O'Charley's Q3 2007 Earnings Call Transcript

Nov. 1.07 | About: O'Charley's Inc. (CHUX)

O'Charley's Inc. (NASDAQ:CHUX)

Q3 2007 Earnings Call

November 1, 2007 11:00 am ET

Executives

Gene Marbach - IR Makovsky & Co.

Gregory Burns - Chairman and CEO

Larry Hyatt - CFO

Analysts

Amy Greene - Avondale Partners

BobDerrington - Morgan Keegan

Chris O'Cull - SunTrust

Jeff Omohundro - Wachovia

Matt DiFrisco - Thomas Weisel and Partners

Barry Stouffer - BB&T Capital Markets

Steve Anderson - MKMPartners

Bryan Hunt - Wachovia Securities

Matt DiFrisco - Thomas Weisel Partners

Operator

Good morning. My name is Takuya, and I will be yourconference operator today. At this time, I'd like to welcome everyone to theO'Charley's, Inc. Fiscal 2007 Third Quarter Conference Call. All lines havebeen placed on mute to prevent any background noise. After the speakers'remarks, there will be a question-and-answer period. (Operator Instructions).

It is now my pleasure to turn the floor over to your host,Mr. Gene Marbach. Sir, you may begin your conference.

Gene Marbach

Thank you, Takuya. Good morning, all and thank you forjoining O'Charley's third quarter 2007 conference call. On the call today areGregory Burns, Chairman and Chief Executive Officer; and Larry Hyatt, ChiefFinancial Officer.

The order of business this morning will be some briefprepared remarks from Greg and Larry about the third quarter and the outlookfor the balance of the year. And then we'll open the call to questions. In thetime allotted, we will take as many questions as possible.

Before we begin, I would like to note that certainstatements made by O'Charley's management on this call may be deemed toconstitute forward-looking statements made pursuant to the Safe Harborprovision of the Private Securities Litigation Reform Act of 1995. Theseforward-looking statements maybe affected by certain risks and uncertainties,including risks described in the company's filings with the Securities &Exchange Commission.

In light of the significant uncertainties inherent in theforward-looking statements included in the company's comments, you should notregard the inclusion of such information as a representation that itsobjectives, plans, and projected results will be achieved. And the company'sactual results could differ materially from such forward-looking statements.

I would now like to turn the call over to Mr. Gregory Burns,Chairman and Chief Executive Officer of O'Charley's. Please go ahead, sir.

Gregory Burns

Thank you, Gene. I want to welcome our many shareholders andteam members to our third quarter conference call. As most of you know, theenvironment we find ourselves in is a difficult and challenging one given theincreasing problems in the housing market due to the subprime mortgage issue,rising energy prices and the outlook for increased commodity prices and fuel cost.

Like many of our peers, we're not immune to the effects ofthese problems, as evidenced by our results for the third quarter. In reactionto this, we've witnessed an increase in promotional activity in all segments ofthe restaurant industry. While we are actively promoting the great price valueat all three concepts, we have elected not to start wide spread discounting andcouponing.

Despite this difficult environment, we continue to makeprogress in our turnaround and transformation of the company. While Larry willdiscuss our financial performance in greater detail later in the call, let megive you some highlights from the quarter, which indicate that we are headingin the right direction.

First, after adjusting for all the items discussed in thismorning's press release our adjusted earnings per share nearly doubled to $0.16per share versus the prior year period.

Second the average check increased at all three of ourconcepts.

Third, we improved restaurant-level margins, which we defineas restaurant sales minus cost of food and beverage, payroll and benefits andrestaurant operating costs by 120 basis points in the third quarter of thisyear versus the prior year period. Even with the guest count declines,restaurant-level margins in the O'Charley's concept increased, which reflectsthe management teams focus on grabbing more profitable sales and controllingcost.

Given the consumer environment, competitive pressures andincreases in food and labor costs, we believe we are among the very few restaurantcompanies that have seen such improvement.

Fourth, we continue to be encouraged by the performance ofNinety Nine, which again posted an increase in same-store sales in the highlycompetitive New England market. While confrontingthe challenges of the current environment, we will continue to execute ourstrategic plan to transform out company. This management team is strategicallyagile, and have taken and will continue to take the appropriate steps toposition the company to weather these difficult times.

We remain focused on making sure we understand our guestswho visit our three restaurant concepts and the things that affect our dailylives, as well as on changing and improving those things within our control.

