Gregory Burns – Chairman, Chief Executive Officer
Lawrence Hyatt – Chief Financial Officer
Meredith Fowler – Wachovia Securities
Jeffrey Omohundro – Wachovia
Kenneth Bann – Jefferies & Co.
Bryan Elliott – Raymond James
Dustin Tompkins – Morgan Keegan
O'Charley's Inc. (CHUX) Q4 2008 Earnings Call February 5, 2009 11:00 AM ET
Welcome to the O'Charley's Inc. fourth quarter 2008 conference call on February 5, 2009. (Operator Instructions) I will now hand the call over the Mr. Gene Marbach.
Good morning all and thank you for joining O'Charley's fiscal fourth quarter 2008 conference call. On the call today are Gregory Burns, Chairman and CEO and Larry Hyatt, CFO. The order of business this morning will be some brief prepared remarks from Larry and Greg about the fourth quarter. Then we'll open the call to questions. In the time allotted we will take as many questions as possible.
Before we begin, I would like to note that certain statements made by O'Charley's management on this call may be deemed to constitute forward-looking statements made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements may be affected by certain risks and uncertainties including risks described in the company's filing with the Securities and Exchange Commission. In light of the significant uncertainties inherent in the forward-looking statements included in the company's comments, you should not regard the inclusion of such information as a representation that its objectives planned and projected results will be achieved and the company's actual results could differ materially from such forward-looking statements.
I would now like to turn the call over to Mr. Larry Hyatt, CFO of O'Charley's.
Good morning everyone. I want to welcome our many shareholders and team members to our fourth quarter 2008 conference call.
As indicated in this morning's release our results for the fourth quarter and the full year 2008 were impacted by a number of non comparable charges and expenses. We provided reconciliation tables in our release which hopefully help to clarify these items. However, since I know that this information may be confusing, I would like to walk you through four items that impacted our fourth quarter and full year results and a comparison of these results to the prior year period.
First, as we announced in this morning's release, our fourth quarter results include an impairment charge of $45.1 million for the good will acquired as part of the Ninety Nine acquisition in 2003. As you may know, good will is an asset that is placed on the balance sheet as a result of an acquisition and represents the excess of the price paid over the appraised value of the tangible and identifiable intangible assets.
SSAS Number 142, good will and other intangible assets requires companies to test the value of the good will on their balance sheet at least once per year, and more often if warranted by changing circumstances. SSAS Number 142 also sets forth a two step process for testing the value of good will.
We completed the first step in the third quarter of 2008 and recognized an estimated impairment charge of $48 million at that time. We updated the first step and completed the second step in the fourth quarter and recognized the additional impairment charge of $45.1 million.
During the fourth quarter, we also recognized the good will impairment charge of $0.6 million relating to Stoney River. With these impairment charges, all of the good will on the company's balance sheet is now fully written off.
Second, during the fourth quarter of 2008 we recorded impairment charges of $15.4 million for five O'Charley's Restaurants, nine Ninety Nine Restaurants and two Stoney River Restaurants, all of which will remain open, combined with other impairment related adjustments.
Including these fourth quarter charges, total restaurant and other impairment charges for the year were $17 million. In comparison, restaurant impairment charges net of gain in the prior year periods were $2.7 million for the quarter and $6.1 million for the full year.
Let me be very clear. While the good will and restaurant impairment charges are relatively large numbers, they are non cash accounting charges. They have no impact on the company's operations, no impact on our cash flow and no impact on our liquidity. Their only impact on future performance is a reduction in our annual non cash depreciation charges of approximately $1.5 million.
Third, in addition to our most recently announced organization change, the company made a number of organizational changes during the year, most of which involved reducing positions in our support centers in response to the current economic environment. The severance and other costs associated with these organization changes were $2.9 million in the fourth quarter of 2008 and $4 million for the full year.
In comparison, such costs in the prior year period was $0.2 million in the fourth quarter and $2.6 million for the year.
Fourth, in comparing our results for the fourth quarter and full year 2008 with the prior year period, it should be noted that the prior period results include impairment, severance and transition charges related to the sale of the Commissary and outsourcing of manufacturing and distribution in 2007. Such charges were $0.3 million in the prior year quarter and $10.2 million for the 2007 fiscal year.
