent. What’s more, our year-over-year growth in GAAP EPS was up 8 percent. With peak investments and significant scale behind us, our pace is quickening as we focus on completing the rollout of these initiatives and reaping the benefits. That’s why we are confident our efforts will translate into industry-leading comps and sustainable double-digit earnings growth in 2017».

Fiscal Q3-2016 Results and Business Review

GAAP net income for fiscal Q3-2016 was 32 million USD, or 1.37 USD per diluted share, or up 8 percent when compared to GAAP net income for fiscal Q3-2015 of 32 million USD, or 1.27 USD per diluted share. Excluding refranchising charges in both quarters (see table below), non-GAAP diluted EPS was 1.37 USD for fiscal Q3-2016 and 1.32 USD for fiscal Q3-2015, up 4 percent.

The following table sets forth, for the periods indicated, certain items included in the Company’s consolidated statements of income (in thousands, except per share data and percentages), including GAAP net income and diluted EPS and non-GAAP net income and diluted EPS, which excludes charges related to the Company’s refranchising initiative:

Q3/2016 Q3/2015 Change
Total revenue USD 684’206 USD 664’654 3 percent
Net income, excluding certain items USD 31’975 USD 32’393 -1 percent
Refranchising loss 129 2’174
Tax impact of adjustments (117) (788)
Net income, excluding certain items (Non-GAAP) USD 31’987 USD 33’779 -5 percent
Diluted EPS, as reported (GAAP) USD 1.37 USD 1.27 18 percent
Refranchising loss 0.01 0.09
Tax impact of adjustments (0.01) (0.04)
Diluted EPS, excluding certain items (Non-GAAP) USD 1.37 USD 1.32 4 percent
Shares used in diluted EPS 23’391 25’501 -8 percent

Comparable Net Bakery-Cafe Sales Growth

In fiscal Q3-2016, Company-owned comparable net bakery-cafe sales increased 3.4 percent, franchise-operated comparable net bakery-cafe sales increased 0.2 percent, and system-wide comparable net bakery-cafe sales increased 1.7 percent compared to the same period in fiscal 2015. Two-year Company-owned comparable net bakery-cafe sales increased 7.2 percent, two-year franchise-operated comparable net bakery-cafe sales increased 2.0 percent, and two-year system-wide comparable net bakery-cafe sales increased 4.5 percent. A schedule of comparable net bakery-cafe sales information is attached to this release as Schedule III.

Historically, the Company has 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 doesn’t believe 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.

To ease the confusion, and to reflect the growth of digitally-enabled, larger party-size channels, going forward, the Company will also disaggregate comparable net bakery-cafe sales growth into change in price, change in entrées sold (a measure of customers served), and change in mix. We refer to this disaggregation method as the «Omni-Channel View».

Using the Historical View, the Company-owned comparable net bakery-cafe sales increase of 3.4 percent in fiscal Q3-2016 was comprised of year-over-year average check growth of 4.9 percent and transaction decline of 1.5 percent. Average check growth was comprised of retail price increases of 2.4 percent and positive mix impact of 2.5 percent.

Using the Omni-Channel View, the Company-owned comparable net bakery-cafe sales increase of 3.4 percent in fiscal Q3-2016 was comprised of year-over-year retail price increases of 2.4 percent, yearover- year growth in entrées served of 0.9 percent, and positive mix impact of 0.1 percent.

Bakery-Cafe Margin

Bakery-cafe margin for fiscal Q3-2016 improved by approximately 30 basis points versus fiscal Q3-2015. The improvement was primarily driven by lower food cost due to improved leverage from higher comparable net bakery-cafe sales and benign food cost inflation, partially offset by structural wage increases and costs related to the startup and transition expenses associated with the Company’s strategic initiatives.

