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O’Charley’s posts profit despite sales slump

Ocharleys

Like the recent news about P.F. Chang’s, O’Charley’s, the casual dining chain, has found a way to post a profit despite slumping sales. In their case, it wasn’t smarter and more efficient operations, but a one-time tax benefit that occured this quarter.

Despite the news that they posted an unexpected profit, shares in the company dropped because it’s predicting an operating loss in the next two quarters. Same store sales are down 6.9%, which really isn’t all that unusual right now, but large chains are vulnerable to share price pressure because the sheer volume of stores that see negative growth is considered a sign of weakness.  For instance, the steakhouse segment has beeen hit much harder, with drops in sales averaging well into the double digits, but they have fewer stores. In fact, O’Charley’s has part of that market with their Stoney River Steakhouse chain, and that exacerbates the problem for them. Back in March, Stoney River was down around 18% (remember I reported recently that Capital Grille reported around a 25% sales slump!).

The thing that makes P.F. Chang’s look better in contrast to O’Charley’s is that it’s difficult to  find efficiencies and reductions in things like food costs because a successful chain is already operating at close to optimum efficiency. A restaurant runs the danger of compromising service and food quality when they try to cut fat out of the budget, and P. F. Chang’s seems to have been able to do this, while chains like O’Charley seem to be struggling. They have a new CEO, Jeffrey Warne, who was installed only in June. He has his work cut out for him. He’s quoted as saying, “”This continues to be a challenging environment for casual restaurant companies.”

Well, that’s insightful.

I shouldn’t be so sarcastic though – Chang’s could end up having similar results in Q3 and Q4 because, let’s face it, it is a demanding marketplace, demanding a close watch on both the little and big things. It helps that P.F. Chang’s is a smaller chain – I think they have somewhere around 130 – 150 stores plus their Pei Wei chain. They were always fairly conservative about growing the chain, a lesson that O’Charley’s and Starbuck’s apparently didn’t learn. I’ve always felt that businesses are rewarded by playing to their strengths by not overexpanding too quickly. Despite what the fictional Wall Street trader Gordon Gecko said in the Oliver Stone flick Wall Street, greed is not always good. 

I wonder how many pieces of flair O’Charley’s waiters have to wear these days.

O'Charley's Bar

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