Summary of PANERA BREAD CO

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Our revenues are derived from Company-owned net bakery-cafe sales, fresh dough and other product sales to franchisees, and franchise royalties and fees. Fresh dough and other product sales to franchisees are primarily comprised of sales of fresh dough, produce, tuna, and cream cheese to certain of our franchisees. The cost of food and paper products, labor, occupancy, and other operating expenses relate primarily to Company-owned net bakery-cafe sales. The cost of fresh dough and other product sales to franchisees relates primarily to the sale of fresh dough, produce, tuna, and cream cheese to franchisees. General and administrative, depreciation and amortization, and pre-opening expenses relate to all areas of revenue generation.
Our fiscal year ends on the last Tuesday in December. Each of our fiscal years ended December 25, 2012, December 27, 2011, and December 28, 2010, had 52 weeks. We include in this report information on Company-owned, franchise-operated, and system-wide comparable net bakery-cafe sales percentages. In fiscal 2010, we modified the method by which we determine bakery-cafes included in our comparable net bakery-cafe sales percentages to include those bakery-cafes with an open date prior to the first day of our prior fiscal year, which we refer to as our base store bakery-cafes. Previously, comparable net bakery-cafe sales percentages were based on bakery-cafes that had been in operation for 18 months. While this methodology modification did not have a material impact on previously reported amounts, prior periods have been updated to conform to current methodology. Company-owned comparable net bakery-cafe sales percentages are based on sales from Company-owned bakery-cafes included in our base store bakery-cafes. Franchise-operated comparable net bakery-cafe sales percentages are based on sales from franchise-operated bakery-cafes, as reported by franchisees, that are included in our base store bakery-cafes. System-wide comparable net bakery-cafe sales percentages are based on sales at Company-owned and franchise-operated bakery-cafes that are included in our base store bakery-cafes. Acquired Company-owned and franchise-operated bakery-cafes and other restaurant or bakery-cafe concepts are included in our comparable net bakery-cafe sales percentages after we have acquired a 100 percent ownership interest and such acquisition occurred prior to the first day of our prior fiscal year. Comparable net bakery-cafe sales exclude closed locations. We do not record franchise-operated net bakery-cafe sales as revenues. However, royalty revenues are calculated based on a percentage of franchise-operated net bakery-cafe sales, as reported by franchisees. We use franchise-operated and system-wide sales information internally in connection with store development decisions, planning, and budgeting analyses. We believe franchise-operated and system-wide sales information is useful in assessing consumer acceptance of our brand, facilitates an understanding of our financial performance and the overall direction and trends of sales and operating income, helps us appreciate the effectiveness of our advertising and marketing initiatives, to which our franchisees also contribute based on a percentage of their net sales, and provides information that is relevant for comparison within the industry. We also include in this report information on Company-owned, franchise-operated, and system-wide average weekly net sales. Average weekly net sales are calculated by dividing total net sales in the period by operating weeks in the period. Accordingly, year-over-year results reflect sales for all locations, whereas comparable net bakery-cafe sales exclude closed locations and are based on sales only from our base store bakery-cafes. New stores typically experience an opening "honeymoon" period during which they generate higher average weekly net sales in the first 12 to 16 weeks after opening, after which customers "settle-in" to normal usage patterns from initial trial of the location. On average, the "settle-in" experienced is 5 percent to 10 percent less than the average weekly net sales during the "honeymoon" period. As a result, year-over-year results of average weekly net sales are generally lower than the results in comparable net bakery-cafe sales. This results from the relationship of the number of bakery-cafes in the "honeymoon" phase, the number of bakery-cafes in the "settle-in" phase, and the number of bakery-cafes in the comparable bakery-cafe base.

