Higher labor costs and a 6% sales drop at its Pat & Oscar's restaurant chain -- due in part to an outbreak of E. coli that sickened about 40 people -- sent fiscal second-quarter profit at Worldwide Restaurant Concepts Inc. plunging 78%, the company said Monday.
The Sherman Oaks company, which also owns the Sizzler steak chain, posted net income of $318,000, or break-even on a per-share basis, for the period ended Oct. 12, compared with $1.4 million, or 5 cents, a year earlier.
Revenue rose 18.5% to $76.3 million. Total operating costs, including labor, increased food costs and an aggressive marketing campaign after the E. coli incident, rose 20%. The firm runs 450 restaurants, including 317 Sizzler outlets and 112 franchised KFC units in Australia.
After the earnings report, investors trimmed 8 cents from the company's share price, which closed at $3.03 on the New York Stock Exchange. The stock is up 14% for the year.
Charles Boppell, Worldwide's president and chief executive, began Monday's conference call with analysts by conceding that the quarter was "mixed with disappointment and setbacks," chief among them the challenges facing Pat & Oscar's.
With consumer interest waning in the Sizzler brand, the company sees Pat & Oscar's as its growth vehicle and has expanded the Southern California chain from seven outlets in 2000 to 21 this year.
But Pat & Oscar's, which offers pizza and ribs, saw its same-store sales, or sales at restaurants open at least 15 months, fall 6% in the quarter. Same-store sales are a key gauge of a restaurant's financial health.
The chain's woes worsened when bagged lettuce served at restaurants in San Diego and Orange counties was linked to the bacteria outbreak that affected 40 people between Sept. 30 and Oct. 4. The incident hurt sales at some branches by as much as 70%.
"The problems at Pat & Oscar's were a major factor in the decline," said David Leibowitz, managing director of Burnham Securities Inc.
The drop in same-store sales comes on the heels of a 3.4% decline in same-store sales in the first quarter, and Boppell said he expected the chain to report a loss in the current quarter when the full effect of the E. coli episode is felt. "It's taken much longer for guests to regain confidence in the safety of the food served at Pat & Oscar's," he said.
Still, he said, the chain remained committed to its strategy of expanding the chain. But he added that the company had slowed growth plans, with only two new stores slated to open in the current fiscal year, down from six last year.
In addition to the sales drop at Pat & Oscar's, the company cited higher labor and benefits costs during the period.
Those expenses were partially offset by a 2.3% gain in same-store sales at Sizzler outlets in the U.S. and a 13% boost at KFC restaurants in Australia.