McCormick & Schmick lowers Q4 and FY07 guidance

Jennifer Schonberger | Dec 21, 2007 12:13pm EST | Comment

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Shares of McCormick & Schmick’s Seafood Restaurants, Inc. (Nasdaq: MSSR) are getting hammered this morning after the upscale seafood restaurant lowered its guidance for its fourth quarter and fiscal year 2007.

For the fourth quarter ending Dec. 31, the Portland, Ore.-based company said it now anticipates revenues of between $98 million and $99 million and a comparable sales decrease between 1.5% and 1.8%. This is down from previous guidance of $100 million to $102 million in revenues and an increase in comparable sales of 1% to 2%. The consensus of 10 analysts polled by Thomson Financial was for revenues of $100.8 million.

The company also said it no longer expects to achieve its previously issued earnings per share guidance of $0.31 to $0.34.

McCormick attributed its downgraded fourth quarter guidance to weaker than expected traffic, which it primarily accredited to a challenging U.S. macro economic environment.

“It’s the customer who doesn’t use McCormick as a regular dining spot who has softened up materially,” said Avondale Partners analyst Amy Greene. “It’s the person who would go somewhere like a McCormick & Schmick’s for a date on a Friday or Saturday night, not the people who make it a regular part of their routine that eat there on a Tuesday.”

Based on the revised expectations for the fourth quarter, the small cap said it expects fiscal year 2007 revenues to be between $357 million and $358 million and a comparable sales increase between 0.7% and 1%. This is down from previous guidance of $359 million to $361 million in revenues, and an increase in comparable sales of 1.3% to 1.8%. The consensus of 12 analysts polled by Thomson Financial was for revenues of $359.53 million.

As a result, McCormick said it no longer expects to achieve its previously issued earnings per share guidance of $0.97 to $1.00.

The company said it is reviewing its financial plans for fiscal 2008 and said it now expects that softening guest traffic will continue at least through the first half of next year. In light of the difficult environment, McCormick said it is focusing on managing costs.

“What’s happening for McCormick is that the softness in traffic is causing a deleveraging affect across all their operating costs,” said Greene. “They still have to have servers and fixed costs are still the same, but there’s less revenue to run against it. So the earnings softness is occurring from not just from lesser top line but from deleveraging on the cost side.”

Although the restaurant is in the process of attempting to streamline its cost structure, McCormick will be faced with fixed costs in 2008. The company said it plans to open twelve domestic McCormick & Schmick’s restaurants in fiscal year 2008. The company opened five restaurants, including one in Vancouver B.C. and four others domestically during the fourth quarter.

“They can’t materially cut back on store openings because [they’re] already in the build out and leases for most of their 2008 openings,” said Greene. “Whatever they do is going to have to be more menu driven, operational and marketing than long term strategic changes.”

Greene is maintaining a rating of “market outperform” on the stock despite its near term challenges. “I still love the concept and I don’t think they’re alone in facing these challenges. I think you’re going have to step to the side lines and remain cautious with the expectation that the customer base will remain soft for the next 6 months.”

Shares of McCormick & Schmick’s sunk 9.4%, or $1.25, to $11.98 at 11:49 a.m. ET.—moderating from a sharp fall off of 25% earlier in the morning. Shares of McCormick & Schmick’s have been trading in the range of $13.06 to $30.98 for the past 52 weeks.