RUTGERS UNIVERSITY
Little Investment Bankers of Rutgers
Panera Bread Company
Equity Research Report
Key Highlights
 New Share Repurchase Program
 Modifications to Business Model via Drive-Thru Stores and Mobile
Ordering
 Strong Financial Performance
Company Description
Panera Bread Company owns, operates, and franchises retail bakery-cafés
within the United States and Canada. The Company operates in three
business segments: company-owned bakery-cafés, franchise-operated
bakery-cafés, and fresh dough facilities & other product sales operations.
Panera Bread specializes in providing consumers with high quality food
items including fresh baked goods, pastries, sandwiches and beverages,
with a cheap affordable price. There are 1,625 company-owned and
franchise-operated stores as of September 25, 2012. The company was
founded in 1981 and is headquartered in St. Louis, Missouri.
Industry Overview
The foodservice industry has seen a downturn during the 2008-2009
housing crisis. However, the industry has been recovering steadily, and is
expected to continue to improve within the near future. Our major
concern is the possibility of a weak economic recovery and runaway
inflation due to the Federal Reserve’s stimulus response that has not been
working. Risks involve consumers to spend less due to lowering
disposable incomes, hurting the industry as a whole.
Peter Byun
B.S. Math, Finance
pbyun213@rutgers.edu
Timothy Le
B.S. Math, B.A. Econ
timothy.le@rutgers.edu
Lap Nguyen
B.S. Finance, B.A. Econ
lap.nguyen@rutgers.edu
Key Data
52-Week Range:
Shares Out.: (MM)
Market Cap.: (MM)
Avg. Daily Vol.:
Dividend/Yield:
Long-Term Debt:
ROE (ttm):
Fiscal Year End:
$130.37-175.26
28.36
$4,553.84
414,011
$0.00/0.0%
$0.0
22.93%
December
3-Year Quarterly Revenue Chart
600
500
400
300
200
100
0
1-Year Price Performance Chart
180
170
160
150
140
130
Parth Patel
B.S. Math, Computer Science
parth.patel.1001@rutgers.edu
9/1/2012
Management’s New Strategic Initiatives Give
Panera Bread a Positive Forward Outlook
Outperform
$163.01
29.64
6/1/2012
176.49%
3/1/2012
196.67%
9/28/2012
243.74%
10/28/2012
Relative P/E
Coverage
Rating:
Price (11/28/2012):
P/E (ttm):
9/1/2011
13.1
12/1/2011
14.1
8/28/2012
14.7
6/1/2011
S&P 500 P/E
7/28/2012
110
3/1/2011
102
6/28/2012
98
5/28/2012
S&P 500 EPS
Consumer | Restaurants
9/1/2010
23.12
12/1/2010
27.73
4/28/2012
35.83
11/28/2012
6/1/2010
PNRA P/E
NASDAQ: PNRA
3/28/2012
7.05
3/1/2010
5.88
2/28/2012
4.55
1/28/2012
PNRA EPS
Panera Bread Company
9/1/2009
2013E
12/1/2009
2012E
12/28/2011
2011A
11/28/2011
Outlook
RUTGERS UNIVERSITY
LITTLE INVESTMENT BANKERS OF RUTGERS
Panera Bread Company
PORTER’S FIVE FORCES
Competitive Landscape
1. Single-Location Restaurants Industry
The single-location restaurants industry is defined to be independent family owned restaurants, offering pay after eat
services, which is highly competitive with low concentration. There are no major players within this industry as they
are locally based businesses, with each of the top players accounting to less than 1% of total market share. For
instance, the top ranked restaurant Tao Las Vegas Restaurant and Nightclub represents only
0.08% of total market share within this industry
2. Chain Restaurants Industry
Chain Restaurant Industry
Major Players
0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00%
Darden Restaurants Inc.
CBRL Group Inc.
Brinker International Inc.
Bob Evans Farms Inc.
DineEquity Inc.
Other
Source: IBISWorld
The chain restaurants industry is defined to be established businesses with multiple locations, offering pay after eat
services, which is highly competitive with low-medium concentration. The top four players account to slightly over
25% of total industry revenues. The current top player in this industry is Darden Restaurants Inc. (known for Red
Lobster, Olive Garden, and Longhorn Steakhouse) and has a market share of 14.4%, with CBRL Group Inc. (known
for Cracker Barrel Old and Country Store) following second with a 4.7% market share. This shows a large gap
between the top two players, which shows the other 80.9% of the market are much smaller businesses implying still a
highly competitive market.
3. Fast Food Restaurants Industry
Fast Food Restaurant Industry
Major Players
0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00%
McDonald's Corporation
Yum! Brands Inc.
Doctor's Associates Inc.
Wendy's International, Inc.
Panera Bread Co.
