| PANERA BREAD CO ITEM 1A RISK FACTORS The following important factors, among others, could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Form 10-K or presented elsewhere by management from time to time |
| Our growth strategy, our business and our ability to increase our revenue and operating profits could be adversely affected if we are unable to execute our growth strategy |
| Our growth strategy consists of new market development and further penetration of existing markets, both by us and our franchisees |
| The success of our growth 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 successfully will depend on a number of factors, including: • identification and availability of suitable locations for new bakery-cafes on acceptable terms including obtaining waivers of exclusive use restrictions from landlords and tenants, as needed, and within appropriate delivery distances from our fresh dough facilities; • competition for restaurant sites; • 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 factors outside our control, such as the timing of delivery of a leased location by the landlord; 7 _________________________________________________________________ [47]Table of Contents • securing required governmental approvals and permits and complying with applicable zoning, land use and environmental regulations; and • general economic conditions |
| Although we have been able to successfully manage and plan our growth to date, we may experience difficulties doing so in the future |
| Our growth strategy includes opening bakery-cafes in new markets where we may have little or no operating experience |
| Accordingly, there can be no assurance that a bakery-cafe opened in a new market will have similar operating results, including average store sales, as our existing bakery-cafes |
| Bakery-cafes opened in new markets may not perform as expected or may take longer to reach planned operating levels, if at all |
| Operating results or overall bakery-cafe performance could vary as a result of higher construction, occupancy or general operating costs, a lack of familiarity with our brand which may require us to build brand awareness, differing demographics, consumer tastes and spending patterns, and variable competitive environments |
| Additional expenses attributable to costs of delivery from our fresh dough facilities may exceed our expectations in areas not currently served by those facilities |
| Our growth strategy also includes opening bakery-cafes in existing markets to increase the penetration rate of our bakery-cafes in those markets |
| However, this strategy could result in a sales decline in some of our existing bakery-cafes if customers choose to patronize a new location over an existing location |
| There can be no assurance that we will be successful in operating bakery-cafes profitably in new markets or further penetrating existing markets |
| Our growth strategy depends on continued development by our franchisees |
| If our franchisees do not continue to successfully open new bakery-cafes, our business could be adversely affected |
| Our growth strategy also includes continued development of bakery-cafes through franchising |
| At December 27, 2005, approximately 65prca of our bakery-cafes were operated by franchisees (566 franchise-operated units out of a total of 877 units system wide) |
| The opening and success 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 |
| Additionally, our results of operations include revenues derived from royalties on sales from, and revenues from sales by our fresh dough facilities to, each franchise-operated bakery-cafe |
| As a result, our growth expectations and revenue could be negatively impacted by a material downturn in sales at and to franchise-operated bakery-cafes or if one or more key franchisees became insolvent or otherwise refused to pay us our royalties |
| If we fail to comply with governmental regulations or if these regulations change, our business could suffer |
| We must comply with extensive federal, state and local laws in connection with the operation of our business, including those related to: • franchise relationships; • building construction and zoning requirements; • environmental matters; • the preparation and sale of food; and • employment |
| Our bakery-cafes and fresh dough facilities are licensed and subject to regulation under state and local laws, including business, health, fire and safety codes |
| Various federal and state labor laws govern our operations and our relationship with our employees, including minimum wage, overtime, accommodation and working conditions, benefits, citizenship require- 8 _________________________________________________________________ [48]Table of Contents ments, insurance matters, workers’ compensation, disability laws such as the federal Americans with Disabilities Act, child labor laws and anti-discrimination laws |
| While we believe we operate in substantial compliance with these laws, they are complex and vary from location to location, which complicates monitoring and compliance |
| As a result, regulatory risks are inherent in our operation |
| Although we believe that compliance with these laws has not had a material effect on our operations to date, there can be no assurance that we will not experience material difficulties or failures with respect to compliance 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, operations and our reputation |
| We depend on senior management and on the retention and recruiting of other personnel for our future success |
| Our success depends on the services of our senior management and other personnel, 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 our growth |
| Our success also depends on our continuing ability to hire, train, motivate and retain qualified personnel in our bakery-cafes, fresh dough facilities and support centers |
| Our failure to do so could result in higher employee turnover and increased labor costs, and could compromise the quality of our service, all of which could adversely affect our business |
