The hits just keep on coming for Lone Star Steakhouse & Saloon
Lone Star operates 290 restaurants in all, with 250 of those under the Lone Star banner and 40 under the Sullivan's, Del Frisco's, and Texas Land and Cattle brands. Sullivan's, Del Frisco's, and Texas Land and Cattle all turned in same-store sales increases, but their combined performance wasn't enough to outweigh the 2.3% decline at Lone Star. As for Lone Star sales, the announcement came on Thursday that they dropped yet another 1% in the first 12 weeks of the company's 16-week fourth quarter.
The story at Lone Star has really changed this year. For the past few years, the company had focused on profitability and on sharing its strong free cash flow with shareholders through dividends and share repurchases. This year, the company changed course and began a meaningful expansion of the business. Thus far, the increased capital expenditures required for expansion have been met with sales declines in the core concept.
There's plenty of competition in the casual-steakhouse space from Rare Hospitality
One of the toughest things in investing is knowing when to sell. And it's a bit tough for me here, because I was positive about Lone Star's prospects less than a year ago. But things have changed, and so has my opinion. Lone Star's P/E of 19.5 isn't excessive, and its 3.2% dividend yield is certainly attractive, but I think those data points are outweighed by the declining sales in the core business and the lack of free cash flow to support the dividend as the company shifts toward larger capital expenditures in pursuit of growth. In short, I wouldn't be surprised to see the shares drift lower unless the sales declines stop or the company slows its expansion.
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