O'Charley's Misses, Loss Narrows

Nashville-based O'Charley’s Inc. (CHUX) has once again incurred a loss in the third quarter of 2011, after recording a profit in the first 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 lower customer spending and higher commodity costs.

The company reported a quarterly loss of 18 cents per share, wider than the Zacks Consensus Estimate by a penny, but narrower than the year-ago quarter's loss of 33 cents.

O'Charley’s third quarter revenue also tumbled 1.1% to $186.6 million, due to lower traffic at its flagship restaurant. The company failed to sustain the upside achieved in the second quarter of 2011, for the first time since the third quarter of 2007.

Inside the Headline Numbers

Same-store sales at O’Charley's restaurants fell 0.9% year over year on the back of a 4.5% drop in guest count, which was partially offset by a 3.8% upside in average check.

Same-store sales at Ninety Nine grew 4.1% aided by an improvement of 4.0% in guest count and 0.1% rise in average check.  Same-store sales at Stoney River Legendary Steaks jumped 6.8% in the quarter,  attributable to a 6.1% increase in guest count and 0.6% spike in average check. The higher comps indicate the fifth consecutive quarter of growth at both Ninety Nine and Stoney River.

O'Charley's restaurant level margin declined 60 basis points (bps) to 11.5%, due to a 190-bp spike in food and beverage costs, partially offset by an 80-bp decline in payroll and benefits and a 50-bp decrease in restaurant operating cost. General and administrative expenses of the company decreased to $5.5 million from $8.3 million in the previous quarter.

Casual dining chain O'Charley’s posted an adjusted EBITDA of $7.8 million in the quarter compared with $8.0 million in the year-ago quarter. The company expects EBITDA in the range of $4 million to $7 million for the fourth quarter of 2011.

Financial Aspects

O’Charley's, which currently operates 342 restaurants, ended the quarter with cash of $30.8 million, long-term debt of $116.8 million and stockholders’ equity of $176.0 million.

Outlook

Management expects total revenue in the range of $82 million - $177 million and loss from operations in the range of $3 million to $6 million for the fourth quarter of 2011.

Our Take

We expect estimates to move down in the coming days as the company reported disappointing third quarter results being exposed to weak economic conditions resulting in lower traffic as well as commodity inflation.

The company’s brands including O’Charley's restaurants, Ninety Nine Restaurant and Stoney River Legendary Steaks primarily emphasizes value menu offerings and enhanced services to drive traffic. The Zacks Consensus Estimates of loss for the fourth quarter of 2011 and fiscal 2011 are 17 cents per share and 34 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 - Snapshot Report) reported third quarter 2011 adjusted earnings of 35 cents per share, which outpaced the Zacks Consensus Estimate by 2 cents and the year-ago quarter adjusted earnings by 8 cents. The upbeat result was attributable to strong international and domestic performance.

Read the full analyst report on DPZ

Read the full analyst report on CHUX