| Our failure or inability to protect our brand, trademarks or other proprietary rights could adversely affect our business and competitive position |
| We believe that our brand, intellectual property and our confidential and proprietary information is very important to our business and our competitive position |
| Our primary trademarks, Panera^®, Panera Bread^®, Saint Louis Bread Co |
| ^®, Via Panera^®, and Mother Bread design, along with other 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, the steps that we have taken 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 are not aware of any assertions that our trademarks or menu offerings infringe upon the proprietary rights of third parties, but we cannot assure you that third parties will not claim infringement by us in the future |
| Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation, cause delays in introducing new menu items in the future 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, results of operations and financial condition |
| 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, the Panera Bread 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 |
| Competition may adversely affect our operations and results of operation |
| The restaurant industry is highly competitive with respect to location, environment, customer service, price, quality of products and overall customer experience |
| We compete with specialty food, casual dining and quick service restaurant retailers including national, regional and locally owned restaurants |
| Many of our competitors or potential competitors have substantially greater financial and other resources than we do, which may allow them to react to changes in pricing, marketing and the casual dining restaurant industry better than 9 _________________________________________________________________ [49]Table of Contents we can |
| Additionally, other companies may develop restaurants that operate with concepts similar to ours |
| We also compete with other restaurant chains and other retail businesses for quality site locations and hourly employees |
| If we are unable to successfully compete in our markets, we may be unable to sustain or increase our revenues and profitability |
| Additionally, competition could cause us to modify or evolve our products, designs or strategies |
| If we do so, we cannot assure you that we will be successful in implementing the changes or that our profitability will not be negatively impacted by them |
| Rising insurance costs could negatively impact our profitability |
| We self-insure a significant portion of our expected losses under our workers’ compensation, and health, 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 financial condition and results of operation |
| Additionally, the costs of insurance and medical care have risen significantly over the past few years and are expected to continue to increase in 2006 |
| These increases, as well as existing or potential legislation changes, such as proposals to require employers to provide health insurance to employees, could negatively impact our operating results |
| Disruptions in our supply chain or increases in ingredient, product and other supply costs could adversely affect our profitability and operating results |
| Our Company-owned and franchise-operated bakery-cafes are dependent on frequent deliveries of ingredients and other products |
| Three companies deliver the majority of our ingredients and other products to the Panera Bread bakery-cafes on a regular basis (two or three times weekly) |
| Our agreements with these distributors are up for renewal in February 2007 |
| In addition, we and our franchisees rely on a network of local and national suppliers for the delivery of fresh produce (three to six times per week) which is particularly susceptible to supply volatility as a result of weather conditions |
| Our dependence on frequent deliveries to our bakery-cafes could cause shortages or supply interruptions that could adversely impact our operations |
| Although many of our ingredients and products are prepared to our specifications, we believe that a majority of the ingredients are based on generally available products that could be obtained from alternative sources if needed |
| In addition, we frequently enter into annual and multi-year contracts for ingredients in order to decrease the risks associated with supply and cost |
| The antibiotic free chicken, which is sold in Company-owned and franchise-operated bakery-cafes, is currently supplied by three different companies |
| However, there are few producers of antibiotic free chicken, which may make it difficult, or more costly, for us to find alternative suppliers if necessary |
| Generally, we believe that we have adequate sources of supply for our ingredients and products to support our bakery operations or, if necessary, we could make menu adjustments to address material supply issues |
| However, there are many factors which could cause shortages or interruptions in the supply of our ingredients and products — including produce, antibiotic free chicken, sweet goods and soup — including weather, unanticipated demand, labor, production or distribution problems, quality issues and cost, some of which are beyond our control, and which could have an adverse affect on our business and results of operations |
| In the past, we have been able to adjust menu prices to partially or fully offset ingredient and other supply cost increases |
| However, a delay in menu price increases or competitive pressures may limit our ability to recover ingredient cost increases in the future |
| 10 _________________________________________________________________ [50]Table of Contents Disruptions or supply issues in our fresh dough facilities, could adversely affect our business and results of operations |
| We operate 16 fresh dough facilities which service all of our Company-owned and approximately 96prca of our franchise-operated bakery-cafes |
| The fresh dough distribution system delivers fresh dough products daily to the bakery-cafes through a leased fleet of temperature controlled vehicles |
| The optimal distribution range is approximately 300 miles |
