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Panera says quality has suffered

The Associated Press

Panera's stock slumped Wednesday 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 store traffic declined and revenue fell short of Wall Street's expectations.

Panera founder, Chairman and CEO Ronald Shaich told investors on a conference call Wednesday that the company's success may be part of the problem. 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 walking out of restaurants because they don't want to wait, he said. The top reason customers say they don't visit more often is because of a "diminished" experience, including slower service, less comfort and inaccurate orders.

Panera has been working for two years on new initiatives to improve its atmosphere and 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 response, the company says it will increase staffing, add extra equipment to ease crowding in certain locations, update systems to improve order accuracy and make changes to catering, phone-in orders and other parts of the business. It also will update its menu, offer some lower-priced options and add national advertising to promote the changes.

KeyBanc Capital Markets stripped the company of its "Buy" rating after losing confidence that the company's initiatives will turn things around next year.

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 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.

Panera Bread Co. shares fell $9.29, a nearly 6 percent drop, to close at $153.15. Its stock had been in a multi-year climb that peaked in May above $193, but shares have taken a rocky tumble since.