Other
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Source: IBISWorld
RUTGERS UNIVERSITY
LITTLE INVESTMENT BANKERS OF RUTGERS
Panera Bread Company
The fast food restaurants industry is defined to be franchised restaurants that require pay before eating services, and is
highly competitive with low-medium concentration. The top four players account to over 35% of total revenues, with
McDonald’s Corporation in lead with 12.9% market share. Panera Bread Co. is categorized within the top 5 with an
estimated market share of 2.3%, according to IBISWorld.
Barriers to Entry
All three industries have low barriers to entry due to the ease of obtaining the required materials to start a foodservice
business. For instance the ability to lease property and equipment, rather than purchasing them in its entirety, makes the initial
capital requirements much cheaper for a new entrant. In addition, new competitors can easily sign a franchise agreement,
lowering their business risk as the franchisee would be allowed to incorporate a working successful business model (ie:
employee training programs and product offerings). There exist few regulations in the foodservice business such as
maintaining minimum wage, providing employee benefits such as workers’ insurance and health insurance coverage, smoking
bans which are spreading across the states, and FDA approvals. Overall, starting a business within this industry is easy as there
are no significant barriers to entry.
Bargaining Power of Suppliers
There is low bargaining power of suppliers within all three industries. These foodservice industries all purchase similar
products such as frozen foods, dairy products, meats, fruits, vegetables, and beverages, where each supplying industry
accompanying in highly competitive markets. We have listed the market concentration within each of the major supplying
industries depicted in the chart below.
Supplier Industries' Market Concentration
Beer
Fruit & Vegetable
Poultry
#1 Industry Player
Wine & Spirits
#2 Industry Player
Seafood
#3 Industry Player
#4 Industry Player
Dairy Products
Other
Frozen Food
Beef & Pork
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
Source: IBISWorld
The illustration shows the competitiveness within each grouping. For example, the beer industry shows there are no major
players, whereas the beef & pork industry shows the top player accounting to over 50% of the total beef/pork revenues.
Overall, the chart displays that these supplying industries for the food sector are all fairly competitive, implying a low
bargaining power for suppliers, as consumers in these markets can easily switch to other sellers.
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RUTGERS UNIVERSITY
LITTLE INVESTMENT BANKERS OF RUTGERS
Panera Bread Company
Bargaining Power of Buyers
The bargaining power of buyers is high as there are many options available for the end consumers. Take for instance the three
industries already listed; there are plenty of ethnic and family owned local restaurants in every town, chain restaurants can
range from a variety of steakhouses to Japanese cuisines, and fast food restaurants with an assortment of burger venues,
sandwich shops, and ethnic stores. In addition, consumers have plenty of further substitute products they can easily switch to.
Therefore price is highly elastic within the foodservice industry, as consumers can opt to go down the street for a better
alternative. However, some businesses can have a slightly flexible pricing menu as consumers also pay for the experience and
quality of service.
Substitute Products
There are plenty of substitute products within Panera Bread’s competing market. As noted, Panera Bread operates in the fast
food service industry, which already comprises of numerous businesses including differentiated ethnic cuisines such as Asian,
European, and Mexican foods. In addition, Panera competes with pay after eating restaurants, which offer a warmer and
cozier environment compared to the fast food counterpart. Also coffee and bakery stores, such as Dunkin’ Donuts, add more
options to consumers within the foodservice business. Furthermore, people also have the choice to dine-in, which has been a
recent trend due to the housing market crisis, adding supermarkets to the list. With the vast array of options available, the
market Panera Bread competes in has extremely high levels of substitute products.
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RUTGERS UNIVERSITY
LITTLE INVESTMENT BANKERS OF RUTGERS
Panera Bread Company
SWOT ANALYSIS
Strengths
Innovative Menu Offering
 Panera Bread successfully introduces new items to its menu, offering seasonal items to completely new menu items quite
frequently. The company also has a unique list of items as Panera operates as a café, bakery, and sit-in sandwich shop. The
management team believes their success lies in how the company has been able to consistently roll out different items by
focusing on the changing taste preferences for the consumers.
Share Repurchase Program
 The Board of Directors have approved a new share repurchase program to become effective as of August 28, 2012. This
replaces the current share repurchase program that was initiated during November 2009, which would have been expired
during the month of November 2012. The program is similar to the previous program as it is still a 3-year period for the
company to purchase up to $600 million worth of shares through the open market. From the previous share repurchase
program, Panera Bread had acquired approximately $250 million in stock as of June 2012 since starting the initiative in
2009, leaving $350 million unused.
