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Panera Bread Co (PNRA) Is Tier 1

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“And by the way, the bulk of the billions in Berkshire Hathaway Inc. (NYSE:BRK.A) has come from the better businesses. … And most of the other people who’ve made a lot of money have done so in high-quality businesses.” — Charlie Munger

At Tier 1 Investments, a Motley Fool Real-Money Portfolio, I seek out and invest in elite businesses. These include companies with the most valuable brands, best management, superior products, and strongest competitive advantages. I call these businesses Tier 1 enterprises, and Panera Bread Co (NASDAQ:PNRA) fits that description perfectly.

Panera Bread Co (NASDAQ:PNRA)

An aspirational brand built on quality
One of the major growth stories over the next decade will be the trend of healthier eating. People are becoming more aware of what they put into their bodies. They aspire to eat better, and maybe even more importantly, they want their children to eat better. Few companies are as well positioned to benefit from this trend as Panera Bread.

Panera has built an aspirational brand that people trust. Customers are willing to pay a premium to dine at Panera because they know that the company uses only fresh, high-quality ingredients. Panera’s bakery cafes serve delicious and highly rated soups, salads, and sandwiches, and they bake their bread fresh each night. But Panera is more than just a bakery cafe. The company has become a “third place” between work and home, along the lines of what Starbucks Corporation (NASDAQ:SBUX) has accomplished, by offering up free Wi-Fi and a comfortable environment in which customers can linger as they eat, work, or simply sit back and relax. Panera explains it best:

We are bakers of bread. We are fresh from the oven. We are a symbol of warmth and welcome. We are a simple pleasure, honest and genuine. We are a life story told over dinner. We are a long lunch with an old friend. We are your weekday morning ritual. We are the kindest gesture of neighbors. We are home. We are family. We are friends.

Combine this ethos with Panera’s award-winning customer service, and you begin to understand what separates Panera from its peers.

The numbers tell the story
Signs of Panera’s competitive advantage — based on its differentiation-by-quality approach and the experience-based nature of its business — can be seen in its financials. The company has earned a 24% return on capital over the past 12 months, up from 12% in 2007, and that’s while growing revenue by 15% annually over the past five years. Panera’s management has managed this growth well and has funded the company’s expansion mostly from cash flow from operations. That approach has allowed Panera to build a fortress-like balance sheet, with $290 million in cash and no debt. Even better, Panera’s balance sheet should continue to strengthen as the company’s strong cash flow generation — more than $160 million in the last year — adds more and more cash to its coffers.

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