Executive Summary of Results
In fiscal 2012, we earned $5.89 per diluted share with the following performance on key metrics: system-wide comparable net bakery-cafe sales growth of 5.7 percent (growth of 6.5 percent for Company-owned bakery-cafes and growth of 5.0 percent for franchise-operated bakery-cafes); system-wide average weekly net sales increased 5.3 percent to $46,676 ($46,836 for Company-owned bakery-cafes and $46,526 for franchise-operated bakery-cafes); 123 new bakery-cafes opened system-wide (59 Company-owned bakery-cafes and 64 franchise-operated bakery-cafes); and 12 bakery-cafes closed system-wide (six Company-owned bakery-cafes and six franchise-operated bakery-cafes). Our fiscal 2012 earnings of $5.89 per diluted share included a favorable impact of $0.01 per diluted share from the repurchase of 158,700 shares under our share repurchase authorizations.
In the fiscal quarter ended December 25, 2012, we earned $1.75 per diluted share with the following performance on key metrics: system-wide comparable net bakery-cafe sales growth of 4.9 percent (growth of 5.1 percent for Company-owned bakery-cafes and growth of 4.7 percent for franchise-operated bakery-cafes); system-wide average weekly net sales increased 4.5 percent to $48,579 ($48,811 for Company-owned bakery-cafes and $48,360 for franchise-operated bakery-cafes); 32 new bakery-cafes opened system-wide (18 Company-owned bakery-cafes and 14 franchise-operated bakery-cafes); and five bakery-cafes closed system-wide (one Company-owned bakery-cafes and four franchise-operated bakery-cafes). In fiscal 2011, we earned $4.55 per diluted share with the following performance on key metrics: system-wide comparable net bakery-cafe sales growth of 4.0 percent (growth of 4.9 percent for Company-owned bakery-cafes and growth of 3.4 percent for franchise-operated bakery-cafes); system-wide average weekly net sales increased 3.4 percent to $44,313 ($44,071 for Company-owned bakery-cafes and $44,527 for franchise-operated bakery-cafes); 112 new bakery-cafes opened system-wide (53 Company-owned bakery-cafes and 59 franchise-operated bakery-cafes); and 24 bakery-cafes closed system-wide (three Company-owned bakery-cafes and 21 franchise-operated bakery-cafes, which included 13 Paradise cafes that de-identified from the brand). Our fiscal 2011 earnings of $4.55 per diluted share included a favorable impact of $0.05 per diluted share from the repurchase of 877,100 shares under our share repurchase authorization. In fiscal 2010, we earned $3.62 per diluted share with the following performance on key metrics: system-wide comparable net bakery-cafe sales growth of 7.9 percent (growth of 7.5 percent for Company-owned bakery-cafes and growth of 8.2 percent for franchise-operated bakery-cafes); system-wide average weekly net sales increased 7.3 percent to $42,852 ($41,899 for Company-owned bakery-cafes and $43,578 for franchise-operated bakery-cafes); 76 new bakery-cafes opened system-wide (42 Company-owned bakery-cafes and 34 franchise-operated bakery-cafes); and three bakery-cafes closed system-wide (two Company-owned bakery-cafes and one franchise-operated bakery-cafes). Our fiscal 2010 earnings of $3.62 per diluted share included a favorable impact of $0.10 per diluted share from the repurchase of 1,905,540 shares under our share repurchase authorization.

Consolidated Statements of Comprehensive Income Margin Analysis The following table sets forth the percentage relationship to total revenues, except where otherwise indicated, of certain items included in our Consolidated Statements of Comprehensive Income for the periods indicated. Percentages may not add due to rounding:

                                                                   For the fiscal year ended
                                                 December 25, 2012     December 27, 2011     December 28, 2010
Revenues:
Bakery-cafe sales, net                                  88.2  %                87.4  %               85.7  %
Franchise royalties and fees                             4.8                    5.1                   5.6
Fresh dough and other product sales to
franchisees                                              7.0                    7.5                   8.8
Total revenue                                          100.0  %               100.0  %              100.0  %
Costs and expenses:
Bakery-cafe expenses (1):
Cost of food and paper products                         29.4  %                29.5  %               28.4  %
Labor                                                   29.8                   30.4                  31.7
Occupancy                                                7.0                    7.2                   7.6
Other operating expenses                                13.6                   13.6                  13.4
Total bakery-cafe expenses                              79.8                   80.7                  81.1
Fresh dough and other product cost of sales to
franchisees (2)                                         88.1                   85.3                  82.1
Depreciation and amortization                            4.3                    4.4                   4.5
General and administrative expenses                      5.5                    6.2                   6.6
Pre-opening expenses                                     0.4                    0.4                   0.3
Total costs and expenses                                86.7                   87.9                  88.0
Operating profit                                        13.3                   12.1                  12.0
Interest expense                                         0.1                      -                     -
Other (income) expense, net                             (0.1 )                    -                   0.3
Income before income taxes                              13.3                   12.1                  11.7
Income taxes                                             5.1                    4.6                   4.4
Net income                                               8.1                    7.5                   7.2
Less: net (loss) income attributable to
noncontrolling interest                                    -                      -                     -
Net income attributable to Panera Bread Company          8.1  %                 7.5  %                7.3  %

Other comprehensive income                                 -                      -                     -
Comprehensive income                                     8.2  %                 7.5  %                7.3  %

(1) As a percentage of net bakery-cafe sales.

(2) As a percentage of fresh dough and other product sales to franchisees.

Bakery-cafe Composition
The following table sets forth certain bakery-cafe data relating to
Company-owned and franchise-operated bakery-cafes for the periods indicated:
                                                                   For the fiscal year ended
                                                 December 25, 2012      December 27, 2011     December 28, 2010
Number of bakery-cafes:
Company-owned:
Beginning of period                                        740                     662                   585
Bakery-cafes opened                                         59                      53                    42
Bakery-cafes closed                                         (6 )                    (3 )                  (2 )
Bakery-cafes acquired from franchisees (1)                  16                      30                    40
Bakery-cafes sold to a franchisee (2)                        -                      (2 )                  (3 )
End of period                                              809                     740                   662
Franchise-operated:
Beginning of period                                        801                     791                   795
Bakery-cafes opened                                         64                      59                    34
Bakery-cafes closed (3)                                     (6 )                   (21 )                  (1 )
Bakery-cafes acquired by Company (1)                       (16 )                   (30 )                 (40 )
Bakery-cafes sold by Company (2)                             -                       2                     3
End of period                                              843                     801                   791
System-wide:
Beginning of period                                      1,541                   1,453                 1,380
Bakery-cafes opened                                        123                     112                    76
Bakery-cafes closed                                        (12 )                   (24 )                  (3 )
End of period                                            1,652                   1,541                 1,453

(1) In March 2012, we acquired 16 bakery-cafes from a North Carolina franchisee. In July 2011, we acquired five bakery-cafes from an Indiana franchisee. In April 2011, we acquired 25 bakery-cafes from our Milwaukee franchisee. In September 2010, we acquired 37 bakery-cafes from our New Jersey franchisee. Also, in March 2010, we acquired controlling interest in three bakery-cafes from our Canadian franchisee and subsequently acquired the remaining noncontrolling interest on December 28, 2010.

(2) In February 2011, we sold two bakery-cafes in the Dallas, Texas market to an existing franchisee. In April 2010, we sold three bakery-cafes in the Mobile, Alabama market to an existing franchisee.

(3) In June 2011, the franchise agreements for 13 franchise-operated Paradise bakery-cafes were mutually terminated and the bakery-cafes de-identified from the Paradise brand.

Comparable Net Bakery-cafe Sales
Comparable net bakery-cafe sales growth for the fiscal periods indicated were as
follows:
                                       For the fiscal year ended
                    December 25, 2012      December 27, 2011      December 28, 2010
Company-owned                6.5 %                  4.9 %                    7.5 %
Franchise-operated           5.0 %                  3.4 %                    8.2 %
System-wide                  5.7 %                  4.0 %                    7.9 %

The following table summarizes the composition of comparable Company-owned net bakery-cafe sales growth for the periods indicated:

                                                                 For the fiscal year ended
                                                                                              December 28,
                                                 December 25, 2012      December 27, 2011         2010
Price                                                     3.0 %                  2.9 %              2.0 %
Mix                                                       2.7 %                  0.2 %              3.4 %
Average check                                             5.7 %                  3.1 %              5.4 %

Transactions                                              0.8 %                  1.8 %              2.1 %
Company-owned comparable net bakery-cafe sales
growth                                                    6.5 %                  4.9 %              7.5 %

Results of Operations

Revenues

The following table summarizes revenues for the periods indicated (dollars in
thousands):
                                               For the fiscal year ended
                                                                              December 28,
                               December 25, 2012       December 27, 2011          2010         % Change in 2012     % Change in 2011
Bakery-cafe sales, net       $         1,879,280     $         1,592,951     $  1,321,162              18.0 %               20.6 %
Franchise royalties and fees             102,076                  92,793           86,195              10.0 %                7.7 %
Fresh dough and other
product sales to franchisees             148,701                 136,288          135,132               9.1 %                0.9 %
Total revenue                $         2,130,057     $         1,822,032     $  1,542,489              16.9 %               18.1 %

System-wide average weekly
net sales                    $            46,676     $            44,313     $     42,852               5.3 %                3.4 %

The growth in total revenues in fiscal 2012 compared to the prior year was primarily due to the opening of 123 new bakery-cafes system-wide in fiscal 2012 and to the 5.7 percent increase in system-wide comparable net bakery-cafe sales in fiscal 2012, partially offset by the closure of 12 bakery-cafes system-wide in fiscal 2012.
The growth in total revenues in fiscal 2011 compared to the prior year was primarily due to the opening of 112 new bakery-cafes system-wide in fiscal 2011 and to the 4.0 percent increase in system-wide comparable net bakery-cafe sales in fiscal 2011, partially offset by the closure of 24 bakery-cafes system-wide in fiscal 2011.
Bakery-cafe sales, net

The following table summarizes net bakery-cafe sales for the periods indicated (dollars in thousands):

                                                For the fiscal year ended
                              December 25, 2012     December 27, 2011     December 28, 2010     % Change in 2012     % Change in 2011
Bakery-cafe sales, net       $       1,879,280     $       1,592,951     $       1,321,162              18.0 %               20.6 %
As a percentage of total
revenue                                   88.2 %                87.4 %                85.7 %

Company-owned average weekly
net sales                    $          46,836     $          44,071     $          41,899               6.3 %                5.2 %
Company-owned number of
operating weeks                         40,125                36,140                31,532              11.0 %               14.6 %

The increase in net bakery-cafe sales in fiscal 2012 compared to the prior fiscal year was primarily due to the opening of 59 new Company-owned bakery-cafes, the acquisition of 16 franchise-operated bakery-cafes, and the 6.5 percent increase in comparable Company-owned net bakery-cafe sales in fiscal 2012, partially offset by the closure of six Company-owned bakery-cafes.

The increase in net bakery-cafe sales in fiscal 2011 compared to the prior fiscal year was primarily due to the opening of 53 new Company-owned bakery-cafes, the acquisition of 30 franchise-operated bakery-cafes, and the 4.9 percent increase in comparable Company-owned net bakery-cafe sales in fiscal 2011, partially offset by the closure of three Company-owned bakery-cafes and the sale of two Company-owned bakery-cafes.

The increase in average weekly net sales for Company-owned bakery-cafes in fiscal 2012 compared to the prior fiscal year was primarily due to the above noted average check growth that resulted from retail price increases and our category management initiatives.

The increase in average weekly net sales for Company-owned bakery-cafes in fiscal 2011 compared to the prior fiscal year was primarily due to the above noted average check growth that resulted from retail price increases and our category management initiatives.

Franchise royalties and fees

The following table summarizes franchise royalties and fees for the periods indicated (dollars in thousands):

                                               For the fiscal year ended
                                                                              December 28,
                               December 25, 2012       December 27, 2011          2010         % Change in 2012     % Change in 2011
Franchise royalties          $           100,159     $            90,486     $     84,806             10.7  %              6.7  %
Franchise fees                             1,917                   2,307            1,389            (16.9 )%             66.1  %
Total                        $           102,076     $            92,793     $     86,195             10.0  %              7.7  %

Franchise-operated average
weekly net sales             $            46,526     $            44,527     $     43,578              4.5  %              2.2  %
Franchise-operated number of
operating weeks                           42,593                  41,058           41,354              3.7  %             (0.7 )%

The increase in franchise royalty and fee revenues in fiscal 2012 compared to the prior fiscal year was primarily due to the opening of 64 new franchise-operated bakery-cafes and the 5.0 percent increase in comparable franchise-operated net bakery-cafe sales in fiscal 2012, partially offset by our acquisition of 16 franchise-operated bakery-cafes and the closure of six franchise-operated bakery-cafes.

The increase in franchise royalty and fee revenues in fiscal 2011 compared to the prior fiscal year was primarily due to the opening of 59 new franchise-operated bakery-cafes and the 3.4 percent increase in comparable franchise-operated net bakery-cafe sales in fiscal 2011, partially offset by our acquisition of 30 franchise-operated bakery-cafes and the closure of 21 franchise-operated bakery-cafes.

