Panera Bread Company Harvard Case Solution & Analysis

Introduction:

            Panera Bread which is competing in bakery-café industry has started in 1981 with name St. Louis Bread Company. Its name was revised in 1999, and was changed to Panera Bread. Its main goal is to provide freshly baked bread in the environment so that people can enjoy the freshness of real food.

            It is committed to the high quality and freshness for its customers. It bakes the bread daily and dispatches them customers as soon as possible so that freshness stays with the bread till it is being consumed.

            To ensure the high quality of the bread, best ingredients, specialized equipment, and careful training for baking is given to the staff so that quality does not get affect in any case. It bakes its bread through European-style heated stone slab oven. The company became successful and received top customer satisfaction by offering the fresh and quality bread to its customers. By 2006, it was operating at above 1,000 locations in 38 states. It is enjoying a 32% average increase in revenue from 2003 to 2006 with operating margins of 12% on an average.

             Moreover, Panera Bread is facing a challenge from the other restaurants; the increase in the other players that are offering similar products has affected the demand for its products as well as profit margins are decreasing due to such effect.  Panera Bread Company is facing a decline in its revenue and profits; therefore it is under pressure to manage the business to sustain in this competitive market.

            Its share price has declined by 10% by the end of 2006, after announcing its third quarter earnings. The firm is in consideration to buy back the shares of worth $75 million as in the effect of such decline in prices to give the benefit of its shareholders. In addition to this, buys back arrangement of shares can increase the value to shareholders of future business proceeds.

            In past years, the company has focused on the equity financing from its retained earnings for expansion plans. Now it is focusing on injecting debts in its business to expand and earn better for its shareholders. The company is facing competition, and it is under consideration that the company can get a debt with a lower required return as compared to its shareholders. The company is interested to change its capital structure through injecting more debts.

Analysis:

Financial Statements Forecast:

The income statement shows a continuous profit for the current and next five years. The sales of the company are growing at a rate of 25% from 2008 to 2009 and afterwards it is constant with 5% annual growth rate. The forecast is made on the basis of market analysis as well as also by considering current and future competition. The competition has started its effect in 2007 and it will continue to hit for many years, but its effects are not high up to 2009. After 2009 the company will face a huge decline in its sales that is a 20 % decline in the growth and it will become constant 5% annually that can be normal increase in the industry due to a combine effect of inflation and the increase in population.

            The percentage cost of sales remains constant (i.e.88 % of sales) because both the increase in price and cost are dependent upon inflation where inflation rate is same for both the items. The operating profits percentage remains the same, but the dollar increase is affected by the competition in the market.

            The net profits of the company are declining consistently till 2010 because of the higher interest rate expense from 2008-2010. The company is under consideration that it will finance the EFM by debt, but not through retained earnings or any other means. The rate of interest is 6% per annum and in the case of 2011 and 2012, the company has an extra case for investment therefore it is considered that the company can earn a 6% of returns from an investment of funds. The reason behind extra cash is that the company growth slows down and it is constantly earning above 7% therefore the extra cash become available to the firm.The tax rate s constant at 36.41% for the period of forecast; there are certain things to assume that the corporate rate of tax in the USA remains constant for these five years.......................

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