The contrarian value investor in me wants to love O'Charley's (Nasdaq: CHUX). The casual dining sector could not be more out of favor. The mere mention of the sector sends some investors into fits of hysterical laughter, while others run for the hills where they can use their shotguns to protect the gold bars they've hidden under the mattress in the face of a potential American economic meltdown.
Great investing minds tell us to buy when everyone else is scared and the outlook is grim. They advise us to open our wallets when no one else can envision what will be when the world returns to normalcy and the stock explodes. Doesn't this make a company like O'Charley's a great buy?
Maybe not. There is no doubt that O'Charley's shares are battered, trading at about half of their peak levels of a year ago. But over that time the company's steak and bar-food business has turned from sirloin to hamburger. And it's likely on its way to being cafeteria mystery meat.
My outlook comes because the company's problems do not seem to have viable near- or medium-term solutions. This was shown in the company's first-quarter results, as all of the company's concepts reported declines in same-stores sales, with flagship O'Charley's down nearly 5%.
In the face of food inflation, average checks were up, but customer traffic was down significantly across the board. With $4 gas, a slowing economy, and a worsening overall employment outlook, how on earth can investors expect the company to stem the decline in its operating income, which already dropped 41% compared to the year-ago quarter? The best management team in the world can't change the way the wind blows, and right now these headwinds feel like a hurricane.
O'Charley's woes are endemic to the industry. Starbucks' (Nasdaq: SBUX) troubles have been well documented, and although Panera (Nasdaq: PNRA) got a nice bump after a decent first quarter, I still agree with my Foolish colleague Kristin Graham's thesis that the company is poised for a very difficult 2008.
I think investors might want to take a bite out of O'Charley's when the outlook is a little more stable, maybe in a basket with other eateries that have been dinged up, such as Brinker (NYSE: EAT), California Pizza Kitchen (Nasdaq: CPKI), Ruby Tuesday (NYSE: RT), and maybe even Famous Dave's (Nasdaq: DAVE). The sector is notoriously cyclical and the sector, like the South, will rise again. Keep those forks ready, but don't bite yet.
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