Things continue to get worse at Country Style Cooking (NYSE: CCSC).
Sure, the quick-service restaurant chain continues to post heady top-line growth. Aggressive expansion in China will do exactly that. However, CSC is coming up short nearly everywhere else -- and that's the kind of disappointing performance slinging the stock back into the single digits this morning.
Revenue did climb nearly 30% to $43.3 million, but it's not as if we can applaud unit-level performance for that. Comparable restaurant sales actually declined by 1.8%. A few quarters ago, investors weren't happy that positive comps weren't keeping up with inflation. Now the problem is far worse.
If you want more bad news, just glide down the income statement. Every single major expense category grew faster than CSC's top line. The result is that restaurant-level operating margins got crushed, and last year's profit is now an adjusted net loss of $0.08 a share. Analysts were holding out for a profit, but they've always overestimated CSC's bottom-line production. This is one of the rare companies that has missed Wall Street's profit targets in each of its first five quarters as a public company, and has lived to tell the tale.
Bottom feeding
There are some signs that things will get better, but only because they really can't get much worse. This was a company that saw sales in Chengdu -- where nearly a third of its 199 restaurants are located -- take a hit in November after a report questioned the sanitary conditions of one of its eateries in the area. There was also a discounted lunch campaign in Sichuan to boost traffic. There's nothing inherently wrong with introducing a value menu. McDonald's (NYSE: MCD) -- the world's largest fast-food chain -- pushes its "dollar menu" front and center. The key here is that Mickey D's has a barbell pricing strategy where it's still able to make some serious money on premium products. CSC obviously can't mark down some of its edibles without seeing its margins get crushed.
After a surprising CFO resignation in January -- for "personal reasons" --the company has brought on a new head bean counter.
"I have confidence that growth can be achieved with improved cost management ," new CFO Adam Zhao was quoted as saying in last night's earnings release. Zhao is working with senior managers to develop new performance metrics for the different business departments. Does he get it? Can he be the one to implement the cost-controlling discipline that CSC sorely needs? The best bet is to remain cynical until Zhao succeeds.
On an upbeat note, CSC does claim that the discounting promotion concluded smoothly and that the negative media reports that temporarily stung sales in Chengdu have passed.
The potential is clearly there. China's growing middle class is hungry for opportunities to dine out.
Yum! Brands (NYSE: YUM) saw its fast-growing Chinese restaurants post a 21% spike in comps during the same three months, drawing even more disgust at CSC's negative performance. Chinese pork producer Zhongpin (Nasdaq: HOGS) posts its quarterly results in two weeks, but it lacks the story stock dynamic of a financially empowered middle class going out to eat more.
For better or worse, CSC has its foot on the accelerator instead of pulling over to check on the flat tire. Its restaurant count has grown from 131 to 199 over the past year, and the plans call for it to close 2012 with 269 units. There is clearly potential here if CSC can improve the efficiency of its operations and get store-level sales growing again, but don't be surprised if six months from now we're discussing its sixth consecutive miss.
Takeout
CSC has been a real disappointment since I singled it out for Rule Breakers subscribers, but the outlook is considerably brighter for the next rule-breaking multibagger that the newsletter has unearthed. It's a free report. Want it? Get it.
