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Any More Sizzle to Lone Star Steakhouse?

By Stephen D. Simpson, Simpson, – Updated Nov 15, 2016 at 5:50PM

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It's tough to fix an ailing restaurant concept.

It's really not too hard to find a steakhouse these days. Assuming you can't, or just don't want to cook a steak yourself, you can choose from a host of restaurant concepts like Outback (NYSE:OSI), RAREHospitality's (NASDAQ:RARE) LongHorn Steakhouse or Bugaboo Creek Steak House, Morton's (NYSE:MRT), Texas Roadhouse (NASDAQ:TXRH), and dozens upon dozens of small local chains or restaurants. And don't forget, most non-steakhouse restaurants have steak on the menu too.

So it's a tough row that Lone Star Steakhouse (NASDAQ:STAR) has chosen to hoe. And right now, things are especially difficult, since weak overall sales trends are combining with higher operating costs.

And yet the stock is up about 9% or so today. That, my fellow Fools, is the beauty of surpassing dismal expectations. The company did report $0.15 a share in earnings from continuing operations, and while that's better than the average estimate of $0.09, it's still far shy of the original estimate a few months back of $0.25, and the year-ago level of $0.47.

Although I have a tough time seeing this company as much more than a me-too restaurant operator, I've got to give management credit for dealing with its problems in a realistic fashion. In addition to making some changes in operations, marketing, and the menu, the company has decided to close 30 chronically underperforming Lone Star sites that cost the company about $0.21 a share in operating losses for the full year. What's more, same-store sales trends seem to be moving in a much better direction this quarter, with 10-week results up 0.9% at Lone Star (versus down 3% in the fourth quarter).

This is a tricky stock to evaluate. On one hand, you have a clean balance sheet and a management team that is apparently willing to bite the bullet when it comes to dealing with poor-performing stores. On the other hand, returns on invested capital have been in the single digits for nearly a decade, which suggests that they've been destroying value. Furthermore, I'm not really a fan of long-term relationships with restaurant stocks -- for every Cheesecake Factory (NASDAQ:CAKE), there are dozens of failures or also-rans.

The bottom line, then, is that this could be a worthwhile turnaround candidate (particularly if you have a real conviction that they have a successful approach/menu/niche), but make sure you don't confuse the sizzle with the steak.

For more meaty Foolishness:

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

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Stocks Mentioned

The Cheesecake Factory Incorporated Stock Quote
The Cheesecake Factory Incorporated
CAKE
$28.43 (-2.44%) $0.71
Texas Roadhouse, Inc. Stock Quote
Texas Roadhouse, Inc.
TXRH
$84.38 (-2.36%) $-2.04

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