Matt Berning

Bill Keith Buy Report

Drew Swanson October 2007

Panera Bread Co. (Nasdaq: PNRA) Total Stores: 1,135

Company-Owned: 475
Franchised: 660
Locations in 38 States
Headquarters: Richmond Heights, MO
Full-Time Employees: 7200
President and CEO: Ron Shaich

Recent Quote: 40.80 52-Week High: 68.90 Beta: 1.19

P/E Ratio (ttm): 22.83 52-Week Low: 39.50 Shares Out.: 32.05M
EPS (ttm): 1.79 Market Cap.: 1.31B Div. & Yield: n/a

Business Overview
Panera Bread Co. is a full service café and bakery. Each location carries a host of artisan
breads, pastries, sandwiches soups and salads, as well as a full coffee-bar. Panera Bread
Co. has successfully set its self apart from other quick-service food restaurants, keeping
itself in a completely separate category from fast-food. Panera Bread Co. has three main
business units: company owned cafés, franchised cafés and bread dough manufacturing
and delivery. The cafés often become popular places for customers of all ages to meet for
lunch or dinner. This success is similar to that of Starbucks, which offers created not only
a product, its coffee, but also an experience.

Recommendation: Buy 825 Shares (Half-Position)

Summary of Analysis
Pros:
• Recent sizeable purchases on the open market by CEO Ron Shaich
• Market price already reflects a weak outlook
• Lots of room for expansion through company-owned stores and franchises
• No long-term debt; cheap capital still available
• Free Wi-Fi network and meeting rooms attract businesspeople
• Analysts are bullish on the restaurant industry as a long-term investment

Cons:
• Poor outlook for the restaurant industry based on certain economic factors
• Declining profitability and liquidity
• Failed to meet initial earnings estimates in recent quarters
Table of Contents

Page 2
Business Overview
Products: Panera Bread Co. is a full service café and bakery. Each location carries a host
of artisan breads, pastries, sandwiches soups and salads, as well as a full coffee-bar. Also,
in an effort to increase dinner visits, the company recently added handmade to order
pizzas which they market under the name Crispani. All the menu items are made with
either all-natural or organic ingredients, as well as being completely free of trans-fats. In
addition to the high quality food served, the company strives to provide an upscale
atmosphere for its customers. Panera Bread Co. has successfully set itself apart from
other quick-service food restaurants, keeping itself in a completely separate category
from fast-food. They feel as though they “provide high quality food at reasonable
prices.”1 In addition to the physical items Panera Bread Co. sells, they also provide many
intangible products for their customers. The cafés often become popular places for
customers of all ages to meet for lunch or dinner. This success is similar to that of
Starbucks, which offers not only a product, its coffee, but also an experience.

Company Organization: Panera Bread Co. has three main business units: company
owned cafés, franchised cafés and bread dough manufacturing and delivery. As of year
end 2006, Panera Bread Co. owned 391 cafes, had franchised 636 cafés and operated 18
dough manufacturing facilities. The company fully manages its corporate owned stores.
They continue to add more of these stores each year. The franchised locations are owned
in their entirety by a third party. Panera Bread Co. issues them a license for the right to
use the Panera Bread Co. name and menu. In return, they are required to pay a fee of
about 4-5% of the stores sales. Additionally, the franchises are required to purchase their
dough from the company, further guaranteeing revenues. This segment continues to grow
with 90 new cafes being planned for opening in 2007. All 636 locations are owned by
one of 41 franchise groups. The dough manufacturing segment is responsible for making
and transporting the dough to all of the cafes, both company owned and franchised. In
addition to the 18 manufacturing facilities, the company also takes care of all the logistics
in house. All the trucks are leased and the drivers employed by Panera Bread Company.

Free Wi-Fi Network: As of 2005, Panera Bread Co. operated the nation’s largest free
Wi-Fi network, with free access at 575 locations.2 Today, it offers free access at over
1,000 locations, giving it a distinct advantage over its competitors. In a recent Motley
Fool article, the author mentions that he has “taken to making Panera [his] office away
from the office,” in place of Starbucks, because of its free wireless network and free
coffee refills.3 This is an indication of a market share increase for Panera Bread Co. in the
arena of business travelers. Many Panera Bread locations feature “Community Rooms”
that can be used, free of charge, for any kind of small meetings.

1
Panera Bread Co. 2006 Annual Report, pg 3
2
http://www.wirelessdevnet.com/news/2005/feb/07/news4.html
3
http://www.fool.com/investing/small-cap/2007/09/06/the-9-bagger-that-gave-you-no-chance.aspx

Page 3
Company History4
• 1981: Au Bon Pain Co. founded by Louis Kane and Ronald Shaich
• 1993: Au Bon Pain Co. purchased St. Louis Bread Co., a chain of twenty bakery-
cafes specialty restaurants in the St. Louis area
• 1993 – 1997: Gradual development and transformation from St. Louis Bread Co. into
what eventually comes to be known as Panera Bread
• 1999: All business units of Au Bon Pain Co. except for Panera Bread are sold off
• 1999: Company officially renamed Panera Bread Co.
• 2002: Panera Bread stock splits 2-for-1 in June
• 1999 – 2007: Panera Bread Co. expands rapidly through company-owned stores and
franchised locations
• 2007: Panera Bread Co. operates over 1,000 locations in 38 States

Recent News5
April 4th, 2007: Panera Bread Co. announces their expectation that Q1 2007 EPS will
come in below the previously forecasted figure.