We continue to approach a task of transforming this companyaggressively and with a great sense of urgency. We remain fully committed tobeing the best-of-class in all our restaurant operations. It would be very easyto alter this commitment in favor of both discounting our sales and reducinginvestment spending on our people. But we will stay on the course and continueto focus on strategies and initiatives on three key elements, build a winningteam, improving the box economics and enhancing guest satisfaction.

Let me talk about the progress we have made in each of theseareas. First build a winning team. Over the past two years we havesignificantly strengthened our executive and senior management teams. Anotherexample of this is our recent hiring of Jay Allen as Vice President of Design andConstruction, a new position for the company.

Jay will be responsible for all the company's design andconstruction activities for all three concepts and company operated andfranchise restaurants and most importantly, he will support a more aggressiverollout of our "Project RevO'lution" and "Dressed To theNines" rebranding initiatives. Jay has a 20 year record of success indeveloping, planning and construction management in the restaurant and hospitalityindustry.

Today, we have one of the best and most experienced teams inthe restaurant industry. Our focus has now shifted to further strengthen ouroperations teams in the field. During the quarter, we restructured to give resourceorganization to better align our resources with our field operations,organization and to reduce G&A cost.

As part of these changes, Dr. Steve McMillan was promoted tothe new position of Vice President of Training and Human Resource Developmentand Bob Luz was promoted to the new position of Vice President of POD Human Resources.To their efforts we are assessing our operations teams, targeting the developmentneeds and putting the appropriate training in place to address those needs.

The success of our company depends on demonstrating the passionto serve with every guest at every restaurant, every day. This requiresexecution on everyone's part from our [hourly] team members to me. To furthersupport, our restaurant operations we have increased the number of operationsdirectors, which will reduce the number of restaurants they have to manage andwill improve our oversight by bringing resources closer to our team members andguests.

While all these changes may not impact our financialperformance over the next quarter or two, they will position us over the long-termin our quest to be best of the class restaurant company in the industry, by furtherimproving our day-to-day execution and our team member development.

Now, let me discuss how we're improving box economics, whichis the relationship between the investment in our restaurants and the sales andrelated operating margins that those restaurants must produce. Ourrestaurant-level margins as a percent of restaurant sales improved during thequarter as we reduced food and beverage and restaurant operating costs as apercentage of restaurant sales. The improvement in our food and beverage costs isdue to our higher check average, as well as the menu engineering applied to ourlimited time offers.

We are in the process of completing our supply chainconversion, which should be accomplished within the next few weeks. It has gonewell and we are confident that we will realize additional savings once thetransition is complete. We also believe that we have opportunities to reduceour labor costs as a result of our new labor scheduling process, which we arein the process of rolling out.

Basically results so far, it will have a positive impact notonly in our labor costs but will also improve guest satisfaction and assist us inproperly staffing the restaurants according to sales activity. One element ofimproving the box economics is driving profitable sales. Our same-store salesand guest counts decreased at O'Charley's average check increased by 4.8%. The declinein guest counts was expected as we continue to phase out the "Kids EatFree" program.

Given the challenging consumer environment and thecompetitor discounting the past few quarters, the impact on guest counts ofphasing the "Kids Eat Free" has been greater than we initiallyanticipated. However, let me emphasize that the "Kids Eat Free"offering is not consistent with the position of the brand and its phase out hasenhanced O'Charley's consumer appeal and financial performance.

We began to phase out the "Kids Eat Free" duringthe second quarter of 2006 and reduce its availability by approximately 80% atthe end of the third quarter this year. We expect to complete the phase out bythe middle of 2008. The resulting increase in average check demonstrates that thecore O'Charley's guests buys or focus on providing great food with unique flavorprofiles along with higher level of service. At the same time our menu continuesto offer our value conscious guest a great deal of variety in terms of pricing.

In summary, Jeff Warne, O'Charley's Concept President andhis team continued to do a terrific job in enhancing the brand, improvingexecution and the quality of our menu offerings, while at the same timeimproving margins.

Now, looking at the Ninety Nine's performance for the thirdquarter, same-store sales increased 1.5% and also experienced restaurantoperating margin improvement over the quarter. Additionally, project "DressedTo the Nines" continues to demonstrate solid and consistent success. Giventhe challenging consumer and competitive environment, our continued positive same-storesales performance serves as a testament to the strength of the Ninety Nineconcept in New-England.

In addition, in September Ninety Nine was announced as thisyear's national winner of the Restaurant Neighbor Award during the NationalRestaurant Associations annual public affairs conference in Washington DC.

The NRA and American Express launched the RestaurantNeighbor Award nine years ago to recognize restaurants committed to making apositive contribution to local communities everyday. This is a perfect exampleof our company's passion to serve our community. John Grady, the Ninety Nineconcept President and the management team have done an outstanding job inpolishing the Ninety Nine concept and improving execution and performance.

Now, third quarter sales for Stoney River Legendary Steaksincreased 20.5% to $8.5 million, which reflects a sales decrease of 0.8% at theseven restaurants included in the same-store sales space, and sales at newrestaurants at Nashville, Tennessee; St. Louis, Missouri and Atlanta.

As we did at O'Charley's and Ninety Nine, we've elected togreatly reduce special offers and promotions this year and that contributed tothe guest count decline, particularly in our weekend business and among ourmore price sensitive customers. We're currently seeing an increase in theamount of promotional offerings in many of the upscale steak house concepts.

Tony Halligan, Concept president and his team continue tostrengthen its position and broaden its appeal to the introduction of new menuofferings and service enhancements. We're poised for more aggressive expansionof the concept.

Our "Project RevO'lution" and project"Dressed To the Nines," rebranding and the use of new prototypedesigns in our new restaurant development are playing a critical role inachieving our goals to improve box economics, as well as achieving higherlevels of guest satisfaction. During the third quarter, we completed five"Project RevO'lution" rebrandings at O'Charley's and 11 "DressedTo the Nines" rebrandings at Ninety Nine restaurants.

Since the inception of these rebranding initiatives, we havecompleted 23 "Project RevO'lutions", and 36 "Dressed To theNines" rebrandings. We are enthusiastic about the response of our teammembers and we continue to be pleased with the results. We plan to complete anadditional six Project RevO's and 6 "Dressed To the Nines"rebrandings in the fourth quarter of 2007 and are finalizing our plans toaccelerate the pace of the rebrandings in 2008.

Our third strategic focus is achieving high guestsatisfaction. Building guest loyalty by driving the intense return is criticalat this time. We will be guided by the principles that the best marketing takesplace within our four walls. We remain focused on driving guest satisfactionthrough A Passion To Serve, the operating philosophy we introduced last year.

Now in order to achieve high guest satisfaction has beenvery important for us to better understand our guests in order to create a valueproposition that will build brand loyalty while differentiating our conceptsfrom the competition.

We spend a considerable amount of time in all three concepts,evaluating our guests to better understand who they are and their spendingpatterns in order to deliver the value that they are looking for when they dineout. Additionally, this knowledge has been a key behind developing our newprototypes and a strategy behind "Project RevO'lution" and"Dressed To the Nines".

It's not a remodeling program, we are repositioning ourconcepts with more polish, more attractive and better executed restaurants inoperations, which will result in further improvements in the guest experience.

Now, as noted earlier, driving guest satisfaction means ahigher level of execution along with the menu offerings which feature uniqueflavor profiles. The food we are offering today is the best that we have everhad in the company's history in surge to differentiate our concepts from ourcompetition. I'm particularly impressed with the efforts of our highly creativeteams that include Stephen Bulgarelli, Vice President of Culinary DevelopmentO'Charley's Concept; George Tagarelis, Vice President of R&D at NinetyNine; and Larry Taylor, our Chief Supply Chain Officer and his teams. They areworking together to develop new products to enhance our menu offerings. The LTO'sthat are currently planned for the remainder of this year and next are terrificin plate presentation, food quality, page profile and price value.

In conclusion, our transformation plan is working and wewill continue to execute these strategies as I discussed earlier. For thebalance of this year and next, we will focus on the rollout of our "ProjectRevO" and "Dressed To the Nines" rebrandings while improving ouroperating cost offering great food with unique taste profiles and maximizingthe advantages of our new supply chain.

We understand the issues and are acting accordingly toimprove our performance during these challenging times. We remain focused ongenerating profitable sustainable growth and improving our operating margins,while enhancing shareholder value. We are pretty strong in the uniquerestaurant concepts, and we are committed to both innovation improvement andremain guided by our conservative fiscal policies that possess as a viable assetbase. And most importantly, we have a great team in place to succeed. I am veryproud of our 25,000 team-member success and what they do everyday to make our companysuccessful.

