O'Charley's 2Q Disappoints - Analyst Blog

After recording profit in the first quarter of 2011, Nashville-based O'Charley's Inc. (CHUX) incurred a loss in the second quarter of 2011. Prior to the first quarter of 2011, the company delivered losses for six consecutive quarters. The results in the reported quarter were impacted by higher commodity costs resulting in lower margins.

The company reported a quarterly loss of 8 cents per share, much wider than the Zacks Consensus Estimate of a loss of 5 cents, but narrower than the year-ago quarter's loss of 11 cents.

However, O'Charley's total revenue spiked 1.2% to $265.0 million in the second quarter, for the first time since the third quarter of 2007, benefiting from 1.25% growth in restaurant sales. The upside in revenue was also driven by improved comps across all the three brands arising from higher guest count for the second consecutive quarter. 

Inside the Headline Numbers

Same-store sales at the O'Charley's restaurants rose 2.9% year over year on the back of higher guest count ( up 2.9%).

Same-store sales at Ninety Nine grew 3.3% due to a 3.6% improvement in guest count. Same-store sales at Stoney River jumped 6.3% in the quarter attributable to an 8.4% increase in guest count.

O'Charley's restaurant level margin declined 200 basis points (bps) to 12.5%, due to a 210-bp spike in food and beverage costs, partially offset by a 30-bp decline in payroll and benefits. General and administrative expenses of the company decreased to $7.6 million from $10.2 million in the previous quarter.

Casual dining chain O'Charley's posted an adjusted EBITDA of $9.5 million in the quarter compared with $12.6 million in the year-ago quarter. The company expects EBITDA in the range of $6 million to $9 million for the third quarter of 2011.

Financial Aspects

O'Charley's ended the quarter with cash of $34.6million, long-term debt of $116.8 million and stockholders' equity of $179.9 million.

Outlook

Management expects total revenue in the range of $185 million to $190 million and income from operations in the range of a loss of $3 million to break-even for third quarter 2011.

Our Take

We expect estimates to move down in the coming days as the company reported disappointing second quarter results and is exposed to weak economic conditions resulting in lower consumer spending as well as commodity inflation.

O'Charley's primarily emphasizes on value menu offerings and great services to drive traffic. Additionally, the appointment of interim chief financial officer (CFO) R Jeffrey Williams as the CFO and treasurer will further drive growth in the long term. The Zacks Consensus Estimates of loss for the third quarter of 2011 and fiscal 2011 are 17 cents per share and 33 cents per share, respectively.

The company retains a Zacks #3 Rank, which translates into a short-term Hold rating. We also have a long-term Neutral recommendation on the stock.

One of O'Charley's competitors, Domino's Pizza Inc. (DPZ) reported second quarter 2011 earnings of 40 cents per share, which outpaced the Zacks Consensus Estimate by 4 cents due to higher international royalty revenues, international expansion and lower interest expense.