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Improved Bottom Line For O'Charley's Inc. Third Quarter

2011-11-07

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O’Charley’s With 12 fewer restaurants in operation, the Company’s revenue for the third quarter of 2011 declined slightly to $186.6 million from $188.6 million for the third quarter of 2010.

O’Charley’s Inc. (NASDAQ: CHUX) reported operating results for the 12-week period ended October 2, 2011.

Financial and Operating Highlights

With 12 fewer restaurants in operation, the Company’s revenue for the third quarter of 2011 declined slightly to $186.6 million from $188.6 million for the third quarter of 2010.
- O’Charley’s comparable sales for company-operated restaurants declined 0.9 percent for the third quarter of 2011 from the third quarter last year, as a 4.5 percent decline in guest counts was partially offset by a 3.8 percent increase in average check.
- Ninety Nine Restaurants comparable sales for the third quarter of 2011 accelerated for the fifth consecutive quarter, increasing 4.1 percent on a 4.0 percent increase in guest counts and a 0.1 percent increase in average check.
- Stoney River Legendary Steaks produced a fifth consecutive quarterly increase in comparable sales, increasing 6.8 percent for the third quarter. The concept’s comparable guest counts increased 6.1 percent, the eighth consecutive quarterly improvement, and average check rose 0.6 percent, the first quarterly improvement in the last 10 quarters.

Restaurant-level margins declined to 11.5 percent of restaurant sales for the third quarter of 2011 from 12.1 percent for the third quarter of 2010, as a 190 basis point increase in food and beverage costs as a percentage of sales, primarily due to rising commodity costs, more than offset margin improvements in payroll and benefits and restaurant operating costs.
Loss from operations was $0.6 million, or 0.3 percent of revenues, for the third quarter of 2011 compared with a loss from operations of $5.2 million, or 2.7 percent of revenues, for the third quarter of 2010. Results for the third quarter of 2010 included net impairment and disposal charges of $2.5 million or 1.3 percent of revenues.
Loss from continuing operations was $4.0 million, or $0.18 per diluted share, for the third quarter of 2011, compared with a loss $7.0 million, or $0.33 per diluted share, for the third quarter of 2010. Net loss was $4.0 million, or $0.19 per diluted share, for the third quarter of 2011, compared with a net loss of $7.4 million, or $0.35 per diluted share, for the third quarter of 2010.
Net cash provided by operating activities was $11.1 million for the first 40 weeks of fiscal 2011, and the Company had $30.8 million of cash and no drawings on its revolving credit facility at the quarter’s end.
As disclosed on October 17, 2011, the Company completed a sale-leaseback transaction for 50 O’Charley’s properties which produced gross proceeds of $105 million. The Company is using the net proceeds, combined with existing cash, to retire all of its outstanding 9% Senior Notes during the fourth quarter. The Company expects the impact of the transaction to be a decrease in annual interest expense of approximately $10.0 million, a decrease in annual depreciation expense of approximately $2.5 million and an increase in annual rent expense of approximately $8.9 million, which includes straight-line rent and the estimated amortization of the deferred gain on the sale and the deferred financing costs. In conjunction with the sale-leaseback transaction, the Company entered into an Amended and Restated Credit Facility with its existing banks, which reduced the facility from $45 million to $30 million. While the terms and conditions are similar to the prior facility, the new facility provides the Company more flexibility regarding capital expenditures and also extends the maturity of the facility to 2016.

David W. Head, president and chief executive officer of O’Charley’s Inc., said, “We are pleased we met our financial guidance for the third quarter and continued the strong comparable sales performance of Ninety Nine Restaurants and Stoney River Legendary Steaks. We did not sustain the positive comparable sales momentum created at O’Charley’s over the previous four quarters. The decline in O’Charley’s guest counts compares to a 2.7 percent increase in guest counts for the third quarter last year, which was driven by the re-launch of the “2 Meals for $14.99” promotion. Although new, high quality menu introductions produced upward migration in guest satisfaction for O’Charley’s for the third quarter, we believe the promotion mis-match coupled with heightened economic uncertainty contributed to the decline in guest counts.