May 8th, 2007: Panera Bread Co. announces expansion in Canada; will open first
Toronto café by end of 2007.

July 24th, 2007: Panera Bread Co. announces a 7% drop in Q2 2007 earnings (as
compared with Q2 2006) and forecasts Q3 2007 profit will fall below prior expectations.

August 10th, 2007: Co-founder and CEO of Panera Bread Co., Ron Shaich, purchases
80,000 shares of PNRA stock, four days after buying 12,198 shares; total cost of these
stock purchases is $4,103,856.

August 30th, 2007: Panera Bread Co. announces a new lineup of products for the fall
season menu, including new sandwiches, salads, soups, baked goods, and coffees.

September 5th, 2007: Panera Bread Co. reports a 3.1% increase in same-store sales for
the month of August.

Upcoming Events
October 3rd, 2007: Panera Bread Co. will announce sales figures for September 2007.

October 23rd, 2007: Panera Bread Co. will announce Q3 2007 earnings.

October 31st, 2007: Panera Bread Co. will announce sales figures for October 2007.

4
http://www.panerabread.com/about/company/history.php
5
Various headlines; http://finance.google.com/finance?q=pnra

Page 4
Board of Directors6
Ronald Shaich - Chairman & Chief Executive Officer
Ron Shaich is the co-founder, Chairman and Chief Executive
Officer of Panera Bread Company. Shaich began his career in the
bakery-cafe industry in 1981, when he co-founded Au Bon Pain
Co., Inc. Shaich has received several national awards including
2004 Ernst & Young Entrepreneur of the Year national finalist
and CNN/Moneyline CEO of the Week. In 2005, Shaich received
the Gold Plate Award, presented by the International Foodservice
Manufacturers Association (IFMA), as the outstanding operator in
the food service industry. In 2004, Shaich was honored as a
Golden Chain recipient by the Multi-Unit Foodservice Operators
(MUFSO). Shaich received a Bachelor of Arts degree from Clark
University in 1976, and a Master's Degree in Business
Administration from Harvard Business School in 1978.

George Kane - Emeritus Director since May 2004

George E. Kane became Emeritus Director in May 2004 and had served as a Director
since November 1988. Mr. Kane was also one of our Directors from December 1981 to
December 1985 and a Director Emeritus from December 1985 to November 1988.
Mr. Kane retired in 1970 as President of Garden City Trust Company (now University
Trust Company) and served as Honorary Director of University Trust Company from
December 1985 to January 2000.

Domenic Colasacco - Director since March 2000

Mr. Colasacco has been President and Chief Executive Officer of Boston Trust &
Investment Management, a trust company formed under Massachusetts state law since
1992. He joined Boston Trust in 1974 after beginning his career in the research division
of Merrill Lynch & Co., in New York City.

Fred Foulkes - Director since June 2003

Professor Foulkes has been a Professor of Organizational Behavior and the Director of
the Human Resources Policy Institute at Boston University School of Management since
1981 and has taught courses in human resource management and strategic management at
Boston University since 1980.

Larry Franklin - Director since June 2001

Mr. Franklin has been the President and Chief Executive Officer of Franklin Sports, Inc.,
a leading sports equipment company, since 1986. Mr. Franklin joined Franklin Sports,
Inc. in 1970 and served as its Executive Vice President from 1981 to 1986.

6
Taken as excerpts from bios; http://www.panerabread.com/about/company/board.php

Page 5
Competition7
Panera Bread Co. (PNRA)
“We compete with specialty food, casual dining and quick service cafes,
bakeries, and restaurant retailers including national, regional and locally-
owned cafes, bakeries, and restaurants. Our bakery-cafes compete based
on customers’ needs for breakfast, lunch, PM “chill-out,” dinner, and
take home bread sales.”8

Caribou Coffee Company (CBOU)

Caribou Coffee Company is an operator of gourmet coffee houses. The
Company offers gourmet coffee and espresso beverages, teas, baked
goods and other related coffee merchandise. Caribou products are sold
in grocery stores, airlines, hotels, sports and entertainment venues, and
college campuses in addition to its coffee houses. Founded and
headquartered in Minneapolis, Minnesota, the Company has roughly 460
locations in the United States.

Starbucks Corporation (SBUX)

Starbucks Corporation purchases, roasts, and sells coffee products
through its retails stores. Brewed coffees, blended beverages, espresso
beverages, and food items are among its primary products sold. The
company processes and sells pre-made coffee products through
grocery stores and other retail outlets across the country. Starbucks
has three operating segments: United States, International and Global
Consumer Products Group, each of which includes Company-operated
retail stores and Specialty Operations. Founded in 1985 in Seattle,
Washington, the Company operates roughly 12,000 retail stores across
the world.

