Finance HW Case study Write executive summary 1 page
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sf_f-1575.pdf
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 administrative situation. Copyright 2008 by the University of
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.
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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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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.
6The 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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Exhibit 1
PANERA BREAD COMPANY
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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Exhibit 2
PANERA BREAD COMPANY
Historic Balance Sheets
(in thousands of dollars)
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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Exhibit 3
PANERA BREAD COMPANY
2007 Operating Forecast(a)
(in thousands of dollars)
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
PANERA BREAD COMPANY
Stock Price History
Data source: Datastream.
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Exhibit 5
PANERA BREAD COMPANY
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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