| However, 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 the fresh dough facilities, whether due to weather conditions, technical or labor difficulties, destruction or damage to the vehicle fleet or facility or other reasons, could cause a shortage of fresh dough products at the bakery-cafes |
| Such a shortage of fresh dough products could, depending on the extent and duration, have a material adverse affect on our business and results of operations |
| Additionally, increased costs and distribution issues related to fuel and utilities could also materially impact our business and results of operations, including with respect to our efficiencies in distribution from our fresh dough facilities to the bakery-cafes |
| Our Franklin, Massachusetts’ fresh dough facility manufactures and supplies through our distributors all of the cream cheese and tuna used in the Company-owned bakery-cafes and approximately 82prca of the cream cheese and tuna used in the bakery-cafes operated by our franchisees |
| Although we believe we have adopted adequate quality assurance and other procedures to ensure the production and distribution of quality products and ingredients, the possibility exists that we will be subject to allegations regarding quality, health or other similar concerns 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 can be very costly and the results uncertain |
| Customer preferences and traffic could be negatively impacted by health concerns about the consumption of certain products |
| Customer preferences and traffic could be impacted by health concerns about the consumption of particular food products and could cause a decline in our sales |
| Negative publicity about ingredients, poor food quality, food-borne illness, injury, health concerns or nutritional content could cause customers to shift their preferences |
| For example, since 2004, Asian and European countries have experienced outbreaks of avian flu |
| Negative publicity concerning avian flu may adversely affect demand for our products because chicken and turkey are key ingredients in many of our menu items and could cause an increase in our food costs and a decrease in customer traffic to our bakery-cafes |
| We are subject to complaints and litigation that could have a material adverse affect on our business |
| In the ordinary course of our business we may become subject to complaints and litigation alleging that we are responsible for a customer illness or injury suffered at or after a visit to one of our bakery-cafes including claims alleging poor food quality, food-borne illness, adverse health effects, nutritional content, personal injury or other concerns |
| In addition, we are subject to litigation by employees, franchisees and others through private actions, class actions or other forums |
| The outcome of litigation is difficult to assess and 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 |
| In fact, 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 financial condition or results of operations |
| Additionally, publicity about these claims may harm our reputation or prospects and adversely affect our results |
| 11 _________________________________________________________________ [51]Table of Contents We periodically acquire existing bakery-cafes from our franchisees, which could adversely affect our results of operation |
| We have historically acquired existing bakery-cafes and development rights from our franchisees either by negotiated agreement or exercise of our rights of first refusal under the franchise and area development agreements |
| Any bakery-cafe acquisition that we undertake involves risk, including: • our ability to successfully complete the acquisition, achieve anticipated synergies, accurately assess contingent and other liabilities as well as potential profitability; • un-anticipated changes in business and economic conditions; • limited or no operational experience in the acquired bakery-cafe market; • future impairment charges related to good will and other acquired intangible assets; and • risks of dispute and litigation with the seller franchisee, the seller’s landlords and vendors and other parties |
| Any of these factors could strain our financial and management resources as well as negatively impact our results of operation |
| 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 financial condition |
| Our quarterly operating results may fluctuate significantly because of a number of factors, including the following, some of which are not within our control: • changes in our operating costs; • labor availability and wages of management and associates; • increases and decreases in average weekly sales and comparable bakery-cafe sales, including as a result of the introduction of new menu items; • profitability of new bakery-cafes, especially in new markets; • changes in demographics, consumer preferences and discretionary spending; • changes in business strategy including concept evolution and new designs; • fluctuations in supply costs, shortages or interruptions; • negative publicity about the ingredients we use or the occurrence of food-borne illnesses or other problems at our bakery-cafes; • natural disasters and other calamities; and • general economic conditions, both nationally and locally |
| Additionally, our sales have fluctuated by season due to the number and timing of bakery-cafe openings and related expense, consumer spending patterns and weather |
| Historically, sales have been higher during the winter holiday season as a result of increased traffic, higher baked goods sales and family and community gatherings |
| In fiscal year 2005, Company-owned bakery-cafes had an aggregate of approximately dlra109 million in sales in the second quarter which was our recorded lowest relative quarterly sales in that year and included 13 Company-owned bakery-cafe openings |
| Comparatively, in our fourth quarter we had an aggregate of approximately dlra137 million in sales with 26 Company-owned bakery-cafe openings in that quarter recording the highest relative quarterly sales for fiscal year 2005 |
| Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter |