Wednesday, August 27, 2008

Good Times Pass O'Charley's By

After three years of trying to turn around slumping sales and traffic, casual-dining company O'Charley's Inc. (CHUX-$10.02), home to O'Charley's and Ninety Nine restaurant chains, is backing away from its re-branding recipe efforts in the corporate kitchen, according to its 10-Q filed Aug. 20.

As part of the re-branding initiative, management fiddled with menu offerings, higher guest service standards (complete with guest satisfaction surveys), and the introduction of concept specific elements, including new uniforms, plateware, menu designs, and Curbside-To-Go service.

But contrary to the happy sing-along commercial for its Ninety-Nine Restaurant, diners at the 114 New England locations could not find "ninety-nine reasons to come back for more," as same-store sales and guest traffic for the second-quarter 2008 ended July 13 fell year-on-year 3.1% and 5.8 percent, respectively.

Unfortunately, "Good Food, Good Times" started and stopped with the rolls at the O'Charley's Restaurant, too. Same-store sales and guest traffic at the 228 restaurants for the second-quarter, on average, dropped 1.4% and 4.5 percent, respectively, compared with the prior year.

Management is learning the hard way that tinkering with box economics, which is the relationship between the capital investment in restaurants and the sales and related operating margin that those sales produce, is not as simple as analyzing a Harvard Business School case study. Rising food and energy prices combined with the impact on discretionary consumer spending from a slowing economic environment can flatten the soufflé of the most-gifted chef. Not that the board of directors would know the difference between a reactive and nonreactive saucepan, as just three of the eleven members of the board have any food retailing experience, according to the April 2008 proxy filing.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

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