Panera Bread Company (NASDAQ: PNRA) owns and franchises some 1,200 bakery-cafes, operating under the Panera Bread and Saint Louis Bread banners in 40 states. The stores offer specialty baked goods, made-to-order sandwiches, soups, salads and custom roasted coffees. They also provide free WiFi Internet access. Starbucks Corporation (NASDAQ: SBUX) is a major competitor.

The company pleased investors last week, when it reported Q1 EPS of 47 cents and revenues of $305 million. Analysts had been expecting 39 cents and $302.8 million. Management also guided Q2 EPS to 40-44 cents (39 cent consensus) and FY08 EPS to $2.00-$2.11 ($2.02 consensus). The press release noted, "Company-owned comparable stores sales growth is targeted at 4% to 5% for the year, with approximately 5% of retail pricing expected."

Panera Bread Company (NASDAQ: PNRA) released on Tuesday 3Q 2007 earnings that indicate the company didn't raise much dough. Revenue was up 35% to $276 million, which sounds encouraging. But that revenue increase translated into a much lower increase in net income, 10%. Net income YTD 2007, $40 million, is exactly the same as net income YTD 2006, even though Panera has opened 35 new bakery-cafe locations in 3Q 2007 alone.

Same-store sales increased 2.6% during the quarter, yet average weekly sales were essentially flat. Diluted 3Q EPS was $0.37, an improvement over diluted EPS of $0.34 in 3Q 2006 until one factors in the $0.05 per share benefit from the resolution of a tax disagreement with the IRS. Without that benefit, actual EPS would have been $0.32 per share.

In effect, Panera is earning more revenue but making less money. Even CEO Ron Shaich admits Panera needs to "return to a record of strong earnings growth."

Panera is faced with a triple whammy. It has shifted its menu offerings away from lower cost soup and sandwiches to higher cost salads. Across the board, ingredients' costs are rising, as are labor costs. Yet the company remains optimistic, or perhaps just confused. Senior management forecasts same bakery-cafe sales growth of 1-3.5% for 4Q 2007 and same bakery-cafe sales growth of 1-4% for FY 2008. Unless that sales growth results in net income growth, the dough simply will not rise.

Investors have reacted negatively to the 3Q figures. The stock closed recently at $41.66, down $1.95 on the news.

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