As of December 25, 2012, there were 843 franchise-operated bakery-cafes open and we have received commitments to open 159 additional franchise-operated bakery-cafes. The timetables for opening these bakery-cafes are established in the respective Area Development Agreements, referred to as ADAs, with franchisees, which provide for the majority of these bakery-cafes to open in the next four to five years. An ADA requires a franchisee to develop a specified number of bakery-cafes by specified dates. If a franchisee fails to develop bakery-cafes on the schedule set forth in the ADA, we have the right to terminate the ADA and develop Company-owned locations or develop locations through new franchisees in that market. We may exercise one or more alternative remedies to address defaults by franchisees, including not only development defaults, but also defaults in complying with our operating and brand standards and other covenants included in the ADAs and franchise agreements. We may waive compliance with certain requirements under its ADAs and franchise agreements if we determine that such action is warranted under the particular circumstances.

Fresh dough and other product sales to franchisees

The following table summarizes fresh dough and other product sales to franchisees for the periods indicated (dollars in thousands):

                                               For the fiscal year ended
                                                                              December 28,
                               December 25, 2012       December 27, 2011          2010        % Change in 2012    % Change in 2011
Fresh dough and other
product sales to franchisees $           148,701     $           136,288     $    135,132              9.1 %               0.9 %

The increase in fresh dough and other product sales to franchisees in fiscal 2012 was primarily due to the 5.0 percent increase in franchise-operated comparable net bakery-cafe sales, the opening of 64 franchise-operated cafes, and an increase in sales of fresh produce to franchisees, partially offset by our purchase of 16 franchise-operated bakery-cafes and the closure of six franchise-operated bakery-cafes.
The increase in fresh dough and other product sales to franchisees in fiscal 2011 was primarily due to the 3.4 percent increase in franchise-operated comparable net bakery-cafe sales, the opening of 59 franchise-operated cafes, and new product offerings, partially offset by our purchase of 30 franchise-operated bakery-cafes and the closure of 21 franchise-operated bakery-cafes.
Costs and Expenses
The cost of food and paper products includes the costs associated with the fresh dough and other product operations that sell fresh dough and other products to Company-owned bakery-cafes, as well as the cost of food and paper products supplied by third-party vendors and distributors. The costs associated with the fresh dough and other product operations that sell fresh dough and other products to the franchise-operated bakery-cafes are excluded from the cost of food and paper products and are shown separately as fresh dough and other product cost of sales to franchisees in the Consolidated Statements of Comprehensive Income.

The following table summarizes cost of food and paper products for the periods indicated (dollars in thousands):

                                             For the fiscal year ended
                                                                         December 28,
                              December 25, 2012     December 27, 2011        2010         % Change in 2012     % Change in 2011
Cost of food and paper
products                     $         552,580     $         470,398     $   374,816              17.5 %               25.5 %
As a percent of bakery-cafe
sales, net                                29.4 %                29.5 %          28.4 %

This decrease in the cost of food and paper products in fiscal 2012 as a percentage of net bakery-cafe sales was primarily due to improved leverage of our fresh dough manufacturing costs due to additional bakery-cafe openings and improved leverage from higher comparable net bakery-cafe sales. In fiscal 2012, there was an average of 74.8 bakery-cafes per fresh dough facility compared to an average of 69.6 bakery-cafes in fiscal 2011.
This increase in the cost of food and paper products in fiscal 2011 as a percentage of net bakery-cafe sales was primarily due to food cost inflation, partially offset by improved leverage of our fresh dough manufacturing costs due to additional bakery-cafe openings and improved leverage from higher comparable net bakery-cafe sales. In fiscal 2011, there was an average of 69.6 bakery-cafes per fresh dough facility compared to an average of 65.2 bakery-cafes in fiscal 2010.

The following table summarizes labor expense for the periods indicated (dollars in thousands):

                                             For the fiscal year ended
                                                                         December 28,
                              December 25, 2012     December 27, 2011        2010         % Change in 2012     % Change in 2011
Labor expense                $         559,446     $         484,014     $   419,140              15.6 %               15.5 %
As a percent of bakery-cafe
sales, net                                29.8 %                30.4 %          31.7 %

. . .