With that comment, I'm now going to turn over to Larry forcomments on our financial performance for the second quarter and our outlookfor the current fiscal year. Larry?

Larry Hyatt

Good morning, everyone and thank you, Greg. Before I beginour review of our overall results for the third quarter and year-to-date, Iwould like to discuss five items that are included in those results and thatimpact have comparability to the prior year period.

First, during the third quarter, we announced changes to ourhuman resources organization designed to strengthen support in the field andreduce cost. We also announced the hiring of new Vice President of Design andConstruction and changes to the operating organization in the O'Charley'sconcept.

Severance and relocation charges associated with thesechanges reduced income from operations by $2 million and reduced net earningsby $1.3 million or $0.5 for diluted share. These charges were not included inthe full year's guidance that the company issued in August, includingseverance, relocation and recruiting expenses recognized earlier in the year,such charges have reduced our year-to-date earnings by $0.07 per diluted share.

Second, results for the third quarter include impairmentcharges for one O'Charley's restaurant that we recently closed and for one Stoney Riverrestaurant and one Ninety Nine restaurant that are remaining open. For thethird quarter, these restaurant impairment charges reduced income fromoperation by $3.5 million and reduced net earnings by $2.2 million, or $0.10per diluted share. These impairment charges were also not included in the fullyear guidance that the company issued in August.

Third, as we announced and discussed with you previously,the company completed the sale of its commissary facility in the second quarterof this year and entered into agreement to outsource distribution, meat andpoultry processing, and other manufacturing operations. The transition isexpected to be completed in the next few weeks.

We indicated at that time, that we expected totalimpairment, severance and transition charges relating to these changes ofbetween $0.27 and $0.29 per diluted share, and included this amount in ourguidance. We now expect these charges to total $0.30 per share for the fullyear. During the third quarter of 2007, such charges reduced income fromoperations by $1.4 million, and reduced net earnings by $0.9 million or $0.04per diluted share.

Fourth, when we initially offered our guidance for the 2007fiscal year, we noted that impairment; pre-opening and depreciation charges forthe company's rebranding initiatives were expected to have a negative impact onthe company's financial results. Many of you have asked me to quantify thisimpact, and we have now done so.

For the third quarter of 2007, impairment, pre-opening anddepreciation charges for "Projects RevO'lution" and "Dressed Tothe Nines" reduced income from operations by $1.3 million and reduced netearnings by $0.8 million or $0.03 per diluted share. On a year-to-date basisthese charges reduced income from operations by $3.1 million and net earningsby $2.2 million or $0.09 per diluted share. For the full 2007 fiscal year, weexpect such charges to total $0.13 per diluted share.

Fifth, when we established our bonus plans for the 2007fiscal year, we and the Board set aggressive targets for financial performance,which we now believe we will not achieve. Therefore, we have reversed most ofthe bonus expense that we accrued in the first and second quarters, whichincreased our income from operations in the third quarter by $1.6 million andincreased our net earnings by $1 million or $0.04 cents per diluted share.

When taken together, these five items reduced our incomefrom operations in the third quarter by $6.5 million and reduced our netearnings by $4.1 million or $0.18 per diluted share.

As reported, the company's income from operations in thequarter was $1 million and our net loss was $0.4 million,or $0.02 per diluted share. When adjusted for these five items, however, ourincome from operations in the quarter was $7.6 million or 3.4% of revenue andour net earnings were $3.8 million or $0.16 per diluted share.

In the prior year quarter, income fromoperations was $6.1 million, or 2.8% of revenue, and net earnings were $2.1million or $0.09 per diluted share. Results for the prior year quarter includednet gains from asset dispositions of $0.02 per diluted share andimpairment, pre-opening and depreciation charges for the rebranding initiativeof $0.01 per diluted share.

I will now discuss our operating results for the thirdquarter of 2007. Revenue rose in the quarter by 0.9% to $220.9 million from$219 million in last year's third quarter. Same-store sales at our O'Charley'srestaurants decreased by 1.7%, which was the result of an increase in averagecheck of 4.8%, offset by a decrease in guest counts of 6.2%. Average check forcompany-operated restaurants was $12.69. Average weekly sales per restaurantwere $49,300 in the quarter, compared with $50,300 in last year's thirdquarter.

For Ninety Nine, same-store sales increased 1.5% in thequarter, which was the result of a 3.8% increase in average check, partiallyoffset by a 2.1% decrease in guest counts. Average check for Ninety Nine in thethird quarter was $14.66. Average weekly sales per restaurant were $53,300 inthe quarter, compared with $53,100 in last year's third quarter.

