Any way you cut the meat, it looks the same: Restaurateur O'Charley's (Nasdaq: CHUX ) had a weak second quarter. Times are likely to stay tough as it deals with a difficult environment.
Last year, O'Charley's began to discontinue its "kids eat free" promotion, and it's now gone in 75% of its restaurants. But although the phase-out had the intended effect of limiting its most bargain-hunting customers, this also may be the wrong time to take such an action. Consumers, already feeling pinched by higher gas and food prices, are eating out less at casual-dining restaurants. O'Charley's felt the pinch: The average check price increased 4.3%, but guest counts fell 6.2%, to drive same-store sales at its core O'Charley's restaurants down 2.1%.
Others in the sector have been feeling the squeeze in recent months, too, including Ruby Tuesday (NYSE: RT ) and Brinker's (NYSE: EAT ) brands. So this would seem to be the time to build loyalty among customers. Taking away a key promotion now seems counterproductive. O'Charley's latest promotion is coupons -- not an original concept. And although coupons can certainly bring people through the doors, it won't necessarily breed loyalty.
The company's Ninety Nine restaurants fared a little better. But since they make up less than one-third of the chain's total restaurants, they're not as important to results. Comps increased 1.6%, with an average check rising 3% and customer traffic declining 1.3%.
Including charges, the overall company lost $0.05 a share, versus net earnings of $0.19 a year ago. O'Charley's would like us to ignore outlays relating to impairment, retention, and legal costs, employee severance, and transition costs connected to the announced sale of the company's commissary, as well as other changes to its supply chain. If we take these things into consideration, earnings still fell 19%, to $0.17, from $0.21 in the comparable period.
Even worse, there was no dessert at the end of the meal, either, as management slashed its guidance for the year to $0.66-$0.73 a share, including $0.27-$0.29 in charges. Management previously expected earnings of $1.00-$1.05 a share. Assumptions include a same-store sales increase of less than 2% for O'Charley's, and 1%-3% for its Ninety Nine chains.
Other casual-dining restaurants, including the Brinker brands, are raising prices to help offset higher food costs. But again, continuing to eliminate a key promotion in the face of a challenging environment doesn't just strike me as wise. Even though the share price fell by nearly 12% yesterday, I'd advise investors to hold off, unless they want to get burned.
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Fool contributor Larry Rothman is happy to receive feedback, and he promises to read it when he's not being wrestled by his three children. Feel free to email him at rothmanviews@comcast.net. He doesn't have any positions in the companies mentioned.
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