Operating Margin

GAAP operating margin for fiscal Q3-2016 decreased approximately 20 basis points versus fiscal Q3-2015. Excluding charges related to the Company’s refranchising initiative in both fiscal periods, as outlined in Schedule IV, non-GAAP operating margin for fiscal Q3-2016 decreased approximately 50 basis points versus fiscal Q3-2015. The decrease was primarily the result of a year-over-year increase in general and administrative expenses reflecting higher incentive compensation due to improved year-over-year Company performance and an increase in depreciation and amortization related to the Company’s investments in technology and growth initiatives.

New Bakery-Cafe Development and AWS

During fiscal Q3-2016, the Company opened 11 new bakery-cafes and its franchisees opened nine new bakery-cafes. As a result, there were 2’024 bakery-cafes open system-wide as of September 27, 2016.

Average weekly sales (AWS) for Company-owned «Class of 2016» bakery-cafes through fiscal Q3-2016 was 49’769 USD. AWS for franchise-operated «Class of 2016» bakery-cafes through fiscal Q3-2016 was 44’940 USD.

A schedule of fiscal Q3-2016 AWS, including AWS information for bakery-cafes based on their designation as either a traditional or non-traditional bakery-cafe, is attached to this release as Schedule II. Non-traditional bakery-cafes refers to a range of alternate formats that the Company believes will allow it to more deeply penetrate existing and new territories.

Update on Canada Strategic Review

On September 13, 2016, the Company completed the previously announced sale of 12 bakerycafes in the Canadian market to Franchise Management Incorporated, one of the largest operators of U.S.-based concepts in Canada, bringing the total number of refranchised bakery-cafes since the start of fiscal 2015 to 102.

Update on Use of Capital

During fiscal Q3-2016, the Company repurchased 433’029 shares at an average price of 211.69 USD per share for an aggregate purchase price of approximately 91.7 million USD. The Company has approximately 481.0 million USD available under the current 600 million USD repurchase authorization as of fiscal Q3-2016.

Fiscal Q4 2016 Outlook

Comparable Net Bakery-Cafe Sales Growth

The Company is setting a target for fiscal Q4 2016 Company-owned comparable net bakerycafe sales growth of 3.5 percent to 4.0 percent. The Company announced that Company-owned comparable net bakery-cafe sales in the first 27 days of fiscal Q4 2016 were up 3.4 percent and were up 6.8 percent on a two-year basis. The Company estimates the impact of Hurricane Matthew resulted in a transaction loss of approximately 35 to 40 basis points in the first 27 days of fiscal Q4 2016. As previously announced on the Company’s fiscal Q2 2016 earnings call, this is the last time the Company will report 27-day comparable net bakery-cafe sales.

Non-GAAP Diluted EPS

The Company raised its fiscal Q4 2016 non-GAAP diluted earnings per share target. The
Company is now targeting fiscal Q4 2016 non-GAAP diluted earnings per share of 1.96 USD to 2.01 USD,
up 4 percent to 7 percent, when compared to fiscal Q4 2015, excluding certain items in both periods.

Full Year Fiscal 2016 Outlook

Comparable Net Bakery-Cafe Sales Growth
The Company reiterated its targeted range for fiscal 2016 Company-owned comparable net bakery-cafe sales growth of 4.0 percent to 5.0 percent.

Non-GAAP Diluted EPS

The Company raised its full-year fiscal 2016 non-GAAP diluted earnings per share target. The Company is now targeting full-year fiscal 2016 non-GAAP diluted earnings per share of 6.67 USD to 6.72 USD, up 7 percent to 8 percent, when compared to full-year fiscal 2015, excluding certain items in both fiscal years.

New Bakery-Cafe Development and AWS

The Company continues to expect 90 to 100 system-wide bakery-cafe openings in fiscal 2016. The average weekly net sales performance for new Company-owned bakery-cafes is now expected to be modestly above the high-end of the previously provided targeted range of 45’000 USD to 47’000 USD.

Non-GAAP Operating Margin

For fiscal 2016, non-GAAP operating margin is now expected to be at the more favorable end of the previously provided range of down 50 to 100 basis points when compared to fiscal 2015, excluding the impact of certain items in both fiscal years.

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