O'Charley's Inc. Reports Results for the Second Quarter of 2009

O'Charley's Inc. (Nasdaq: CHUX), a leading casual-dining restaurant company, today reported revenues and earnings per share for the 12-week period ended July 12, 2009.

Financial and Operating Highlights

• Revenue for the second quarter of fiscal 2009 decreased $14.9 million or 6.7 percent to $206.2 million, from $221.1 million in the second quarter of fiscal 2008. Same-store sales for the second quarter of 2009 declined 6.9 percent at O'Charley's company-operated restaurants, 10.0 percent at Ninety Nine Restaurants, and 20.4 percent at Stoney River Legendary Steaks.

• Restaurant-level margins, which the Company defines as restaurant sales less cost of food and beverage, payroll and benefits costs, and restaurant operating costs increased to 16.4 percent of restaurant sales from 15.0 percent in the prior year quarter. Declines in food and beverage costs as a percent of restaurant sales, improved controls over labor scheduling, reductions in the cost of employee benefit plans and reductions in other restaurant operating costs contributed to this improved performance.

• Results for the quarter include impairment charges for three O'Charley's restaurants, all of which will remain open. These and other non-cash impairment charges reduced income from operations by $1.5 million, or 0.7 percent of revenue, and reduced earnings available to common shareholders by $0.07 per diluted share. Results for the prior year quarter include impairment charges of $1.7 million, and expenses relating to the Company's re-branding initiatives of $2.5 million.

• Including the impairment charges, income from operations in the quarter was $5.2 million, or 2.5 percent of revenues, and earnings before income taxes were $2.6 million. In comparison, income from operations in the prior year quarter was $0.4 million, or 0.2 percent of revenues, and the loss before income taxes was $2.3 million.

• Results for the second quarter include an income tax benefit of $0.3 million, resulting in net earnings available to common shareholders of $2.8 million, or $0.13 per diluted share. In comparison, net loss available to common shareholders in the prior year second quarter was $0.38 per share. The tax provision for the quarter reflects changes in the Company's full-year projections, and the impact of these changes on valuation reserves and discrete items.

• For the 28-week period ended July 12, 2009, revenue was $497.9 million, income from operations was $17.2 million, and net earnings available to common shareholders were $9.7 million, or $0.47 per diluted share. In comparison, for the prior year period revenue was $518.6 million, income from operations was $9.0 million, and net earnings available to common shareholders was $2.5 million, or $0.12 per diluted share.

• Although current economic conditions limit its ability to project future sales performance, the Company stated that for internal planning purposes it is forecasting total revenue of between $190 million and $195 million for each of the third and fourth quarters of 2009. This sales forecast reflects historical seasonal patterns and recent sales trends. At these sales levels many of the Company's costs are relatively fixed, and the Company believes that its loss from operations in each of the two quarters would be between $1 million and $4 million.

'This continues to be a challenging environment for casual restaurant companies, and like most of our competitors we experienced a decline in same store sales during the quarter,' said Jeffrey D. Warne, president and chief executive officer of O'Charley's Inc. 'Unfortunately, we have not seen signs of improvement in the environment, as same store sales for our two casual dining brands declined further in the second half of the quarter than in the first. In response to this environment, we remain focused on differentiating our brands through innovative and value-oriented food and beverage offerings, controlling margins while enhancing guest service, and maintaining our financial flexibility by maximizing cash flow. Even in this difficult environment, we believe that we made substantial progress in all three of these areas during the second quarter of 2009.'

'While we will never be satisfied with declining revenue, same store sales at all three of our restaurant concepts were consistent with their relevant Knapp-Track(TM) averages for the April through June period, and we saw significant increases in our guest satisfaction scores compared to the prior year. The improvement in our operating margin is the result of our food cost reduction initiatives, the implementation of our theoretical labor cost system, and tight control over our general and administrative costs. Given our strong cash flow and reduced level of capital investment, we have reduced our debt since the beginning of the year by $28.6 million. We expect to complete the transaction to outsource food and supply distribution for Ninety Nine Restaurants within the next few weeks, and as previously announced we expect our cash proceeds from this transaction to be between $6 million and $8 million.'

O'Charley's Restaurants

Restaurant sales for company-operated O'Charley's decreased 5.0 percent to $131.9 million for the second quarter, reflecting the decline in same store sales partially offset by the addition of three new company-operated restaurants since the second quarter of 2008. The same-store sales decrease of 6.9 percent was comprised of a 0.6 percent increase in average check offset by a 7.4 percent decrease in guest counts. Average check for company-operated restaurants in the second quarter was $12.98. Average weekly sales per company-operated restaurant were $47.3 thousand in the quarter, compared to $50.8 thousand in the prior year quarter. There were 245 O'Charley's restaurants, including 12 restaurants operated by franchisees or joint venture partners, open at the end of the quarter. During the second quarter, a joint venture restaurant was converted to company ownership.