For Stoney River, same-store salesdecreased 0.8% in the quarter on a 10.2% increase in average check and a 10%decrease in guest counts. Average check in the quarter was $45.41. Average weeklysales per restaurant were $70,900 in the quarter, compared with $70,900 in thequarter compared with $71,300 in last year's third quarter.

Our restaurant level margin, which we defined as restaurantsales, minus cost of food and beverage, payroll and benefit cost and restaurantoperating costs was $37.6 million or 17.2% of restaurant sales, compared to$34.7 million or 16% of restaurant sales in the prior year quarter. This 120basis point improvement was the result of reductions in costs of food andbeverage, and restaurant operating costs as a percentage of restaurant sales,partially offset by increases in payroll and benefit costs.

Our cost of food and beverage was $63.8 million was 29.1% ofrestaurant sales in the third quarter of 2007, compared with $64.8 million or29.9% of restaurant sales in the third quarter of 2006. This 80 basis pointimprovement reflects the impact of our higher average check, higher margins onour limited time offers and lower costs for pork and seafood partially offset byhigher costs for most other food commodities.

As we previously have discussed, we have locked in ourpricing for virtually all of our remaining 2007 requirements for beef, poultryand pork. As we look ahead at our total projected needs for the 2008 fiscalyear we have written or verbal agreements, which we believe lock in our pricingfor approximately 90% of our estimated requirements for beef and approximately95% of our estimated requirements for poultry. Using a constant product mix ourlocked in pricing for 2008 is less than 2% higher for beef and between 8% and9% higher for poultry than the average prices paid during 2007.

Our restaurant level pay roll and benefit costs were $75million or 34.2% of restaurant sales in the third quarter of 2007, comparedwith $73.1 million or 33.7% of restaurant sales in the third quarter of 2006.This increase in labor cost as a percent of sales was primarily the result ofhigher wage rates and employee benefit costs.

Restaurant operating costs in the quarter were $42.6 millionor 19.5% of restaurants sales, compared to $44 million or 20.3% of restaurantssales in the third quarter of the prior year. This improvement was primarilythe result of reductions in repair and maintenance, supply and supervisorybonus expenses as a percent of sales.

Our general and administrative expenses, depreciation andamortization, impairment, disposal and restructuring charges and pre-openingcosts in the third quarter were all impacted by the five adjustment itemsdiscussed earlier.

The detailed information on the impact of these items isprovided in this morning's release. Advertising expense was $7.9 million or3.6% of revenue in the third quarter of 2007 compared with $6.5 million or 3%of revenue in the third quarter of 2006 reflecting the company's decision toincrease advertising spend, primarily at the O'Charley's concept.

Our net interest expense for the third quarter was $2.7million, compared with $3.2 million in the third quarter of 2006. This changefrom the prior-year quarter is primarily the result of higher earnings on ourcash and cash equivalents.

For the third quarter of 2007, the company recognized anincome tax benefit of $1.3 million, resulting in an effective tax rate appliedto the pretax loss of approximately 80%.

Based upon the company's anticipated full year results, theestimated effective tax rate applied to pretax profit for fiscal 2007 is 5.1%.Since this is lower than the estimated rate applied to the first two quartersof the year, the third quarter income tax provision includes a benefit from achange in estimate of $1 million, or $0.04 per diluted share to adjust theyear-to-date amount.

The third quarter income tax provision also includes abenefit of $0.3 million, or $0.01 per diluted share for the true-up of the 2006tax provision relating to the filing of our 2006 tax returns in the thirdquarter.

Excluding the impact of the five items discussed previouslythe effective tax rate would have been 22.5%, compared to a tax rate in theprior year quarter of 25.9%.

Our capital expenditures in the quarter were $13.3 million,including $4.2 million for new restaurants, and $6 million for "ProjectRevO'lution" and "Dressed To the Nines". In comparison, capitalexpenditures were $15.8 million in the prior-year quarter.

During the third quarter, we repurchased 1.9 million sharesof our common stock under the previously announced share repurchaseauthorization.

In this morning's release, the company revised itspreviously issued full-year guidance; we now expect to report net earnings perdiluted share of between $0.42 and $0.47 for the fiscal year ending December30, 2007. Included in this full year guidance is an estimated impact of $0.56per diluted share for the five items that I discussed previously.

