So maybe I'm the wrong guy to be writing about O'Charley's (NASDAQ:CHUX).

I'll admit from the top, I just don't get it. I don't get why we need yet another one of these chains. Isn't Applebee's (NASDAQ:APPB) enough? If not, what about Brinker International's (NYSE:EAT) Chili's? Ruby Tuesday (NYSE:RI)? TGI Friday's? And don't give me the story on the upscale stuff, or the steak houses. OSI Restaurant Partners (NYSE:OSI) and Darden Restaurants (NYSE:DRI) provide plenty of competition there.

But even if you could convince me the market isn't saturated, I don't get O'Charley's as an investment idea. Not before today's 10% haircut, and not afterward.

Let's get to today's news: the reduced guidance. Management now expects to earn between $0.85 and $0.90 per share for the year, rather than the $0.90 to $0.96 it previously expected. Q3 earnings will be $0.09 per share instead of the $0.11 to $0.16 projected. Same-store sales were a bit squishy, with reduced guest counts across all concepts.

Big deal. After looking at the rest of the numbers, I'd say today's headlines are the least of investors' worries. I see a company that's currently free cash flow-negative and earning a return on invested capital somewhere around 6%. Even worse, that number's been falling for years.

It's not hard to understand how this could happen when you look at margin trends.

FY Ended 12/01

FY Ended 12/02

FY Ended 12/03

FY Ended 12/04

FY Ended 12/05

Gross Margin






Operating Margin






Net Margin Ex Items






Data provided by CapitalIQ, a division of Standard & Poor's.

That's a record only a mother could love. Well, a mother who doesn't care about money. If she does, I don't think anything could make O'Charley's look loveable.

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At the time of publication, Seth Jayson had no positions in any company mentioned here. View his stock holdings and Fool profile here. See what he's Digging these days. Fool rules are here.