Chipotle Mexican Grill (CMG)

Chipotle Mexican Grill is a Mexican specialty restaurant which
serves tacos, burritos, and salads. Formerly a subsidiary of
McDonalds Corporation, the Company operates roughly 580
restaurants across the United States. A small majority of its
restaurants are operated through franchisees. The company went
public in January of 2006, and is headquartered out of Denver,
Colorado.

7
Yahoo Finance
8
Panera Bread Co. 2006 Annual Report, pg 2

Page 6
Restaurant Industry Outlook9,10
The restaurant industry has experienced several months of poor performance. Analysts at
ValueLine and S&P both rate the industry as an underperformer for the rest of 2007 and
don’t predict 2008 to be much better. They cite the mortgage fallout as a prime cause for
this. When consumers find themselves paying more for mortgages on houses worth less
money, the amount of discretionary spending (such as dining out) decreases. This crisis is
not showing any signs of waning in the near future. Additionally, the prices of important
food commodities, such as milk and corn have risen considerably and the trend looks like
it will continue for the foreseeable future.

While the overall industry does not look positive in the short term, analysts point out this
is an opportune time to purchase for the long-term hold. Many companies have been
exceptionally beaten down and are trading well below historical multiples. Additionally,
S&P points out that there have been a few companies who have stood out positively in
the negative restaurant market. These companies have offered their customers
exceptional service through items such as longer hours, free Wi-Fi and more health
conscious choices. Also, they reference the fact that the trend of American’s eating out
more is not apt to stop any time soon.

Recent headlines have indicated bleak near-term prospects for the restaurant industry, and
chains in particular. A recent survey indicated that 54% of Americans plan to eat out less
over the coming months11. The recent lowering of the interest and its possible
implications concerning inflation are signals of woe for the industry. Restaurants where
clientele are likely spending discretionary income, such as Panera Bread, may be harmed
as the macroeconomic outlook turns darker. However, businesspeople and others who
might otherwise consider premium restaurants may choose “tweener” restaurants such as
Panera Bread.

All in all, the restaurant industry is very well suited to the long-term investor who
carefully evaluates the company he is considering investing in. He should be willing to
experience significant volatility in the short term.

The S&P Restaurants Index is up 1.3% in 2007 vs. 6.6% for the S&P 500.

Both Starbucks and Caribou Coffee are being sued in class action suits about managers’
overtime pay. The prosecutors feel they do roughly 70% barista work and should thus be
considered for overtime pay like regular employees. Instead, since managers are exempt
from overtime pay, these workers feel they should be eligible for the overtime hours they
have worked.12

9
S&P Restaurant Industry Report
10
ValueLine Report
11
http://www.reuters.com/article/marketsNews/idUKN2727800720070927?rpc=44
12
http://money.cnn.com/2007/09/21/news/companies/starbucks_overtime.ap/index.htm

Page 7
Porter’s Five Forces
Competitors: The main competition Panera Bread Co. experiences is from coffee shops
such as Starbucks and Caribou Coffee, along with specialty restaurants such as Chipotle
Mexican Grill. Starbucks is a global company with superior market share and brand
awareness. Caribou coffee is closer in scale to Panera Bread Co.; both have high growth
outlooks and are currently expanding. Chipotle competes with Panera Bread at lunch and
dinner, whereas Starbucks and Caribou compete with Panera Bread in the mornings and
at non-traditional dining hours. Panera Bread Co.’s free Wi-Fi network gives the
company a considerable competitive advantage.

Substitutes: Small, privately owned local coffee shops or delis could be substitutes for a
chain restaurant such as Panera Bread. The small neighborhood atmosphere that “mom
and pop shops” offer could potentially be eliminated. Panera Bread Co. has the ability to
offer a wider array of goods and services than substitutes such as these. Since Panera
Bread offers a broad assortment of goods on its menu, the threat of substitutes is not of
large concern.

Potential Entrants: The specialty restaurant industry is by no means mature and has
plenty of room for growth, as seen by Caribou and Panera Bread Co.’s expansion into
new markets. In researching competitors, there were few companies with an identical
structure and strategy as Panera Bread Co., which exhibits its belief that there is room for
profit in the specialty restaurant industry. As seen through Chipotle’s success, the
specialty chain restaurant model can work and the threat of new entrants to the industry is
possible. However, the current restaurant market is experiencing commodity and labor
inflation that could contract the current margins in the industry and inhibit new entrants.13

Power of Suppliers: Since many of Panera Bread’s items on the menu are directly
correlated to commodity prices such as wheat and dairy prices, the suppliers are quite
powerful in this industry. A recent shift Panera Bread made was attaining some its baked
goods from external vendors instead of being produced by its own fresh dough facilities
(FDF’s), which again increases the power of suppliers.

