O'Charley's SegmentThe sales trends at the O'Charley's segment have not been good: 1. Same Store Sales declined 2.3%, marking the sixth consecutive quarter in which SSS has either declined or remained flat. Moreover, the drop in SSS grew larger as the quarter went on, falling to -4% to -5% in the last month. The SSS decline was evident in all regions, not just one or two regions.2. The average store now gets about 4,500 customer visits/week, down from 4,700 visits/week. 3. Average weekly sales is now $51,800/store, down about 4%.CEO Greg Burns acknowledged that the turnaround will take several quarters at least. What went wrong? For one thing, the company increased menu prices by 3% in 2002. Burns now believes the company underestimated the impact of the price increase on value-oriented customers who make up a large part of CHUX's base. In recent months, those customers have been staying away in increasing numbers. Another problem area has been lunch. Customers have complained about slow service. Another thing is that the “feel” of the restaurants (i.e., ambiance) may have become a little too upscale for some customers. Burns did not say how the company plans to address the “too upscale” issue when adding new stores in the future. Sales InitiativesTo get the value-oriented customer back to O'Charley's, a new “Lunch Club” menu—featuring 10 items starting at $5.99—will be introduced in the near future. Service times at lunch should improve if a good number of customers order off this menu. (The limited number of offerings helps improve efficiency in the kitchen.)In addition, managers will focus more on getting customers in and out faster at lunch, which should lead to better service times. Also, the “regular” menu is being redesigned. Some of the more popular items that were dropped in the last menu update are being brought back. There will be some new marketing/advertising initiatives that focus on the new menu and on “Limited Time Only” offers. These new efforts will cost an additional $2 million.New StoresBurns still thinks O'Charley's can be a 700+ store concept. The “Town and Country” approach to growth has served CHUX well over the years, he said. (Fully penetrate large Metropolitan markets, then backfill into smaller markets). The Company is seeing some evidence of saturation in Nashville, Knoxville, and Indianapolis. Burns thinks this is a temporary phenomenon but did not elaborate.Despite the SSS decline, the company plans to continue adding stores according to plan for the remainder of 2003. In keeping with past practice, the company will not announce the plan for next year until November. I got the impression that Burns was laying the ground work for a less ambitious building plan.OtherThe Ninety Nine Restaurants segment, which represents about one-third of total sales, continues to do well. Burns did not think the time and effort that went in to managing the Ninety Nine acquisition caused management to neglect the O'Charley's segment.Franchising – nothing really new here. The Company is still looking at potential franchisees. The Company also is considering whether joint venture relationships might offer additional growth opportunities, although Burns provided no details.Food To-Go - At the Ninety Nine segment, carryout is 8% of sales. At O'Charley's, its 4% of sales. One analyst suggested that the Company spend some marketing dollars promoting carryout, but Burns thinks it's best to focus on “dine in” customers.
Thanks, kh.I continue to think (hope???) that their long-term strategy for growth will pan out--but I also have a fear that I might be "falling in love" with the stock. I like the idea of their "town and country" growth, and also the idea that they would be growing between now and the time I was looking forward to retirement. (Hmmm, maybe that's a big red flag right there, emotional involvement...)I still wonder why they didn't push ahead with franchising. It seems that they have been talking about doing this for years. But nothing's come of it yet. And if their sales continue to go downhill, then it will be an even harder thing to to franchise the concept.... Other questions and concerns:When the prices went up by 3% in 2002, does this refer to a widespread or across-the-board price increase, or just to some items going up? It seems to me that one quick way of guaranteeing negative SSS would be to raise all the prices (even a little) on everything, all at once. That way, everybody's favorite item would go up in price, and everybody would be (at least a little) disappointed. So, I'm supposing that what happened is that they raised the prices on only some items, or raised the prices over a period of time.... The analyst who suggested to push the "to go" business seems to me to be on the right track. Even Burns admits that there is somewhat of a perception problem about the ambiance of the place. Food "to go" seems like an answer. I really don't get this one: The Company is seeing some evidence of saturation in Nashville, Knoxville, and Indianapolis. Burns thinks this is a temporary phenomenon but did not elaborate. How can a saturation problem be temporary? Are they planning to close some stores in saturated areas? The sales initiatives sound good.Gosh, this company has to do a turnaround if they are ever going to go forward with the franchise plans. --SirTas
SirTas,I believe the price increase was pretty much across all menu items. The annual report says only that menu prices were raised 3.1 % in two-thirds of the restaurants in the third quarter of 2002, and 3.1% in the remaining one-third of the stores in the fourth quarter. If the increase was across the board, I agree that it probably disappointed all customers—at least those who were paying attention—to some degree.Burns did say the revised menu will include price reductions on items that had crossed “barriers” with customers. Apparently, there were items that stood out above the others as having price points that customers were particularly sensitive about.The analyst who suggested to push the "to go" business seems to me to be on the right track. Even Burns admits that there is somewhat of a perception problem about the ambiance of the place. Food "to go" seems like an answer. He said he thought that with just so many advertising dollars to go around, it's better to focus on the core dine-in customers. He did say they were going to mention the To Go business prominently some place on the menu. That way, at least the dine-in customers will be made aware of carryout. I really don't get this one: The Company is seeing some evidence of saturation in Nashville, Knoxville, and Indianapolis. Burns thinks this is a temporary phenomenon but did not elaborate. How can a saturation problem be temporary? Are they planning to close some stores in saturated areas? ?Good question. It didn't make sense to me, either. I only recall one brief mention of store closings, and that was a store in Murfreesboro, TN. When a new store opened up nearby, the old store was considered for closure, but left open. Sales dropped off initially at the old store, and the new store got off to a slow start, but both stores have turned around and are now doing well. Perhaps that's what he meant by “temporary” saturation—where both the new store and the old store struggle at first but eventually come around. I'm not sure.Kh
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