On a GAAP reported basis, our net loss for the fourth quarter was $68.2 million or $3.34 per diluted share and our net loss for the 2008 fiscal year was $132.5 million or $6.34 per diluted share. However, when adjusted for the non comparable items that I just discussed, our net loss for the quarter was $3.1 million or $0.15 per diluted share and our net loss for the year was $1.2 million or $0.06 per diluted share.
In the prior year quarter, our adjusted net earnings were $1.5 million or $0.07 per diluted share and for the prior fiscal year, our adjusted net earnings were $18.6 million or $0.79 per diluted share.
I will now discuss our operating results for the fourth quarter of 2008. Revenue for the quarter was $202.9 million compared to $125.2 million in the prior year quarter. Same store sales at our O'Charley's Restaurants decreased by 6.1% which was the result in the increase in average check of 2.1% offset by a decrease in guest counts of 8%.
Average check for company operated restaurants was $13.21. Average weekly sales per restaurant were $45.9 thousand in the quarter compared with $48.7 thousand in last year's fourth quarter.
For Ninety Nine, same sale store sales decreased 8.4% in the quarter which was the result of a 1.4% increase in average check offset by a 9.7% decrease in guest counts. Average check for Ninety Nine in the fourth quarter was $15.24. Average weekly sales per restaurant were $46.3 thousand in the quarter compared with $50.7 thousand in last year's fourth quarter.
For Stoney River same store sales decreased 18.2% in the quarter which was the result of a 3% increase in average check offset by a 20.6% decrease in guest count. Average check in the quarter was $48.96. Average weekly sales per restaurant was $68.3 thousand in the quarter compared with $82.6 thousand in last year's fourth quarter.
During the fourth quarter of 2008 our three restaurant concepts sold a total $18.7 million of gift cards an increase from the $18.6 million of gift card sales in the fourth quarter of 2007.
Our restaurant level margin which we define restaurant sales minus cost of food and beverage, payroll and benefit costs and restaurant operating costs were $29.2 million or 14.4% of restaurant sales compared to $34.3 million or 15.9% of restaurant sales in the prior year quarter. A number of factors contributed to this 150 basis point decline.
Our cost of food and beverage was $60.1 million or 29.6% of restaurant sales in the fourth quarter of 2008 compared with $64 million or 29.8% of restaurant sales in the fourth quarter of 2007. On a constant mix basis, our food costs were 6.2% higher in the fourth quarter than in the prior year quarter.
The comparative impact of these higher costs was offset by higher menu prices, operating inefficiencies during the close down of our commissary in the prior year quarter, and changes to recipe and product specifications as part of our cost reduction initiatives.
During the fourth quarter, we saw a significant softening in the market for food commodities and took advantage of the opportunity to lock in pricing for the current fiscal year. We have locked in our pricing for over 70% of our estimated requirements for beef, over 90% of our estimated requirements for poultry, over 95% of our estimated requirements for pork and half of our estimated requirements for seafood.
Based upon our locked in pricing and our market outlook, we expect our 2009 prices for beef and seafood to be lower than our 2008 prices and expect our prices for pork and poultry to show increases in the low to mid single digits.
We also expect to mitigate food cost increases through further specification, portion size and menu changes.
Our restaurant level payroll and benefit costs were $71.8 million or 35.4% of restaurant sales in the fourth quarter of 2008 compared with $74.4 million or 34.6% of restaurant sales in the fourth quarter of 2007. Higher management labor expense on a reduced sales base and higher employee benefits expenses contributed to the 80 basis point change.
Restaurant operating costs in the quarter were $41.6 million with 20.5% of restaurant sales compared to $42.2 million or 19.6% of restaurant sales in the fourth quarter of the prior year. Utility costs were 60 basis points higher than the prior year quarter while the deleveraging impact of reduced sales on rent and other fixed costs accounted for the remainder of this 90 basis point increase.
Advertising and marketing expense was $7.7 million or 3.8% of revenue in the quarter compared to $6.5 million or 3% of revenue in the prior year quarter. The higher advertising spend as a percent of sales reflects the deleveraging impact of reduced sales as well as our decision to increase advertising spending in an effort to drive sales in this difficult environment.
