Panera slumped in Wednesday trading after acknowledging that quality has fallen at its stores and cutting its outlook for the year.
The sandwich chain emerged from a bruising quarter in which profits fell, store traffic declined and revenue fell short of Wall Street expectations.
KeyBanc Capital Markets stripped the company if its "buy" rating after losing confidence that new initiatives will turn things around next year.
The company's founder, chairman and CEO Ronald Shaich told investors on a conference call Wednesday that Panera's success may be part of the problem it is facing today. After an extensive examination, Panera has determined that its rapid sales growth over the past few years has outstripped some of its capabilities in some of its stores.
Customers are regularly walking of the restaurants because they don't want to wait in line and the top reason customers say they don't visit more often is because of a "diminished" experience, he said. That includes slower service, less comfort and inaccurate orders.
Panera has been working for the past two years on new initiatives it believes have the potential to improve the atmosphere, as well as sales.
"But here is the conundrum we face," Shaich told investors. "If capabilities are not in place today to handle the business we're presently doing, how can we expect to benefit from the additional demand fueled by our initiatives?"
In that regard, the company is now bolstering the staffing in its restaurants, adding extra equipment to help in its most crowded locations, updating systems to help with accuracy and making changes to catering, phone-in orders and other parts of the business. It also will update its menu, offer some lower-priced options and improve its advertising.
It's advertising that KeyBanc analysts Christopher O'Cull and David Carlson focused on in their downgrade of the company to "neutral."
"We felt national advertising would be an important transaction-driving initiative for 2014, but the efficacy of Panera's advertising during August and September cast doubt on this initiative," the analysts said in a research report out Wednesday.
So far in the current quarter, Panera said sales at established stores are up 1.6 percent. It now expects the figure to be flat to up 2 percent for the period, down from its previous forecast for growth of 3 percent to 5 percent. For the year, Panera Bread Co. now expects sales at company-owned locations to increase between 2 percent and 2.75 percent. It had previously forecast growth of 3 percent to 5 percent.
It's also now targeting its earnings per share for 2013 to be at the low end of its long-term growth target of 15 percent to 20 percent.
Shares of the company fell nearly 5 percent to $154.35 by midday Wednesday. Panera's stock had been a multi-year climb that peaked in May with its stock price above $193 but shares have taken a rocky tumble since.
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Original headline: Panera says quality has suffered
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