'During the second quarter, we continued to differentiate the O'Charley's brand through innovative food and beverage, and by emphasizing our value offerings,' Warne said. 'Our recently-completed promotion featured a complete steak dinner, including a seven-ounce top sirloin served with a side item, a choice of soup or salad, and our signature yeast rolls, all for the compelling price of $9.99. This offering proved so popular that we have made it a part of our regular menu. We are now offering two meals for $14.99, featuring six new entrees, including Cajun Shrimp and Grits, Hand-Battered Fish n' Chips, and Meatballs and Spaghetti. We designed each product to provide a reasonable margin to the Company, while providing our guests with craveable flavors and full-sized portions at a compelling value. We believe that our guests are responding to our quality food, beverage, service and value, as the percentage of guests who give O'Charley's the highest rating for overall satisfaction in our guest satisfaction measure has reached an all-time high and increased by 500 basis points since the second quarter of 2008.'

Ninety Nine Restaurants

Restaurant sales for Ninety Nine Restaurants decreased 8.9 percent to $65.4 million in the second quarter, reflecting the decline in same store sales, the addition of one new restaurant and the closing of one restaurant since the second quarter of 2008. The same-store sales decrease of 10.0 percent was comprised of a 1.8 percent decrease in average check and an 8.4 percent decrease in guest counts. Average check in the second quarter was $14.61. Average weekly sales per restaurant were $47.0 thousand in the quarter, compared to $52.2 thousand in the prior year quarter. At the end of the quarter, the Company operated 116 Ninety Nine restaurants.

'During the quarter, Ninety Nine continued to reinforce its 'Great Meal. Great Deal' brand message with innovative food and beverage offerings and compelling values,' said Warne. 'Our current 'Sensational Seaside Deals' promotion features four seafood entrees starting at $9.99, with the option to upgrade to a three course meal for an additional $3.00. Both promotions were supported with radio and print advertising and discount coupons. Our popular 'When the Red Sox Win Kids Eat Free' promotion will continue through the regular season, and offers free kids meals the day after every Red Sox win. We believe that our guests are responding favorably to the great food, atmosphere and value at Ninety Nine, as the percentage of guests who give us the highest rating for overall satisfaction in our guest satisfaction measure has reached an all-time high and increased by 200 basis points since the second quarter of 2008.'

Stoney River Legendary Steaks Restaurants

Restaurant sales for Stoney River Legendary Steaks decreased 16.0 percent to $7.0 million in the second quarter. The same-store sales decrease of 20.4 percent was comprised of a 12.6 percent decrease in average check and a 9.0 percent decrease in guest counts. Average check for Stoney River in the second quarter was $40.19. Average weekly sales per restaurant were $55.2 thousand in the quarter, compared to $69.5 thousand in the prior year quarter. One Stoney River restaurant closed during the quarter, and at the end of the second quarter nine of the ten restaurants were included in the same store sales base.

'During the quarter, we continued to reposition Stoney River within the polished casual segment by providing a great guest experience with lower menu prices, new menu offerings, and a new menu format,' Warne said. 'The repositioning has been supported by radio, on-line incentives, newspaper advertisements and a $20 coupon to induce trial. We initially tested this new positioning in Louisville, with enthusiastic response from our guests. Even after the initial six-week advertising campaign, guest counts in Louisville were more than 10 percent above the prior year, while guest counts in the other restaurants declined by double digits. Based upon our success in Louisville, the new positioning was recently implemented in our two Nashville restaurants, and our restaurant in Chesterfield, Missouri, with additional restaurants planned for the third quarter of 2009.'

Outlook for 2009

Although current economic conditions limit its ability to project future sales performance, the Company stated that for internal planning purposes it is forecasting total revenue of between $190 million and $195 million for each of the third and fourth quarters of 2009. At these sales levels, the Company believes that its loss from operations in each of the two quarters would be between $1 million and $4 million. The Company expects its cost of food and beverage as a percentage of restaurant sales to remain relatively constant throughout the year, while it expects its other cost categories to be sequentially higher as a percentage of sales due to the deleveraging impact of reduced sales.

'Given the economic conditions late last year, and our uncertainty about future performance, we announced that we would discontinue offering financial guidance,' Warne said. 'In the current economic climate it remains very difficult to predict consumer demand and therefore to forecast sales. However, we have grown more confident in our ability to control and project our costs, and in our ability to predict financial performance at different levels of sales. We recognize that our internal sales forecast for the balance of 2009, which reflects historical patterns of seasonality and recent sales trends, is lower than the market's current expectations. We developed this forecast by assuming that our recent sales performance establishes a new baseline for the remainder of the year, and that at current levels of average weekly sales per restaurant, many of our costs have become relatively fixed.'

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