Our general and administrative expenses were $11 million or 5.4% of revenue in the fourth quarter compared to $10.3 million or 4.8% of revenue in the prior year quarter. Our G&A expense in the quarter included $2.9 million or 1.4% of revenue for severance and other expenses associated with our management changes.
A change in the value of deferred compensation balances due to the investment performance of the participant self directed accounts reduced G&A expense by $1.3 million or 0.6% of revenue when compared to the prior year quarter with an offsetting increase in interest expense.
Our interest expense for the fourth quarter was $4.1 million compared with $3 million in the fourth quarter of 2007. Three items contributed to this $1.1 million increase. First, as I previously mentioned, changes in the value of deferred compensation balances increased our interest expense by $1.3 million with an offsetting dollar for dollar reduction in G&A expense.
Second, we had higher debt levels in the third quarter as our revolver balance was $23.8 million at the end of the quarter. At the end of the prior year quarter, we did not have any borrowings under the line. However, it should be noted that we reduced our revolver balance by $12.9 million since the end of the third quarter of 2008.
Third, the impact of reductions in short term interest rates on the company's variable rate debt was a partial offset to the first two items mentioned. As we announced during the fourth quarter, we have amended the terms of our bank credit agreement to provide greater flexibility with respect to the financial covenants. We expect our revolver borrowings to be substantially reduced or completely paid off by the end of 2009.
Our capital expenditures in the quarter were $4.2 million including $2.7 million for new restaurants. In comparison, capital expenditures were $12.4 million in the prior year quarter. Capital expenditures for the 2008 fiscal year were $47.9 million compared to $52 million in the prior year.
We expect our capital expenditures in the 2009 fiscal year to be between $15 million and $18 million.
And with that, I will turn the call over to Greg.
Good morning everyone. During the fourth quarter of 2008 we saw the negative trends that were evident throughout the fiscal year accelerate. These trends included volatility in the financial markets, risking unemployment rates and the aftermath of the housing crisis, all of which significantly curtailed consumer spending.
In addition, this past holiday season was one of the most difficult in recent memory for the retail and restaurant industry as consumers remained cautious about discretionary spending. In fact, they have brought their spending to a screeching halt.
However, even in this dismal environment, restaurants, and in particular O'Charley's Inc. provide a life necessity; great food and beverage along with the opportunity to be with friends, family and co-workers, and while same store sales in the industry is very soft, the number of guests who go out to eat every day remains strong.
We are focused on three things; driving sales by providing great food, beverages and service to our guests, controlling margins, and maintaining our financial flexibility. We believe that we are serving the best food in the casual dining segment and we have seen meaningful improvement in our guest satisfaction measurements throughout the year, and this is in an environment where the consumers' bar for quality has risen considerably. These improvement in guest satisfaction scores, gives us optimism for improving sales.
On the other side, we have taken several steps to keep our cost structure efficient in the face of lower sales levels including staffing reductions in our support centers, a company wide salary freeze and a redesign of our early benefit programs. I can assure our shareholders we are looking at every expenditure both inside and out of our restaurants.
In order to maintain our financial flexibility, we have reduced our capital expenditure plans for 2009 to between $15 million and $18 million from the $48 million in 2008. The amendment to our revolving credit facility announced during the fourth quarter provides additional flexibility during these uncertain times.
These steps followed the other actions taken earlier in the fiscal year which included the deferral of our restaurant rebranding program, a reduction in our restaurant openings and a suspension of the dividend and various other corporate cost saving initiatives.
Although the ongoing economic downturn has impacted all of us in casual dining, we remain confident in our industry's long term future and particularly in the strength of our brands. As I implied a moment ago, dining out is engrained in the American lifestyle.
The consumer will continue to seek out those restaurants that offer unique, high quality food in a comfortable family oriented environment, delivered with outstanding service. We believe that all three of our concepts offer compelling values and are emerging as destinations of choice for the consumer.
While there have been a few positive signs of late, most notably a decline in gas prices and a stabilization of selected commodity costs, it appears that it will take some time for the economy to recover and for consumers to regain confidence. Judging from recently released government statistics about GDP, housing sales and employment among others, it is also difficult what the present economic stimulus package will be and whether it will be effective.
As I noted earlier, we have taken and are continuing to take a number of steps to adjust to this difficult economic environment. We remain focused on managing cash and reducing our debt. I do want to emphasize that we are mindful of carefully managing our capital. We are just as focused on operating inviting, modern and well maintained restaurants.
We will not compromise our service standards or the quality of the food we serve for the short term gain, and while you might think that our cost control efforts have had a negative effect on our guests, we continue to see guests' experience scores improve.
We continue to believe that there are more opportunities in the management of our restaurant margins. In 2009 business plan, we'll make further use of the tools and systems we have for managing food, labor and beverage costs to a theoretical cost which have been ultimately useful as sales have declined.
Additionally, we continue to place strict controls on overtime hours and all three concepts are working closely with the O'Charley's team cause, Pennies for Plates, a program to uncover opportunities to improve plate cost while improving or maintaining quality.
Theoretical labor costs or TLC has helped us match our labor scheduling more closely with guest traffic patterns, and we have added incremental bonuses for improving guest satisfaction scores to highlight the importance to our managers.
All three of our concepts are re-emphasizing service tips for hosts, servers and bartenders. Despite the fact that we have deferred the rebrands, the service standards that we have had, were so successful for project Revolution and Dress to Nines has been rolled out at all of our restaurants.
Now let me know discuss with you the plan to drive profitable sales at each of our concepts. We understand our guests need to manage expenses during these challenging economic times and as a result; all three of our concepts are focused on delivering great food and value for the money.
For O'Charley's concept, we have sharpened our value message as we continue our focus on the great food and beverage offerings which we believe are the best in our segment. As we previously reported, O'Charley's won the 2008 nation's restaurant Menu Masters Award in a category of best menu revamp. O'Charley's was ranked fourth in Restaurant Institution Consumers survey and O'Charley's was nominated for various Cheers Magazine awards categories for unique beverage offerings.
During the fourth quarter we concluded our All Stars promotion and introduced our Together for the Holidays, the fifth promotion of 2008. This promotion allowed us to highlight some of the great tasting new products including the Apple Crunch Salad and Bacon Cheddar Steak trio and O'Charley's good time planners program continues to build momentum especially over Super Bowl weekend and had generated positive guest feedback.
On January 13, we launched our first of five promotions of 2009. The Made for You menu features excellent new items including Southern Fried Chicken Taco's and Chili Cheese Twisted Chips which is an extension of our original Twisted Chip appetizer, both with a price point of $7.99.
We have also created two great new beverages that are highlighted in this limited time offer, a non-alcoholic Cinnamon Roll Milkshake and our Firefly Sweet Tea Martini. On February 2, we expanded our $20.00 meal deal by adding new menu items and making this value offering available each week Monday through Wednesday. On February 16, we will launch a new menu with several great new items with particular attention to Sunday brunch.
Now turning to Ninety Nine, up until this year, the Ninety Nine restaurant concept has had positive same store sales since our acquisition in 2003. I think it's notable because it is a record that few others in the industry can match. Unfortunately, no area of the country has been spared from the recessionary pressure and the New England region has been particularly hard hit which resulted in a downturn turn of sales at Ninety Nine.
So just like O'Charley's, Ninety Nine is communicating their value message as the best deal in town as we continue to focus on the great food and beverages at Ninety Nine. During the fourth quarter, we concluded our Incredible Indulgent Flavor promotion which featured new menu items like Chicken Imperial, Butternut Squash, Tortilachi[ph] with Grilled Chicken, Steak Burger menus and Calypso Coconut Shrimp appetizer with a Molten Chocolate Latte Cake.
Our Deliciously Comforting Deals promotion began in January and continues through March 1. This promotion which features two great deals to choose from, a selection of entrees starting at $9.99 or three course meal starting at $12.99 by adding a Bistro salad or soup and a petite treat dessert.
There are four delicious new entrees and several new beverages. This promotion is being supported with a chain wide free standing insert which includes free coupon offerings.
I have the LTO's and menus for both O'Charley's and Ninety Nine in front of me and I've obviously eaten a lot of these new items and have to saw, "Wow. I'm really impressed with what our culinary and marketing teams have put together."