Customers: Patrons love Panera Bread for the wonderful smells and flavors that fill its
stylish and very relaxed bakery/cafe shops.14 The place tends to be a hotspot for the
“soccer mom” crowd, but with the largest free Wi-Fi network in the country, it looks as
though businesspeople may become regulars. Its customers have substitutes in the
specialty restaurant industry but Panera Bread Co. tends to have loyal customers.

13
Rachael Rothman, Merrill Lynch, “10-Q Review”
14
Lawrence Rothman, Motley Fool, “Panera needs a more even rise”

Page 8
SWOT Analysis15
Strengths
• No long-term debt

• Largest free Wi-Fi network in the United States16

• Diverse and unique product mix

• Favorable atmosphere in its bakery shops17

Weaknesses
• Brand recognition and popularity

• Poor profitability ratios

• Poor efficiency as shown through its operating margins

• Slowing average weekly sales

Opportunities
• Expansion into new US and Canadian Markets18

• Attain baked goods from external vendors opposed to its fresh dough factories to
increase margins19

• Attract more businesspeople with the free Wi-Fi and meeting rooms

• New products such as the recently introduced Crispani

Threats
15
Panera 2006 10-K
16
http://www.wirelessdevnet.com/news/2005/feb/07/news4.html
17
http://www.fool.com/investing/small-cap/2007/09/06/panera-needs-a-more-even-rise.aspx
18
Various headlines; http://finance.google.com/finance?q=pnra
19
WaistWatchers: 10-Q Review, Rachel Rothman, Merrill Lynch

Page 9
• High commodity prices causing margins to shrink

• Restaurant industry losing customers and heading into slump

• Competing with small local coffee shops and bakeries in new markets

• Competitors such as SBUX, CBOU, and CMG taking away customers

• Excessively ambitious expansion plans

Page 10
 Institutional Ownership20

This exceedingly high level of institutional ownership (the percentage higher than 100%
is likely attributable to error in data reporting) is striking. Despite a substantially negative
net position change, institutions still hold almost all outstanding shares of Panera Bread
Co. T. Rowe Price holds 10.1% of outstanding shares. Three other institutions hold more
than 5% of the outstanding shares: Maverick Capital (8.6%), BlackRock Financial
(6.9%), and Franklin Advisers (6.8%). The negative net position change is not surprising
given that Panera Bread has continually lowered its estimates throughout 2007.

Insider Ownership21 Insider Transactions22

Shares Shares
Ronald Shaich, CEO 129,908 Purchases 92,198
Scott Davis, Senior VP 14,850 Sales (4,000)
Neal Yanofsky, President 12,812 Net Change 88,198
Michael Nolan, Senior VP 10,540
Michael Markowitz, Senior VP 8,231

Insider ownership is fairly minimal at Panera Bread Co.; the largest insider shareholder,
Ron Shaich, owns less than a 0.5% stake. All insiders taken as a group own less than 1%
of the common stock. Over the last six months, insider purchases have far outweighed
insider sales, largely due to the sizeable recent purchases by CEO Ron Shaich. Mr.
Shaich’s August stock purchases are a strong indicator for a bullish outlook at Panera
Bread Company.

Recent Purchases by Ronald Shaich23

Aug. 10th, 2007: Purchased 80,000 shares at $44.94 per share.
(Cost of $3,595,200)
Aug. 6th, 2007:Purchased 12,198 shares at $41.70 per share.
(Cost of $508,656)

20
http://moneycentral.msn.com/ownership?Holding=Institutional+Ownership&Symbol=PNRA
21
http://finance.yahoo.com/q/mh?s=PNRA
22
For the past six months; http://finance.yahoo.com/q/it?s=PNRA
23
http://biz.yahoo.com/t/64/385.html

Page 11
Price Performance
Five-Year Performance24

The restaurant industry has steadily outperformed the S&P 500 over the past 5+ years.
Up through the middle of 2006, Panera Bread yielded greater growth than the industry
average, but has since stumbled significantly. Despite the recent downturn, $10,000
invested in PNRA at the beginning of 2001 would have yielded a greater return to date
than the S&P 500 index. Panera Bread has exhibited erratic returns when compared with
its industry; in 2002 and 2005 it blew away its peers, while in 2003, 2004, 2006, and
2007 it has lagged behind significantly. The same general trend applies to Panera Bread
when compared with the S&P500 index.

Two-Year Performance25

The past two years have seen PNRA stock peak and subsequently drop significantly in
stock price. The stock price has been beaten down severely following earnings news over
several of the most recent quarters, resulting in a stock that is trading at over 33% below
its 52-week high of $68.90 and over 40% below its 5-year high of $75.88.