“We are using the substantial guest count and sales progress in two of our three concepts as a blueprint to regain momentum in our O’Charley’s concept. We have undertaken several initiatives designed to grow O’Charley’s guest counts that center on greater clarity and precision in communicating our message of high quality, flavorful food at an everyday value. We intend to keep our focus on improving the guest experience at all three of our concepts. As reflected in our continued increases in guest satisfaction scores, we believe this focus will translate into higher sales, improving margins and increased shareholder value.”

Financial Guidance

For the fourth quarter of 2011, a 12-week quarter ending December 25, 2011, the Company’s guidance includes: total revenues of between $177 million and $182 million; loss from operations of between $3 million and $6 million; and adjusted EBITDA of between $4 million and $7 million. The Company’s guidance for the fourth quarter includes an estimated loss of approximately $1.2 million associated with the sale of certain properties included in the sale-leaseback transaction completed earlier in the quarter. Adjusted EBITDA is a non-GAAP financial measure. A reconciliation of adjusted EBITDA to income from operations is included with the supplementary information to this release. The Company anticipates capital expenditures of between $16 million and $18 million for fiscal 2011.


O'Charley's Inc. and Subsidiaries
Consolidated Statements of Operations (unaudited)
12 Weeks Ended October 2, 2011 and October 3, 2010

All percentages shown as a percentage of total revenue unless indicated otherwise


			2011					2010 (2)
			(in thousands, except per share data)
Revenues:
	Restaurant sales		$	186,392		99.9	%	$	188,291		99.8	%
	Franchise and other revenue			196		0.1	%		351		0.2	%
				186,588		100.0	%		188,642		100.0	%
Costs and expenses:
	Cost of food and beverage			59,862		32.1	%		56,933		30.2	%
	Payroll and benefits			64,848		34.8	%		67,015		35.6	%
	Restaurant operating costs			40,160		21.5	%		41,502		22.0	%
		Cost of restaurant sales (1), excluding depreciation and amortization shown below		164,870		88.5	%		165,450		87.9	%

	Advertising and marketing			8,197		4.4	%		7,947		4.2	%
	General and administrative			5,554		3.0	%		8,282		4.4	%
	Depreciation and amortization of property and equipment			8,425		4.5	%		9,629		5.1	%
	Impairment and disposal charges, net			177		0.1	%		2,497		1.3	%
				187,223		100.3	%		193,805		102.7	%

Loss from operations				(635	)	-0.3	%		(5,163	)	-2.7	%

Other expense (income):
	Interest expense, net			3,161		1.7	%		2,488		1.3	%
	Other, net			-		0.0	%		(6	)	0.0	%
				3,161		1.7	%		2,482		1.3	%

Loss from continuing operations before income taxes				(3,796	)	-2.0	%		(7,645	)	-4.1	%

Income tax expense (benefit)				157		0.1	%		(615	)	-0.3	%

Loss from continuing operations				(3,953	)	-2.1	%		(7,030	)	-3.7	%

Loss from discontinued operations, net				(59	)	0.0	%		(408	)	-0.2	%

Net Loss			$	(4,012	)	-2.1	%	$	(7,438	)	-3.9	%

Net loss per share - basic and diluted
	Loss from continuing operations		$	(0.18	)			$	(0.33	)
	Loss from discontinued operations, net		$	(0.01	)			$	(0.02	)
	Net Loss		$	(0.19	)			$	(0.35	)
	Weighted-average common shares outstanding			21,591					21,267

(1) Percentages calculated as a percentage of restaurant sales.
(2) Prior year results have been adjusted to reflect results from discontinued operations.


