O’Charley’s Inc. Reports Results for the Second Quarter of 2010

O’Charley’s Inc. (Nasdaq: CHUX) reported operating results for the 12-week period ended July 11, 2010, and filed its Form 10-Q for the second quarter of 2010.

Financial and Operating Highlights

• Revenue for the second quarter of fiscal 2010 decreased by 5.9 percent to $194.1 million from $206.2 million in the second quarter of fiscal 2009. Second quarter same-store sales at O’Charley’s company-operated restaurants declined by 7.9 percent, on a 5.7 percent decline in guest counts and a 2.4 percent decline in average check. Same-store sales at Ninety Nine declined by 0.5 percent, as a 0.4 percent increase in guest counts was offset by a 0.9 percent decline in average check. Same store sales at Stoney River Legendary Steaks declined by 0.7 percent, as a 7.8 percent increase in guest counts was offset by an 8.0 percent decline in average check.
• Restaurant-level margins, which the Company defines as restaurant sales less cost of food and beverage, payroll and benefits costs, and restaurant operating costs, decreased to 14.1 percent of restaurant sales from 16.4 percent in the prior year quarter, with year-over-year margin improvement at Stoney River offset by margin declines at O’Charley’s and Ninety Nine.
• General and administrative expenses for the quarter were $10.2 million, or 5.3 percent of revenue, and included severance and other charges of $2.4 million, or 1.2 percent of revenues relating to organizational changes in the quarter. General and administrative expenses in the prior year quarter were $8.1 million, or 3.9 percent of revenues.
• Including the severance charges, loss from operations in the quarter was $0.5 million, or 0.3 percent of revenues, compared to income from operations of $5.2 million, or 2.5 percent of revenues in the prior year quarter. Results for the prior year quarter included impairment charges of $1.5 million. Adjusted EBITDA in the quarter was $12.4 million, or 6.4 percent of revenues, compared to $18.9 million, or 9.2 percent of revenues in the prior year quarter. Adjusted EBITDA is a non-GAAP supplemental financial measure that the Company believes may be useful for understanding its financial performance. A reconciliation of adjusted EBITDA to income from operations is provided later in this release.
• Results for the quarter include interest expense of $2.9 million, and an income tax benefit of $0.9 million, resulting in a net loss attributable to common shareholders of $2.5 million, or $0.12 per diluted share. In comparison, net earnings available to common shareholders in the prior year quarter were $2.8 million, or $0.13 per diluted share.
• Capital investment during the quarter was $4.7 million, compared to $4.5 million in the prior year quarter. At quarter end, the Company had a cash balance of $25.9 million, and had no drawings on its revolving line of credit.

“Although the economic environment continues to be challenging for casual dining companies, two of our three concepts, Ninety Nine and Stoney River, experienced a positive shift in momentum in the second quarter,” said Philip J. Hickey, Jr., chairman of the board of directors and interim chief executive officer of O’Charley’s Inc. “Ninety Nine outperformed its relevant Knapp-Track averages in the quarter, and had its first quarter of positive guest count growth in more than four years. Our guests continue to respond favorably to our ‘Nine Real-Sized Entrees for $9.99’ offering, and we hope to continue this momentum at Ninety Nine in the second half of the year. It appears that the repositioning of the Stoney River concept continues to show progress. Same store sales were better than the trends of the past three years, guest counts have been positive in the high single digits for three consecutive quarters, and restaurant operating margin in the quarter improved by 530 basis points compared to the prior year quarter.

“While we were disappointed with the second quarter financial performance of the O’Charley’s concept, we believe that enhanced focus on innovative food offerings, service improvements and value will lead to a shift in sales trends later this year. We believe that improving guest counts is the first step toward improving the sales and profitability of the concept. In this regard, we recently re-introduced ‘2 Meals for $14.99’ featuring our proven favorites combined with value-priced appetizer, beverage, and full-meal offerings. As we announced last week, David Head will be joining us soon as President and Chief Executive Officer and a member of our Board of Directors. I look forward to working closely with David to continue our pursuit of positive momentum.”

Outlook for the Third Quarter of 2010

Given the current uncertainty in the general economic outlook and the outlook for consumer spending, the Company does not believe that it has sufficient visibility to offer a projection of its full-year 2010 financial performance. For the third quarter of 2010, the Company is forecasting total revenue of between $186 million and $192 million, and a loss from operations of between $1 million and $4 million. The Company projects adjusted EBITDA of between $7 million and $10 million in the third quarter, based upon estimated depreciation and amortization expense of approximately $10 million, and estimated stock compensation expense of approximately $1 million.

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