Both concepts got positive response from radio and television campaigns in 2008 as well as our focus on internet and local restaurant marketing. We will continue with that approach in 2009, obviously with a particular emphasis on the strong value equation.
In reviewing the performance for Stoney River, the sales decline at Stoney River reflects the ongoing pressure on upscale and posh casual restaurants associated with the volatile economic environment. Stoney River has always been a more affordable Steak House compared to many of the more high profile upscale Steak Houses. We plan to place more emphasis on communicating that message in 2009.
In December, we offered our guests a $25.00 gift certificate for every $100.00 in gift cards purchased. In 2009 we will continue to deliver value with $25.00 offers to members of our Red Canoe Society as well as to the guests dining in restaurants with bounce back opportunities.
In early November, Stoney River opened its newest location in Annapolis, Maryland that was part of a recent expansion of the Westfield Mall where we are serving lunch and dinner.
No one knows how long this recession will last, however our top priority as an organization remains increasing profitable traffic over time. The execution of our strategies, aligned to the current environment, improved communications of the value and great food in each of our concepts, combined with proactive balance sheet management, we are confident that our company is well positioned to deliver profitable growth over the long term.
As you know, this will be the last time that I have the opportunity to address you in this form, for I will be retiring from O'Charley's this month. Larry Hyatt will serve as interim CEO as a nationwide search is underway for a permanent CEO.
This was a difficult decision for me, however I'm leaving the company with a very good business plan for 2009 and the best senior management team in the industry, and quite frankly what I'm most excited about is the strong esprit de corps in the organization that I can recall in recent years and this is even in the face of a difficult environment.
I'll look forward to eating in my restaurants as a guest and rest assured I will continue to be a shareholder of this company. It's been a privilege to work at O'Charley's over the past 25 years. The entire O'Charley's family is very close to me and I have a great deal of confidence in their ability to lead the company in this difficult economic environment through their passion to serve.
I give my sincerest thanks to all my co-workers for their support during my career and I also wish to thank our shareholders and the investment community for your interest in our company.
Now I'm going to turn the call so we can go through questions.
(Operator Instructions) Your first call comes from Meredith Fowler – Wachovia Securities.
Meredith Fowler – Wachovia Securities
Based on your costs that you've had what do you expect for the overall food inflation in 2009 on a purchase end basis?
We've not given specific guidance for 2009, but as noted in my prepared remarks, we saw significant softening in the market for food commodities in the fourth quarter and we took advantage of that softening to lock in our pricing for the current fiscal year.
With that locked in pricing which includes over 70% of our estimated beef requirement and over 90% of our estimated poultry requirement, 95% of our pork requirement and half of our expected seafood requirements, we expect our beef and seafood prices to be lower in 2009 than they were in 2008 and expect our pork and poultry to show increase in the low to mid single digits.
Without being very specific, we expect on a constant mix basis that we will see food price increases in the relatively low single digit range in 2009 versus 2008.
Meredith Fowler – Wachovia Securities
Can you just talk about how same store sales have been trending so far in Q1?
We really do not give our periodic same store sales information. We report that on a quarterly basis. Certainly the weather during the first quarter has been pretty touch particularly in New England and we also saw a lot in the Ohio market. But as I said earlier in my comments, the traffic in general in the restaurant industry remains strong. Restaurants are reporting numbers, most restaurant companies in the single digits.
So we still have pretty strong traffic. I think as we get a little further in the year, we'll get a little more clarification about where this economic prices, gasoline prices and so on. I still remain optimistic that we're going to see improvement in sales in our company and others as well.
Your next question comes from Jeffrey Omohundro – Wachovia.
Jeffrey Omohundro – Wachovia
Greg, I want to wish you all the best in your future endeavors. It's been a pleasure working with you. My question, I wonder if you could perhaps touch on some of the traffic building initiatives such as the new menu roll out for O'Charley's? You mentioned that the focus there is on some changes at brunch but are there other changes that are anticipated in that menu? And perhaps you could talk a little bit more about promotional initiatives around building traffic at O'Charley's.
Thank you for your kind words. There's really more than I can talk about on this call here but I can give you an overall taste. Obviously this is an environment where value comes from food and service but quite frankly, people are looking for deals. So we are doing some discounting during the current quarter. We've done some in the past. We're trying to make sure that it's as targeted as possible.
