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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When Starbucks recorded a not-amazing same-store sales increase of just 4% for June, compared to a more typical comparable-store increase of 6% in the previous month, those more-caffeinated investors all held our collective breath (it's a short breath, you know, coffee has a way of making one's heart race and one's breath come shallow and fast). As Michael Canfield pointed out: could this mean Starbucks had become mature? Or was it, as Starbucks management posited, simply the impatience factor: customers tired of waiting in line for banana coconut frappuccinos?

It's a long-subscribed-to axiom that you can't have both quality and quantity. And in my opinion, Starbucks' quantity has finally increased to the point that its quality is problematic. A local one-time Starbucks manager who recently opened his own coffeeshop told me that he shook his head when his employer switched from the authentic but sometimes difficult-to-manage mechanical espresso machines to the simple, fast, industrial push-button variety. As a coffee aficionado, one who's spent her share of time behind a coffee counter, I can attest: Starbucks lattes are no longer almost as good as the ones from Gladstone Coffee down the street (they serve up locally-roasted beans from the fabu La Marzocco machine).