O'Charley's Inc. and Subsidiaries
Consolidated Statements of Operations (unaudited)
40 Weeks Ended October 2, 2011 and October 3, 2010

All percentages shown as a percentage of total revenue unless indicated otherwise


			2011					2010 (2)
			(in thousands, except per share data)
Revenues:
	Restaurant sales		$	644,186		99.9	%	$	645,737		99.9	%
	Franchise and other revenue			741		0.1	%		922		0.1	%
				644,927		100.0	%		646,659		100.0	%
Costs and Expenses:
	Cost of food and beverage			203,814		31.6	%		191,642		29.7	%
	Payroll and benefits			223,189		34.6	%		226,954		35.1	%
	Restaurant operating costs			132,576		20.6	%		134,632		20.8	%
		Cost of restaurant sales (1), excluding depreciation and amortization shown below		559,579		86.9	%		553,228		85.7	%

	Advertising and marketing			27,421		4.3	%		27,489		4.3	%
	General and administrative			24,192		3.8	%		29,420		4.5	%
	Depreciation and amortization of property and equipment			28,587		4.4	%		32,932		5.1	%
	Impairment, disposal and restructuring charges, net			(184	)	0.0	%		5,752		0.9	%
	Pre-opening costs			-		0.0	%		7		0.0	%
				639,595		99.2	%		648,828		100.3	%

Income (Loss) from operations				5,332		0.8	%		(2,169	)	-0.3	%

Other expense (income):
	Interest expense, net			9,075		1.4	%		9,405		1.5	%
	Other, net			3		0.0	%		(5	)	0.0	%
				9,078		1.4	%		9,400		1.5	%

Loss from continuing operations before income taxes				(3,746	)	-0.6	%		(11,569	)	-1.8	%

Income tax expense (benefit)				20		0.0	%		(694	)	-0.1	%

Loss from continuing operations				(3,766	)	-0.6	%		(10,875	)	-1.7	%

Loss from discontinued operations, net				(308	)	0.0	%		(3,430	)	-0.5	%

Net Loss			$	(4,074	)	-0.6	%	$	(14,305	)	-2.2	%

Net loss per share-basic and diluted
	Loss from continuing operations		$	(0.18	)			$	(0.51	)
	Loss from discontinued operations, net		$	(0.01	)			$	(0.17	)
	Net Loss		$	(0.19	)			$	(0.68	)
	Weighted-average common shares outstanding			21,500					21,175

(1) Percentages calculated as a percentage of restaurant sales.
(2) Prior year results have been adjusted to reflect results from discontinued operations.


O'Charley's Inc.
Condensed Consolidated Balance Sheets (unaudited)
At October 2, 2011 and December 26, 2010



		2011		2010
		(in thousands)

Cash		$	30,773	$	29,693

Other current assets			33,413		33,050

Property and equipment, net			301,487		320,011

Trade names and other intangible assets			25,946		25,946

Other assets			11,297		14,041

	Total assets	$	402,916	$	422,741


Current portion of long-term debt and capital leases		$	219	$	1,710

Other current liabilities			64,589		74,746

Long-term debt and capitalized lease obligations, net of current portion			116,670		117,164

Other liabilities			45,441		50,887

Shareholders' equity			175,997		178,234

	Total liabilities and shareholders' equity	$	402,916	$	422,741


O'Charley's Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
40 Weeks Ended October 2, 2011 and October 3, 2010
(In thousands)

		2011			2010

Cash flows from operating activities:
	Net Loss	$	(4,074	)	$	(14,305	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
	Depreciation and amortization		28,587			33,278
	Asset impairment		(592	)		8,184
	Share-based compensation		1,374			3,062
	Changes in assets and liabilities and other, net		(14,203	)		(6,816	)
	Net cash provided by operating activities		11,092			23,403

Cash flows from investing activities:
	Additions to property and equipment		(11,072	)		(10,876	)
	Proceeds from sale of assets and other, net		2,272			1,132
	Net cash used in investing activities		(8,800	)		(9,744	)

Cash flows from financing activities:
	Payments on long-term debt and capitalized lease obligations		(1,550	)		(1,627	)
	Repurchase of senior notes		-			(9,993	)
	Debt issuance costs		(125	)		(1,647	)
	Proceeds from the exercise of stock options and issuances under CHUX Ownership Plan		615			739
	Shares tendered and retired for minimum tax withholdings		(169	)		(277	)
	Other, net		17			5
	Net cash used in financing activities		(1,212	)		(12,800	)

