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WICHITA, KS-Lone Star Steakhouse & Saloon Inc. shockedWall Street with the announcement that its thirdquarter profit took a huge nose-dive to $924,000 from$4.4 million for the same period last year. The thirdquarter numbers represent a 78% decline with dilutedearnings per share of just two cents compared to 17cents for the third quarter 2004. Analysts wereexpecting earnings per share of 24 cents.

The company, which operates 291 restaurants under theLone Star, Sullivan’s, Del Frisco’s and Texas Land &Cattle brands, blamed skyrocketing operating expensesrelated to advertising, labor and Hurricane Katrinafor the decline. Lone Star saw its third quarteroperating expense grow to $78.4 million from $72.1million, representing 52% of the company’s totalsales.

Revenue for the third quarter was relatively flat at$148.8 million from $148 million for the prior year.Similarly, the company posted flat comp-store sales of.4%. Same-store sales at Lone Star Steakhouse & Saloon restaurant declined .6%, while Sullivan’s same-stores sales increased 2%; Del Frisco’s improved by 6.4%; and Texas Land & Cattle Steak House was nearly flat at 0.7% growth.

“The third quarter was a challenging quarter – it’stypically our slowest quarter,” said Lone Star CEOJamie Coulter during the company’s earnings conferencecall.

Costs associated with Hurricane Katrina in the thirdquarter were nearly $2.9 million, reducing net incomeby eight cents per diluted share. These costs includeinsurance deductibles for nine Lone Star restaurantsthat were damaged or destroyed, along with thecompany’s nearly $1.9 million charitable donation to theAmerican Red Cross 2005 Hurricane Relief Fund.

Lone Star spent an extra $1.5 million on advertisingduring the third quarter, an expense that is expectedto occur during the fourth quarter and beyond,according to company executives. Moreover, the company experienced a $2.3 million increase from labor expenses. “The cost of retaining existing employees is going through the roof,” Coulter said. “And, we’re adding to people employed per restaurant.”

During the call, several analysts expressed surpriseat the increased operating expenses, which were $5million more than expected, according to one analystwho questioned Lone Star executives. Moreover, theexecutives were slammed for their lack ofcommunication with their investors and for eschewingany one-on-one conversations with analysts.

Coulter responded to the criticisms by saying that thecompany was following the advice of its legal counsel.”If we have something material to say, we’re going tosay it to everyone at once during a press release orconference call,” he said. “It’s these one-on-oneconversations that tend to get people in trouble, andwe just want to avoid that.”

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