Wheat Contracts
 Panera Bread locks in wheat futures contracts 12 months in advance. While the exact date of their contracts is unknown, it
is expected to end during the second half of 2013. Recent wheat prices have sharply increased due to the shortage that
existed from the drought earlier this year. Just in the month from June to July, wheat prices have increased over 25%. This
offers a huge cost advantage for Panera Bread against their competitors without contracts, which will ultimately benefit
the top line figure. It is also expected for wheat prices to come back to “normal” levels during 2013 which will allow
Panera to maintain consistent prices.
Weaknesses
Limited Scale of Operations
 Many competitors are much larger than Panera Bread. Take for instance McDonald’s with revenues of $27.0 billion and
Starbucks revenues of $11.7 billion in fiscal year 2011. Panera Bread shies with a mere $1.8 billion during fiscal year 2011.
While Panera Bread is still growing and establishing its presence, the company is nevertheless smaller compared to its
competitors. Therefore, Panera Bread may have a lower bargaining power against its suppliers due to lower purchasing
units.
Opportunities
New Initiatives to Boost SSS
 Panera Bread has made several significant key initiatives to help boost revenues and same-store sales. The first is the
MyPanera loyalty program, which was introduced in November 2010. The loyalty program is not the traditional buy 10,
get 1 free coupons, but described to be a “Surprise and Delight” reward system dependent on customer purchases.
MyPanera loyalty program has brought innovative ways to market new products and give away their traditional items. The
program has seen success with over 9 million members within a period of one year.
Another key initiative Panera Bread has been taking is by introducing drive-thru stores. The company recently started
experimenting this and had about 120 drive-thru stores by the end of 2011 (currently operates approximately 1,600 stores).
Panera Bread’s management team has recently announced their plan to total 200 drive-thru stores by the 2012. While still
early to mention the effectiveness, the outcome seems favorable. During Starbucks’ early implementation of drive-thru
stores, it has been noted the company’s drive-thru locations averaged $1,000,000 in revenues compared to $715,000 at the
traditional sites.
5
RUTGERS UNIVERSITY
LITTLE INVESTMENT BANKERS OF RUTGERS
Panera Bread Company
Panera Bread is also testing kiosks, mobile ordering, “Rapid Pick-Up,” and
delivery services in select stores. Kiosks are computer terminals with simple user
interfaces for the purpose of displaying information for people walking by. The
company is using kiosks to help the waiting time for customer purchases, which
also improves in-store traffic during peak hours. The company has also
introduced a dine-in service allowing customers to order and pay online, which
can be conveniently done through a smartphone. Customers can now enter a
Panera bakery-café, sit down without waiting on line, order their meal via
smartphones, and have their food serviced to their tables. The “Rapid Pick-Up”
is another interesting feature that permits customers to order online and pick up
(iPad being used as a Kiosk at a Panera
their food without wait in a “Rapid Pick-Up” area.
Bread store in Pennsylvania)
Lastly, Panera Bread is also testing initiatives of delivery services which require a
minimum $5 purchase. All these innovative initiatives are great opportunities
for Panera Bread, which may significantly boost same-store sales within the
future.
(Conveniently located “Rapid PickUp” service area)
Expanding Market
 Panera Bread had a total of three stores operating outside of the United States by the end of fiscal year 2011. These three
stores were all in Canada, accounting for 0.2% of total Panera Bread bakery-cafés. In addition, the company had over 30%
of total stores located in just four states (FL 8.7%, CA 7.9%, OH 7.0%, and IL 6.9%). Panera Bread still has much room
for expansion not just internationally but still domestically.
Threats
Dependence on Dough Facilities
 The company had a total of 24 dough facilities (22 company owned) at the end of 2011. This averages to about 60 stores
being supported per dough facility, or approximately 4% of total stores per facility. Therefore a disruption within the
supply chain can cause dramatic problems and severely hurt revenues if a facility were to be down within a given period.
Rising Commodity Prices with Weak Economic Recovery
 A possible risk for Panera Bread is a sharp increase in commodity prices. Despite the company’s futures contracts for
wheat, if prices continue to increase the market for Panera does not look promising as consumers will opt to other
substitutes. In addition, other commodity prices, such as chicken, have been increasing which does not look favorable for
the foodservice industry as people would spend less dining out.
1-Year Historical Poultry Prices
(US cents per pound)
(US dollars per metric
ton)
1-Year Historical Wheat Prices
400
350
300
250
Price
200
6
100
95
90
85
Price
RUTGERS UNIVERSITY
LITTLE INVESTMENT BANKERS OF RUTGERS
Panera Bread Company
Furthermore, the current economic outlook does not look positive. Despite unemployment figures being at a 3 year low,
the job market is still depressed as many have left the labor market. There is also the possibility of a spike in inflation
within the near future due to the Federal Reserve’s response to the recession. If these outcomes were to arise, consumers’
disposable income will shrink and cause them to spend much more conservatively.
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