Before the opening bell this morning, O'Charley's
In the report, management stressed the importance of increasing customer counts and operating margins (operating income divided by sales). According to the information in the release, customer visits appeared to be flat to slightly up for the quarter. So management will have to work on getting more people to the restaurants. And despite the fact that reducing costs increased operating margins to 6.6% from 5.7% for the comparable first quarter, management wasn't exactly thrilled with the results.
To find out why, let's compare O'Charley's operating margins for the quarter to those from Applebee's
O'Charley's is lagging its competitors. It's one thing to offer the customer a good value proposition, but the company has to be able to take its cut of the value pie as well. Management wants to get gross margins up in order to take in more share of the pie.
Even though things seem to be moving along slowly but surely at O'Charley's, management lowered guidance for the rest of the year. Analysts were expecting $0.29 per diluted share for the next quarter and $1.30 for the year. Management lowered to $0.19 to $0.23 for the second quarter and to $1.10 to $1.16 for the year. Expectations are nothing to fool around with on Wall Street. Accordingly, the stock is down about 15% today.
Management lowered expectations based on the thinking that higher gas prices and interest rates will make predicting customer spending patterns more difficult. That's probably so, but my experience with its restaurants is that they are usually full. To me, that means that the company may have to increase menu prices to increase gross margins, which may hurt customer visits. But if customer satisfaction scores keep increasing, it may be able to increase prices without losing customers. O'Charley's stock is trading at around 15 times the company's earnings estimate for this (half-completed) fiscal year. That's still not quite bargain territory for me, so I'll stick to taking my daughter there for dinner after violin.
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