24
Morningstar; http://quicktake.morningstar.com/StockNet/StockReturns.aspx?Country=USA
&Symbol=PNRA&stocktab=returns
25
http://finance.yahoo.com/q/bc?t=2y&s=PNRA&l=on&z=m&q=l&c=&c=%5EGSPC

Page 12
Ratio Analysis
The ratio analysis that follows is divided into four areas: liquidity, asset management,
debt management, and profitability. For each area, a trend analysis of Panera Bread Co.
and a comparative analysis with a basket of three competitors are presented. An extended
DuPont analysis of return on equity is also included, as well as an analysis of enterprise
value per restaurant, an industry-specific ratio.
Panera Bread Co. functions as a coffee shop, bakery, and restaurant; for comparative
analysis, its unique business strategy required the use of a handpicked basket of
competitors rather than a published industry average. The selected basket includes
Starbucks (SBUX), Caribou Coffee (CBOU), and Chipotle Mexican Grill (CMG).
The ratios for Panera Bread Co. for ’05 and ’06 were computed using the 10-K report
from 2006. 2007 figures for Panera Bread Co., Starbucks, Caribou, and Chipotle were
computed by annualizing the data presented in the most recently published 10-Q report
for each respective company.
In the analysis that follows, fixed assets include only property, plant, and equipment;
intangible long-term assets such as goodwill are not considered to be fixed assets. One
year has been defined as 360 days for computational purposes. The quick ratio includes
only cash, equivalents, and accounts receivable; inventories, deferred tax assets, prepaid
expenses, and other similar accounts are excluded.

Liquidity

Panera Bread Co. has a historically low level of liquidity; it carries only a small amount
of cash and equivalents on hand. In 2007, further decreases in liquid investment holdings
lead to a severely lowered quick ratio. The lowering trend of these two ratios indicates
the problem is only getting worse. One cause of this weak area is that Panera Bread Co.
does not have any long-term debt; it’s probable that this has lead to an increase in short-
term borrowings.

Panera Bread falls in the middle of its peer group in terms of liquidity; the basket average
is skewed greatly by Chipotle’s strong liquidity. In comparison with Starbucks and
Caribou, Panera Bread’s level of liquidity is adequate.
Liquidity: Moderate

Page 13
Asset Management
Total and fixed asset turnovers are rising while average collection period and days sales
in inventory are declining: all positive trends.

Total asset turnover is towards the low end but very much in line with the basket average;
fixed asset turnover falls in the middle of the pack. Average collection period is high
relative to Caribou and Chipotle but very similar to Starbucks and empirically speaking,
fairly low. Days sales in inventory are extremely low due to Panera Bread’s low levels of
inventory.
Asset Management: Strong

Debt Management

Panera Bread’s capital structure leans much more heavily on equity than debt; essentially
three-to-one in favor of equity. They have no long-term debt on their balance sheet and
owe only $0.34 for each $1 of equity. The lowering trend in times-interest-earned is not
alarming given how strong the figures are. Panera Bread’s low debt risk essentially
eliminates the possibility of bankruptcy and gives way to a less volatile bottom line.

The basket of peers displays a variety of capital structures; none is too heavily reliant on
debt. Panera Bread Co. is the strongest in terms of times-interest-earned; it is most easily
able to pay its interest expense. Although Chipotle is also strong in this area, Panera
Bread blows away Starbucks and Caribou in debt management.
Debt Management: Very Strong
Profitability

Panera Bread’s profit margins and returns are down across the board. This declining trend
is largely attributable to growing pains in cost management as the company expands.

Panera Bread’s margins and returns are better than the basket averages in all four
measures; however, Caribou, a company who turned a net loss in its most recent quarter,
skews this average. Comparing Panera Bread to Starbucks and Chipotle, it is certainly
underperforming in every measure.
Profitability: Weak

Extended DuPont Analysis

Page 14
A declining net profit margin is the cause of the lowering trend in return on equity. Total
asset turnover is improving and the equity multiplier is basically constant. This analysis
points to profitability as the area in which improvement must be made.

Enterprise Value per Restaurant

This industry-specific measure computes enterprise value relative to number of locations.
Caribou’s extremely low figure is expected given its net operating loss. Chipotle’s EV
per restaurant blows away both Starbucks and Panera Bread Co.; in this relative measure,
Chipotle is very expensive. Panera Bread’s low figure of 1.32 is relatively cheap when
compared to Starbucks and especially Chipotle.
Investor Relations and Analyst Contact
We attempted to contact investor relations, but after a week of phone calls and emails we
were still unable to pose our questions to them. We had planned to ask them a series of
questions regarding the company’s future profitability, liquidity and recent downturn in
stock price. We also wanted to get some color on the inner workings of the corporation—
specifically their plans for growth and how this will be achieved. We will continue to try
and contact them through the date of our presentation and issue an addendum should that
be necessary.

Additionally, we attempted to contact three of the analysts who cover Panera Bread
Company. Two were out of the country on business and one did not return out calls. We
wanted to ask the analysts many of the same questions, hoping to gain an outsider’s
prospective on Panera Bread Co.’s stock valuation.

Analyst Recommendation26
Merrill Lynch Research Analyst Rachel Rothman reviews Panera Bread Co. on a
consistent basis. The following summary conveys her opinion on the state of the
company as of August 16th, 2007.
• Insider buying may signal near-term turning point – Recent SEC filings disclosing the
purchase of 90K shares in the open market by CEO Ron Shaich indicate a bullish
viewpoint from the company and a sign of turning the stock price around

• Visible fundamentals lackluster – 2Q07 average weekly sales declined 0.9% versus same
store sales growth of 2.1%. This trend indicates underperforming new units in the
portfolio

• Cap-ex guidance raised – Increased construction costs largely attributed to the increase.
Plans to increase company owned square footage growth would be better served by
increasing free cash flow to shareholders.