	Increase in cash and cash equivalents		1,080			859
	Cash and cash equivalents at beginning of period		29,693			21,880
	Cash and cash equivalents at end of period	$	30,773		$	22,739


O'Charley's Inc. and Subsidiaries
Financial and Other Information (unaudited)
40 Weeks Ended October 2, 2011 and October 3, 2010
All percentages shown as percentage of restaurant sales


				12 weeks ended						40 weeks ended
O'Charley's Concept:				2011			2010 (3)			2011			2010 (3)
	Number of restaurants open at period end (1)				221			233			221			233
	Average check per guest (1)			$	12.75		$	12.26		$	12.60		$	12.46
	Average weekly sales per restaurant (1)			$	43,446		$	42,851		$	46,052		$	44,653

	Restaurant sales (millions)			$	115.2		$	118.9		$	407.1		$	413.3

	Costs and expenses:
		Cost of food and beverage			32.6	%		30.3	%		32.1	%		29.6	%
		Payroll and benefits			34.9	%		36.0	%		34.6	%		35.2	%
		Restaurant operating costs (2)			21.9	%		22.1	%		20.2	%		20.4	%

			Cost of restaurant sales		89.4	%		88.4	%		86.9	%		85.2	%


Ninety Nine Concept:
	Number of restaurants open at period end				106			113			106			113
	Average check per guest			$	14.55		$	14.51		$	14.67		$	14.54
	Average weekly sales per restaurant			$	50,161		$	47,133		$	49,886		$	47,093

	Restaurant sales (millions)			$	63.8		$	62.0		$	211.5		$	207.2

	Costs and expenses:
		Cost of food and beverage			30.7	%		29.4	%		30.2	%		29.0	%
		Payroll and benefits			35.4	%		35.7	%		35.7	%		36.1	%
		Restaurant operating costs (2)			21.2	%		22.3	%		21.2	%		21.8	%

			Cost of restaurant sales		87.3	%		87.4	%		87.1	%		86.9	%


Stoney River Concept:
	Number of restaurants open at period end				10			11			10			11
	Average check per guest			$	35.03		$	34.69		$	35.39		$	36.26
	Average weekly sales per restaurant			$	61,360		$	55,544		$	63,760		$	57,377

	Restaurant sales (millions)			$	7.4		$	7.3		$	25.6		$	25.2

	Costs and expenses:
		Cost of food and beverage			37.2	%		36.5	%		36.7	%		35.9	%
		Payroll and benefits			27.7	%		27.5	%		27.5	%		26.8	%
		Restaurant operating costs (2)			19.7	%		19.1	%		19.7	%		20.3	%

			Cost of restaurant sales		84.6	%		83.1	%		83.9	%		83.0	%

(1) Excludes franchised restaurants
(2) Includes rent: 100% of the Ninety Nine restaurant locations are leased (land or land and building) as compared to 57% for O’Charley’s and 70% for Stoney River.
(3) The 2010 periods include the operations of certain restaurants closed during 2010 which are now classified as discontinued operations.


O'Charley's Inc. and Subsidiaries
Calculation of Adjusted EBITDA (unaudited) (1)
A Non-GAAP Financial Measure
12 and 40 Weeks Ended October 2, 2011 and October 3, 2010

			12 Weeks						40 Weeks
			2011			2010			2011			2010
	(Loss) Income from Operations		$	(635	)	$	(5,163	)	$	5,332		$	(2,169	)

	Add:
		Depreciation and amortization		8,425			9,629			28,587			32,932

		Impairment and disposal charges, net (2)		177			2,497			(184	)		5,752

		Stock-based compensation (benefit) expense (3)		(190	)		850			1,374			3,062

		Severance, recruiting and relocation expense (4)		559			-			932			2,395

		Changes in deferred compensation balances (5)		(535	)		138			(270	)		138

	Adjusted EBITDA		$	7,801		$	7,951		$	35,771		$	42,110