On The Money: What Went Up, Now Comes Down

Casual-dining stocks tumble in an uncertain economy.

By David Farkas, Senior Editor -- Chain Leader, 7/1/2006

The salad days of casual dining appear to be wilting as negative sales trends plague many leading full-service chains. “We are not happy with our performance,” Applebee’s President and COO Dave Goebel told investors at the Piper Jaffray Consumer Conference in June in New York.

Money managers attending the two-day event heard from the top brass from Applebee’s, The Cheesecake Factory, O’Charley’s and McCormick & Schmick’s. Here are highlights.

Applebee’s: Same-store sales tanked in May, falling as much as 6 percent in Virginia, New England and Michigan, significant markets for the 1,846-unit chain. Sales had also weakened slightly in Southern California, normally a robust market. Goebel, citing macro pressures for the declines, said company research showed “low end” customers, who make up about 5 percent of the base, have simply disappeared, presumably trading down to less expensive fast food.

Still, management wasn’t abandoning its long-term strategy, including improving Carside To Go (now 10 percent of sales), beefing up Weight Watchers marketing and adding dozens of new products.

The Cheesecake Factory: Shares of CAKE dipped below their 52-week low of $29 last month on news that comps were weakening, if only slightly. Chairman and CEO David Overton said while lunch and dinner remained steady, mid-afternoon and late-night sales slipped 1 percent. “This is new, and it came pretty quickly,” he said, blaming the negative impact on adjustable-rate-mortgage hikes and rising credit-card minimum payments.

Overton said new sales initiatives include radio spots in four markets and a revamped menu with a lunch section. He predicted a modest second-quarter gain of 0.5 percent.

McCormick & Schmick’s: What macro pressures? CEO Saed Mohseni said the seafood concept’s “diversity of its customer base” minimized its vulnerability to weak consumer trends. Such diversity includes business travelers and upper-income diners. “From Day One the concept was designed to be flexible and for broad usage,” he explained.

Part of the attraction is a twice-daily menu and the chain’s ability to position itself as the best seafood restaurant in many of its 61 locations.

Citing 14 out of 16 years of positive same-store-sales growth, Mohseni said comp sales would climb 2 percent to 3 percent in ’06.

O’Charley’s: The 233-unit chain has struggled with “box economics,” said Chairman and CEO Greg Burns, who added the chain is now in early turnaround mode. Same-store sales were up 0.6 percent in the first quarter and would likely remain positive in the second. Burns announced that the new management team at the Nashville, Tenn.-based company finally boosted margins with a pricing scheme that eliminated discounts and kids-eat-free positioning in 30 percent of the system.

Burns added the company recently decided not to enter more sale-leaseback deals after the board determined the best way to build shareholder value was through improving operations. “It’s not business as usual at O’Charley’s,” Burns declared.