26
WaistWatchers: 10-Q Review, Rachel Rothman, Merrill Lynch

Page 15
• Restaurant margins decreasing – Restaurant level margins dipped 14.4% during 2Q07.
Commodity inflation combined with labor pressures such as the federal minimum wage
hike could have potential to decrease the company’s margins.

• Potential catalysts for share price appreciation

o Slow-down in franchise acquisitions coupled with a return to franchise

development

o Decline in capital expenditures leading to a return of capital to shareholders

o Continued insider buying signaling bullish sentiment by management

• For now, Neutral: Remain cautious given the current pace of company unit
development and weak business trends. Merrill Lynch recognizes numerous potential
catalysts for the stock, but is uncomfortable recommending a buy at this juncture.
Because of this, Merrill Lynch reiterates its Neutral rating.

Page 16
 Pro Forma Income Statement
P a n e ra B re a d C o m p a n y
S ta te m e n ts o f O p e ra tio n s
(in m illions )
2 6-D e c -07 26-D ec -0 8 26 -D ec -0926 -D ec -1026-D ec -1 126 -D ec -12
S ale s gro w th 3 3% 22% 23 % 2 4% 25% 25 %
Total reve nue 1,01 8 1,24 2 1,5 28 1 ,894 2,36 8 2,9 60
C os ts and ex p ens es
B ak ery -c afé ex p ens es 67 2 82 0 1,0 08 1 ,250 1,56 3 1,9 54
F res h dou gh c os ts o f s a le s to fra nc h is e es11 7 14 3 1 76 218 27 2 3 40
D ep rec iatio n an d am ortiz atio n 53 65 80 99 12 3 1 54
G ene ral a nd a dm inis trative ex pen s es 82 10 0 1 23 153 19 1 2 38
P re-o pen ing ex p ens es 9 11 14 17 21 26
Tota l c o s ts a nd e x pe ns e s 93 3 1,13 8 1,4 00 1 ,736 2,17 0 2,7 13
O p erating p rofit 85 10 4 1 28 158 19 8 2 47
Intere s t ex pen s e 0 0 0 0 0 0
O th er (in c om e) ex pen s e, ne t (2) (3) (4) (5) (6) (7 )
Inc o m e b efo re in c om e tax es 87 10 7 1 31 163 20 3 2 54
Inc o m es tax e s (35 % ra te) 31 37 46 57 71 89
N et in c om e 57 69 85 106 13 2 1 65
P er s h are d ata
B as ic E P S 1.7 8 2.1 2 2 .55 3.10 3.8 0 4 .65
D iluted E P S 1.7 5 2.1 1 2 .56 3.14 3.8 8 4 .79
W eig hted ave rage s ha res o f c o m m o n s h ares o uts ta nding (in tho us a nds )
B as ic 32 ,000 3 2,70 0 33,4 00 34 ,100 3 4,80 0 35,5 00
D iluted 32 ,500 3 2,90 0 33,3 00 33 ,700 3 4,10 0 34,5 00

The pro forma five-year outlook is driven mainly by the sales growth outlook. Due to
macroeconomic and industry factors, as well as a few company-specific issues, sales
growth for the next fiscal year is expected to decline rather sharply. Looking past this
short-term decline in sales, the future shows steady growth for Panera Bread Company.
In this model, expenses are projected as percentages of sales and the 35% tax bracket is
held constant. EPS, basic and diluted, grow fairly steadily in the range of 20 – 22% each
year.

Valuation
Price-to-earnings Ratio (P/E)
Using the projected diluted EPS for fiscal year ’08 and a recent P/E ratio (ttm):

$2.11 * 22.83 = $48.17

This projection offers an 18% upside from a recent quote of 40.80.

Page 17
 Appendix: Financial Statements
PANERA BREAD COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)

June 26, December

2007 26, 2006
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 20,686 $ 52,097
Investments in government securities — 20,025
Trade accounts receivable, net 15,350 19,041
Other accounts receivable 10,696 11,878
Inventories 9,900 8,714
Prepaid expenses 18,987 12,036
Deferred income taxes 6,300 3,827

Total current assets 81,919 127,618

Property and equipment, net 390,553 345,977
Other assets:
Goodwill 87,246 57,192
Other intangible assets, net 22,470 6,604
Deposits and other 7,782 5,218

Total other assets 117,498 69,014

Total assets $ 589,970 $ 542,609

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable $ 5,208 $ 5,800
Accrued expenses 97,650 102,718
Deferred revenue 2,795 1,092

Total current liabilities 105,653 109,610

Deferred rent 29,752 27,684
Other long-term liabilities 12,984 7,649

Total liabilities 148,389 144,943

Commitments and contingencies
Minority interest 2,635 —
Stockholders’ equity:
Common stock, $.0001 par value:
Class A, 75,000,000 shares authorized; 30,747,292 issued and 30,638,292 outstanding in 2007; and 30,453,157 issued and
30,344,157 outstanding in 2006 3 3

