Ted Yi, Matt Fischer, Anna Russo Michael Puleo Finance 3504 9 July 2015 Panera Bread Case Study Execute Summary: The company Panera Bread has a goal in creating a dining experience centered on creating fresh baked breads everyday including selections on made-to-go sandwiches and soups. They are trying to distinguish themselves from the vast array of fast-food businesses by putting an emphasis on wholesome foods and a hospital environment. The bread and butter of this company is, in fact, the bread and butter used in production. Over the past two decades, Panera Bread has increased from 20 locations starting in 1993 to over 1000 locations in 2006. Up until recently, the company has been able to finance its rapid growth through internal funds of retained earnings and minor equity infusions. However, due to tightening margins, uncertain costs, and a softening transaction growth in 2007, Panera Bread must now seek out external financing resources to maintain growth stability and recent stock price drops. As we already know, the goal of a corporation is to maximize shareholder wealth by maximizing the company’s value of stock. Introduction: One of the best ways to compare and examine financial information is to use methods such as standardizing financial statements and ratio analysis. When calculating for % of total sales, we took the plug we were solving for and divided by total sales or revenue. When calculating for taxes, we took the taxes and divided by our pretax figure. Additionally we have used forecasts and averages of past information to give a more detailed survey of the data. Forecasts were used when we noticed clear trends in the data, while averages were used when we saw a fairly steady trend. To measure performance, we used the return on equity ratio (net income/stockholder equity), return on asset ratio (net income/total assets), profit margin ratio (net income/revenue), equity multiplier ratio (total asset : total shareholder equity), total asset turnover ratio (sales or revenue/total assets), and times interest earned ratio (EBIT/total interest). This data has allowed us to provide a detailed analysis of Panera’s current situation and our recommendation has also been enclosed. Analysis and Recommendation: We have started our analysis by using the percentage of sales approach to get a better idea of Panera’s past, current and future financial position. With our calculations and forecast, we have noticed an increase in the cost of goods sold for Panera from 87% in 2003 to 92% in 2012. This is important to know because this will obviously cut into our profits, along with overhead costs. Additionally dough sold to franchises has decreased significantly from 15% in 2003 to 7% in 2012. When using the profit margin ratio, Panera has suffered a 3.2% loss in profit from 2003 – 2012. Fortunately both net income, and operating profit have both increased over the time period. Moving to the balance sheet, we can see a negative trend in the % of current assets – total sales. When using the total asset turnover ratio, one can see that that negative trend is definitely not a bad thing. The rise of the total asset turnover from 1.42 to 1.57 has further backed this information. Panera has just been using assets more efficiently. Another important metric that will aid our decision is the return on assets calculation of Panera; we noticed a decline from 2003 at 11.8% to 8.1%. Obviously there is a decline in the percentage, but this is not necessarily bad due to the fact that an acceptable range for ROA starts anywhere over 5%. Return on equity has shown similar behavior with a negative trend going from 15.4% in 2003 to the 12.4% in 2012. Equity Multiplier is a measurement of financial leverage and tells us how much of asset financing is done through debt. Knowing this, we can see a sharp spike in the equity multiplier followed by a decline; almost back to the 2003 number in 2012. Total asset turnover ratio is an indicator of how efficiently a company deploys its assets. We know the higher the number the better, so it is optimal that we see the number rise from 2003-2012. The profit margin measures how much out of every dollar of sales a company actually keeps in earnings. When utilizing our last metric of times interest earned, we see a sharp decline in the number due to financing we have taken on. We predict that the TIE will increase after this sharp decline to 36, meaning that Panera will be able to pay its interest obligations on a pretax basis 36 times. One can notice a rise in the OCF, followed by a decline at the end our forecast. Although the number peaked in 2009, the OCF increased from the 2003 and ended about 3.3 times higher than it started at. This is important because this indicates that Panera can generate sufficient positive cash flow and maintain and grow operations. Originally cash flow from assets was negative, but with the increase in net capital spending, net working capital and operating cash flow, we predict that the cash flow from assets will be forecasted with a positive number. After careful examination, we recommend that Panera continue with the buyback because the numbers are fairly consistent with what they experienced in 2003. Although the immediate result of the buyback was not optimal, they have been steadily increasing back to the numbers in 2003. With this being said, we recommend that they also incorporate external financing as well to be able to maintain growth in this time period. Although their profit margin has decreased (due to the cost of goods sold increasing), we can still note that it is at a solid 5.2% and appears to be rising. Panera will most definitely still be profitable, but they will not be able to attain the same profit margin they once were capable of because they are expanding operations and there is more room for shrinkage and other inopportune events that decrease profits. Conclusion: As loyal Panera bread fans, we can tell you first hand that we love the product and so does a good majority of the people that try it. With the significant expansion noted, Panera has had a tough time growing and maintaining that growth. However with the aforementioned financing plan, we believe that Panera can sustain the finances necessary to continue to grow and prosper. Even with the buyback, we forecast that Panera will remain profitable through this time. As we previously mentioned before, the goal of a corporation is to maximize shareholder wealth by maximizing the company’s value of stock and Panera’s stock price has nearly quadrupled in value since 2007. Before you know it, you won’t be able to travel without seeing a Panera in that area. Appendices: