You won't find chunky margins on the Country Style Cooking (NYS: CCSC) menu, but that's exactly what investors are hungry for these days.
The quick-service restaurant chain is certainly popular in China. Revenue soared 39% to $45.5 million in its latest quarter, fueled partly by a 6.1% uptick in same-unit sales but mostly by the company's breakneck expansion. There are now 186 restaurants open, including its first foray into Beijing.
Earnings growth wasn't as kind, declining 30% to $0.09 a share -- or $0.11 a share after backing out share-based compensation expenses. Either way, this is the fourth consecutive quarter in which Country Style Cooking misses Wall Street's profit target. It did come out ahead of the $44.95 million that analysts were eyeing for the top line.
How can revenue soar 39% while profitability takes a 30% hit? It's probably not what you think. Yes, we're living in a time of percolating inflation, but food and paper, wages, and restaurant utility expenses all grew by less than 39%. In other words, margins improved on all of those fronts.
The restaurant-level hits this quarter came from rent and the "other" category that includes costs for warehousing, logistics, and in-store promotions. However, a 110-basis-point hit in restaurant operating expenses can be overcome given Country Style's brisk growth. The real culprits here are a spike in its effective tax rate, a surge in pre-opening expenses given the ramped-up expansion schedule, and a problematic 89% uptick in selling, general, and administrative expenses.
The news gets worse when we get to Country Style Cooking's guidance for the current quarter, where the chain sees revenue of $42.3 million to $43.9 million. Wall Street was expecting a sequential uptick, instead. If the company has had problems managing its costs when things are going well on the top line, what's going to happen now that revenue is going the wrong way sequentially?
It's easy to fall for Country Style Cooking. China's economy is booming, and an economical high-traffic eatery will be an obvious beneficiary of the improving middle class there. You won't find too many pure plays when it comes to eating in China.
Yum! Brands (NYS: YUM) is a popular play on China given its KFC success and its acquisition of the Little Sheep hot-pot chain, but it's obviously not a pure play. Chinese pork producer Zhongpin (NAS: HOGS) makes more sense, but it still lacks the dynamic of a financially empowered middle class going out to eat more.
Country Style Cooking went public last year at $16.50, nearly doubling initially. Now it's yet another busted Chinese IPO. It's a shame because the potential is there for Country Style Cooking -- it just can't get its cost controls in check. Hiring a Chinese McDonald's (NYS: MCD) executive earlier this year should have helped, but it seems as if Country Style Cooking has more pressing needs in the kitchen than to worry about disappointing stateside investors.
It's sadly more than just an ingredient or two away from regaining its zesty flavor.
At the time thisarticle was published The Motley Fool owns shares of Yum! Brands. Motley Fool newsletter services have recommended buying shares of Country Style Cooking Restaurant Chain, Yum! Brands, and McDonald's. Motley Fool newsletter services have also recommended writing puts in Zhongpin. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.