Class B, 10,000,000 shares authorized; 1,398,588 issued and outstanding in 2007 and 1,400,031 in 2006 — —
Treasury stock, carried at cost (900 ) (900 )
Additional paid-in capital 190,657 176,241
Retained earnings 249,186 222,322

Total stockholders’ equity 438,946 397,666

Total liabilities and stockholders’ equity $ 589,970 $ 542,609

Page 18
 PANERA BREAD COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

For the 13 Weeks Ended For the 26 Weeks Ended

June 26, June 27, June 26, June 27,
2007 2006 2007 2006
Revenues:
Bakery-cafe sales $ 209,626 $ 157,151 $ 406,744 $ 312,231
Franchise royalties and fees 17,010 15,346 33,269 29,814
Fresh dough sales to franchisees 26,323 24,638 52,621 49,061

Total revenue 252,959 197,135 492,634 391,106

Costs and expenses:
Bakery-cafe expenses:
Cost of food and paper products 66,125 46,215 125,120 91,958
Labor 67,389 48,104 129,860 95,455
Occupancy 16,356 11,511 31,893 22,519
Other operating expenses 29,560 22,276 55,320 42,519

Total bakery-cafe expenses 179,430 128,106 342,193 252,451

Fresh dough cost of sales to franchisees 21,595 20,783 43,437 42,517
Depreciation and amortization 14,063 10,517 27,398 20,724
General and administrative expenses 17,377 14,640 34,514 28,848
Pre-opening expenses 1,642 1,674 2,779 2,484

Total costs and expenses 234,107 175,720 450,321 347,024

Operating profit 18,852 21,415 42,313 44,082

Interest expense 39 4 171 7
Other (income) expense, net 4 (717 ) (586 ) (1,696 )

Income before minority interest and income taxes 18,809 22,128 42,728 45,771
Minority interest 79 — 192 —

Income before income taxes 18,730 22,128 42,536 45,771

Income taxes 6,095 8,076 14,857 16,706

Net income $ 12,635 $ 14,052 $ 27,679 $ 29,065

Per share data:

Net income per share
Basic $ 0.40 $ 0.45 $ 0.88 $ 0.93

Diluted $ 0.39 $ 0.44 $ 0.86 $ 0.91

Weighted average shares of common and common equivalent

shares outstanding:
Basic 31,683 31,269 31,616 31,218

Diluted 32,250 32,042 32,225 32,010

(in thousands, except per share information)

Page 19
 PANERA BREAD COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

For the 26 Weeks Ended

June 26, June 27,
2007 2006
Cash flows from operations:
Net income $ 27,679 $ 29,065
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 27,398 20,724
Stock-based compensation expense 4,480 3,561
Tax benefit from exercise of stock options (3,388 ) (2,635 )
Minority interest 192 —
Deferred income taxes (4,967 ) (3,581 )
Other 666 (292 )
Changes in operating assets and liabilities, excluding the effect of acquisitions:
Trade and other accounts receivable 5,197 3,080
Inventories (304 ) (199 )
Prepaid expenses (6,804 ) (263 )
Accounts payable (1,933 ) 783
Accrued expenses 7,566 (8,921 )
Deferred rent 2,068 1,114
Other long-term liabilities 3,035 2,779

Net cash provided by operating activities 60,885 45,215

Cash flows from investing activities:

Additions to property and equipment (53,697 ) (48,500 )
Proceeds from sale of bakery-cafe 1,844 —
Acquisitions, net of cash acquired (68,934 ) —
Purchase of investments — (30,619 )
Investment maturities proceeds 20,000 26,900
Increase in deposits and other (1,446 ) (1,420 )

Net cash used in investing activities (102,233 ) (53,639 )

Cash flows from financing activities:

Exercise of employee stock options 5,643 3,626
Tax benefit from exercise of stock options 3,388 2,635
Proceeds from issuance of common stock under employee benefit plans 906 750

Net cash provided by financing activities 9,937 7,011

Net decrease in cash and cash equivalents (31,411 ) (1,413 )

Cash and cash equivalents at beginning of period 52,097 24,451

Cash and cash equivalents at end of period $ 20,686 $ 23,038

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 PANERA BREAD COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)

December 26, December 27,

2006 2005

ASSETS
Current assets:
Cash and cash equivalents $ 52,097 $ 24,451
Investments in government securities 20,025 36,200
Trade accounts receivable, net 19,041 18,229
Other accounts receivable 11,878 6,929
Inventories 8,714 7,358
Prepaid expenses 12,036 5,736
Deferred income taxes 3,827 3,871

Total current assets 127,618 102,774

Property and equipment, net 345,977 268,809
Other assets:
Investments in government securities — 10,108
Goodwill 57,192 48,540
Other intangible assets, net 6,604 3,219
Deposits and other 5,218 4,217