As I mentioned on the early part of the week at O'Charley's the $20.00 meal deal is a great opportunity. We've got certain selected items that we are focused on during those days, and we're using a placement on our table to do that. We also have done some offerings with this new menu at O'Charley's with a $5.00 off $20.00 minimum food purchase.
LTO and the new menu has some fabulous items on it, particularly the Chicken Tacos are a great item and the Twisted Chip which has really become kind of our Blooming Onion Head at O'Charley's is a great product as well, and those products are selling at $7.99. So we're very excited about that LTO at O'Charley's.
The new menu, I'll stay at O'Charley's for a minute, then I'll go to Ninety Nine. The new menu at O'Charley's has a number of new brunch items. Brunch has always been an extremely period for us, Sunday Brunch. We think that there's still opportunities there. The environment really is a special occasion environment today.
A lot of people are looking for opportunities to go out to celebrate anniversaries, after church, birthdays, things like that. So we'll make sure on Sunday Brunch that we've got a broad range of items. We test those items and they're very popular.
There are a few other changes in the menu. The overall concept of the menu remains the same. Some pricing adjustment. We did take pricing at both concepts last fall in the fourth quarter, but the general look and the feel of the menu remains the same, focused on the quality of our food.
In terms of Ninety Nine, the Ninety Nine currently LTO's again has some great items on it, in particular focused on the Deliciously Comforting deals starting at $9.99. We are doing a $5.00 off there with $20.00 and we're also doing one with our to-go, which is the first time we've done that and have gotten some good responses.
Then the three course meal which starts at $12.99 gives you an opportunity to pick either a super salad, a Bistro soup of the day, you pick one of four entrees which a couple of them are new entrees, and then a small dessert. So that's been a very positive hit.
There's lots of other things that are going on that we're using. Internet marketing, we've had a lot of people signed up on that and that continues to be a way to direct communication about things that we're doing in our restaurants. Local store marketing plan very focused around the restaurants.
A number of other value messages, we've got TV going on in O'Charley's with a new spot kind of in line with the humorous approach that we took last year in a number of our ads and in utilizing radio in both concepts with a similar kind of approach and a value message.
A lot of words and comments there; certainly I'd be happy to go into a little more detail with you off line but that's the kind of overall big picture of what we're doing.
Your next question comes from Kenneth Bann – Jefferies & Co.
Kenneth Bann – Jefferies & Co.
I was wondering with the increased promotions in combination with some of the price increases and maybe the lower food costs, do you expect even with the greater promotions that you can keep your food costs as a percentage of sales sort of in line with where it is now, or do you still think you can still lower it as some of those food costs come down and have you engineered the menu in those items to maybe have lower portion sizes so that you can keep those costs under control even though the prices are lower?
First of all, I'll have to again mention that we're not offering specific guidance for 2009 and in particular are not offering guidance for the food costs as a percent of sales for '09 versus the prior fiscal year.
We have taken the whole notion of menu engineering very seriously over the past few years and when we look at promotion, look at price increases, look at menu changes. We are basically doing it in a way to attempt to maximize gross margin dollars. Again, this is an environment where the consumer is very value conscious so we have to weight the effect of maximizing gross margin dollars per customer with the objective of maximizing the number of customers who are coming into the restaurant.
Our challenge in 2009 as well as for most casual dining companies is going to be to drive traffic. We think with our great food and beverage, great service and with more of an emphasis on value in 2009 that we have a good shot of doing that. But again, recognizing this is a difficult environment.
I would just add to Larry's comment, is that the team is really focused on all of these LTO's in both these concepts at O'Charley's today, and what is the plate cost of those items and have done a great job of coming up with some great tasteful items at lower food cost levels. So that's a real positive.
Second is, Larry Taylor and the team at both concepts working obviously working the concepts' marketing teams and operators, have dismantled just about every item on our menu and continue to do that, and we found some ways to re-engineer some of the menu items so that several changes in product, several changes in some of the product quantities, but still giving a bountiful array of items, good flavor profile.
We tested those items with our guests and got positive feedback. So I think the engineering word is probably the best focused, a laser like engineering of those items gives us some optimism for being able to control those costs and drive guest traffic.
