Zacks_Analysts' Blog : O'Charley's Shuts Down Restaurants - Analyst Blog

Nashville, Tennessee-based O'Charley’s Inc. (CHUX), which currently owns and operates 339 restaurants in 25 states and franchises 9 restaurants, announced that it has shut down 16 underperforming restaurants. The closure includes 11 O’Charley’s restaurants in the South and Midwest and five Ninety Nine restaurants in the Northeast.

Half of the shuttered restaurants will be treated as discontinued operations. The casual dining chain expects to incur a pre-tax charge of about $5 million, excluding discontinued operations in the fourth quarter of 2010. O'Charley’s forecast a jump of $1.5 million in its annual operating income and a rise of $1.0 million in the annual adjusted EBITDA for the full fiscal year.

O'Charley's, which is operating under its namesake along with Ninety Nine Restaurant and Stoney River Legendary Steaks, said that it was forced to close these restaurants in order to improve its performance. The company offered severance pay to the affected workers and is also trying to provide them jobs in their other outlets or at rival restaurants such as Chipotle Mexican Grill Inc (CMG) and Brinker International Inc. (EAT).

We believe that the company has taken a wise decision by closing down the underperforming restaurants, as it has posted five straight quarterly losses. Same-store sales at the company’s O’Charley restaurants also fell 2.2% year over year in the recently concluded third quarter.

Almost five years back, the company had pulled down shutters of its six underperforming O'Charley's restaurants in order to lift the results of its existing restaurants.

With respect to earnings surprises, O'Charley's has reported below the Zacks Consensus Estimate in the trailing four quarters. The average earnings surprise was a negative 136.5%. This implies that the company has missed the Zacks Consensus Estimate by the same magnitude over the last four quarters.

The company is taking initiatives to drive traffic by offering quality service, but still has a long way to go. The Zacks Consensus Estimate for the fourth quarter is also a loss of 29 cents per share and remains at 61 cents per share for fiscal 2010.