Total other assets 69,014 66,084

Total assets $ 542,609 $ 437,667

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable $ 5,800 $ 4,422
Accrued expenses 102,718 81,559
Deferred revenue 1,092 884

Total current liabilities 109,610 86,865

Deferred income taxes — 5,022
Deferred rent 27,684 23,935
Other long-term liabilities 7,649 4,867

Total liabilities 144,943 120,689

Commitments and contingencies (Note 10)
Stockholders’ equity:
Common stock, $.0001 par value:
Class A, 75,000,000 shares authorized; 30,453,157 issued and 30,344,157 outstanding in 2006; and 29,957,297 issued and
29,848,297 outstanding in 2005 3 3
Class B, 10,000,000 shares authorized; 1,400,031 issued and outstanding in 2006 and 1,400,621 in 2005 — —
Treasury stock, carried at cost (900 ) (900 )
Additional paid-in capital 176,241 154,402
Retained earnings 222,322 163,473

Total stockholders’ equity 397,666 316,978

Total liabilities and stockholders’ equity $ 542,609 $ 437,667

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 PANERA BREAD COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)

For the fiscal year ended

December 26, December 27, December 25,
2006 2005 2004
Revenues:
Bakery-cafe sales $ 666,141 $ 499,422 $ 362,121
Franchise royalties and fees 61,531 54,309 44,449
Fresh dough sales to franchisees 101,299 86,544 72,569

Total revenue 828,971 640,275 479,139

Costs and expenses:
Bakery-cafe expenses:
Cost of food and paper products 197,182 142,675 101,832
Labor 204,956 151,524 110,790
Occupancy 48,602 35,558 25,040
Other operating expenses 92,176 70,003 51,044

Total bakery-cafe expenses 542,916 399,760 288,706

Fresh dough cost of sales to franchisees 85,618 75,036 65,627
Depreciation and amortization 44,166 33,011 25,298
General and administrative expenses 59,306 46,301 33,338
Pre-opening expenses 6,173 5,072 4,332

Total costs and expenses 738,179 559,180 417,301

Operating profit 90,792 81,095 61,838

Interest expense 92 50 18
Other (income) expense, net (1,976 ) (1,133) 1,065

Income before income taxes 92,676 82,178 60,755

Income taxes 33,827 29,995 22,175

Net income $ 58,849 $ 52,183 $ 38,580

Per share data:

Net income per share
Basic $ 1.88 $ 1.69 $ 1.28

Diluted $ 1.84 $ 1.65 $ 1.25

Weighted average shares of common and common equivalent shares outstanding

Basic 31,313 30,871 30,154

Diluted 32,044 31,651 30,768

Page 22
 PANERA BREAD COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

For the fiscal year ended

December 26, December 27, December 25,
2006 2005 2004
Cash flows from operations:
Net income $ 58,849 $ 52,183 $ 38,580
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 44,166 33,011 25,298
Stock based compensation expense 8,171 — —
Tax benefit from exercise of stock options (4,346 ) 9,307 4,336
Deferred income taxes (5,065 ) (2,249) 5,993
Other (222 ) 803 472
Changes in operating assets and liabilities, excluding the effect of acquisitions:
Trade and other accounts receivable (4,515 ) (7,902) (4,850)
Inventories (1,156 ) (1,686) (1,055)
Prepaid expenses (6,300 ) (4,078) (358)
Accounts payable 1,378 (1,418) (2,232)
Accrued expenses 7,629 26,435 10,420
Deferred rent 3,749 3,754 7,680
Other long-term liabilities 2,557 2,468 —

Net cash provided by operating activities 104,895 110,628 84,284

Cash flows from investing activities:

Additions to property and equipment (109,296 ) (82,056) (80,429)
Proceeds from sale of assets 1,883 — —
Acquisitions, net of cash acquired (9,101 ) (28,261) (5,224)
Purchase of investments (30,619 ) (20,025) (28,792)
Investment maturities proceeds 57,200 2,000 9,300
(Increase) decrease in deposits and other (984 ) (1,298) 2,854

Net cash used in investing activities (90,917 ) (129,640) (102,291)

Cash flows from financing activities:

Exercise of employee stock options 7,716 12,632 3,569
Tax benefit from exercise of stock options 4,346 — —
Proceeds from issuance of common stock 1,606 1,192 1,073
Other — — 602

Net cash provided by financing activities 13,668 13,824 5,244

Net increase (decrease) in cash and cash equivalents 27,646 (5,188) (12,763)
Cash and cash equivalents at beginning of period 24,451 29,639 42,402

Cash and cash equivalents at end of period $ 52,097 $ 24,451 $ 29,639

Supplemental cash flow information:

Cash paid during the year for:
Interest $ — $ — $ —
Income taxes $ 42,227 $ 23,161 $ 10,367
Noncash investing activities:
Accrued property and equipment purchases $ 23,396 $ 15,208 $ 9,066
Assets transferred to minority interest owner $ — $ — $ 2,673
Accrued acquisition purchase price $ 8,650 $ — $ —

ValueLine Report

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