I'll just add that guest satisfaction scores, we've seen anywhere from 200 to 500 basis point improvements in categories and overall and in this is in an environment where consumers definitely raise the bar on what their expectations are in terms of price and value.
Kenneth Bann – Jefferies & Co.
Is it still your primary focus on paying down debt? You mentioned you expect to be out of the revolver by year end, but is there even more of an emphases to reduce debt even further than that and would you buy back bonds in the open market?
A couple of ways of answering that. We have three primary focuses going into 2009. The first of those is to drive sales and drive customers by providing great food, beverage and service at what the consumer will perceive as a value.
Our second priority is focusing upon margins. Our third priority is maintaining our financial flexibility which includes paying down our revolver balance. With the restriction that exists on our revolving line of credit, we do not have the opportunity to buy back bonds so that is currently not a part of our plans for 2009.
Your next question comes from Bryan Elliott – Raymond James.
Bryan Elliott – Raymond James
First a clarification, did I hear correctly that with asset write downs, did you give us an estimate of the depreciation reduction for next year of $1.5 million? Did I hear that correctly?
Bryan Elliott – Raymond James
Just looking at the G&A line, I know you're not giving any real line by line guidance or specificity, but let me ask the question this way. It looks like the underlying run rate in G&A was about $9.5 million in the fourth quarter after all the one times are adjusted for. The question is, is that a reasonable number from which to make independent judgments about G&A levels next year in '09?
Not commenting upon how you might get to the underlying rate because they're both cash and non cash items. They are non comparable and comparable items that are running through the G&A line. We spoke about severance costs in the forth quarter of $2.9 million. There is the deferred compensation impact which both had an impact on the fourth quarter and on the full year, and we additionally had non cash compensation which is stock based compensation which was $2 million in the fourth quarter and $5.9 million for the full fiscal year.
So depending upon which of those you might include in the underlying run rate or you might not include in the underlying rate, it's kind of hard for me to comment on the $9.5 million number, but I would say, is that we expect our ongoing cash G&A expenses on a run rate basis for 2009 to be probably at or below the level of the fourth quarter of 2008.
Bryan Elliott – Raymond James
A quick clarification, the valuation allowance for the deferred comp that was a non cash benefit contra expense in G&A in Q4 and it was offset as a non cash expense in addition to the interest line, correct?
It is correct, yes.
Your next question comes from Dustin Tompkins – Morgan Keegan.
Dustin Tompkins – Morgan Keegan
Looking at the balance sheet in the press release, property and equipment looked like it declined by about $22.5 million from last quarter and that seemed to be greater than the asset impairment noted in the press release. Was there some other, was there a sale of some other assets or something else that might have driven that number?
With depreciation running at about $50 million run rate, you basically have to factor than in to the fixed asset number versus the prior year end so that you both have $17 million of non good will impairment charges in the 2008 fiscal year. As I noted in my prepared remarks and then depreciation for the year as is indicated in the financial statements was about $51 million which was about $11.9 million in the fourth quarter.
Additionally, we did have as I noted in my prepared remarks, capital expenditures of $4.1 million which would have been an increase. So basically factor those in and it should get you to the change in fixed assets.
Dustin Tompkins – Morgan Keegan
One other question on the gift cards. You mentioned the gift cards were up in the quarter. Was that driven by new sales channels or was it driven by in store gift card sales?
We made a major focus both on the in store gift sales as well as on the retail sales channel. We saw a decline in in store gift sales that was more than offset by an improvement in the retail channel.
There are no further questions at this time.
As noted earlier, Greg will be retiring from O'Charley's later this month after more than 25 years with the company, the last 16 of which he served as our Chief Executive Officer. In fact, Greg was the company's first employee and under his leadership, O'Charley's has grown to three great brands, 371 restaurants and almost 25,000 employees providing great food and great service to guests in 28 states.
On behalf of those 25,000 team members, as well as Greg's fellow directors, I would like to express our appreciation and our gratitude for the many contributions he has made to this company. I know that they join me in wishing you every success in your future endeavors.
And finally, I would like to thank everyone who participated on today's call. We greatly appreciate your interest in O'Charley's. If you have any additional questions, Greg and I stand ready to answer those and we look forward to speaking to you in the future. Again, thank you very much.
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