Our projected results for the fourth quarter are based uponanticipated same-store sales decline of between 1% and 3% for O'Charley's, andanticipated same-store sales increases of between 1% and 3% for Ninety-Nine.For the full year, we expect to open five company operated O'Charley'srestaurants, and three Ninety Nine Restaurants. We expect capital expendituresin 2007 to be in the range of $50 million to $53 million.

Our guidance for the balance of the year does not reflectany impact for additional charges or expenses relating to decisions that thecompany may make as part of our transition efforts nor the impact of anyadditional share repurchases that the company may make.

And with that, I will turn the call back to the operator sothat Greg and I can answer your questions. Thank you very much.

Question-and-AnswerSession

Operator

Thank you. (Operator Instructions) Your first question comesfrom Amy Greene with Avondale Partners.

Amy Greene - AvondalePartners

Good morning guys, just a couple of quick questions. Did yousee any seasonality during the quarter? Did they get better as you movedthrough, anything you can comment about that, across the concept?

Gregory Burns`

Amy, not really from a seasonality side, I would say thatwhat we're seeing right now is a pattern of a lot of volatility, up and down,sometimes during the week and weekends, very affected by events that are outthere. Obviously, we were seeing some affect in New England with the Red Sox,which up sided, that the Red Sox does so arguments so on and so on at New England. But it does affect sales up there, but, notreally at this point.

Amy Greene - AvondalePartners

Are you seeing any material differences during the day aslunch? Is lunch weaker or has, it stayed pretty constant?

Gregory Burns

I would say that we're consistent in terms of this lunchversus dinner. Again, I think depending on where some special events fall, youmay see a slower lunch these days, after a big weekend or a holiday period, butit's pretty consistent. One thing we're seeing is to [Go], increases into [Go]sales. I think that kind of reflects peoples watching their expenditures, andalso some of the initiatives that we’ve done to focus on to [Go] sales of bothconcepts.

Amy Greene - AvondalePartners

Then last question on the "Project RevO’lution".Has the Board yet approved any additional O'Charley's units or is thatsomething they still are waiting to revisit and if you have you seen, are yougetting any closer to hitting some of those cost targets and everything thatwe’ve talked about in previous quarters?

Gregory Burn

Well first of, as we’ve said before Amy, as we go along withRevO’s and "Dressed To the Nines" that we’ve been pleased with theperformance that means that they’re achieving the hurdles that we have set outfor both concepts; roll outs of those projects. Having said that, we aretweaking both of those, and as we illustrated or discussed in this morningscall that we’re completing a number of those between now and the end of the year.

Also, my comment was that we expect a more aggressive rollout in 2008, but we haven’t finalized that capital outlay with the Board ofDirectors as we do every year as a part of our ongoing process for budgetapproval, but I’d certainly anticipate that you’ll hear a more detailed plan onour more aggressive roll out for 2008. Keep in mind also that the "DressedTo the Nines" still has six to nine months advance on the "ProjectRevO’lution" process. And so our promise in the past about that have notbeen an indication of lack of approval or excitement about Project RevO’s, ismore of a timing issue.

Operator

Thankyou. You're next question is coming from Bob Derrington with Morgan Keegan.

Bob Derrington - Morgan Keegan

Yeah.Greg, if I could stay on that topic for a second. I know that you've tried tolook at the "Dressed to the Nines" and the 'Project RevO'lution'particularly for the O'Charley's brand taking "Kids Eat Free" awayfirst before you comeback and you go through the reemerging process. Can yougive us any kind of perspective on has that helped the sales that you've seenfrom those stores relative to what your prior experience was?

Gregory Burns

Well, first off, we have had a mix bag on some of therestaurants. We did take "Kids Eat Free" up simultaneous with the"RevO" process and others we took it out outside of that, I will tellyou that "Kids Eat Free" certainly as my comments this morning and Ithink this is reflected in the environment that we are in. And then, certainlyhurt us from a guest count side more than we anticipated. And, again, I thinkit's entirely tied to the consumer environment.

Having said that, as we also noted this morning, we areseeing improvements in margins because we basically are loosing more onprofitable guests and seeing our check average go up longer term, as we get allthe way from "Kids Eat Free." Those older stores, we are seeingimprovement in sales the longer period that we get away from those opening. Butone thing I would say on the "RevO," certainly, it puts a lot ofnoise in a numbers but having said that, when your-- a lot of restaurants whenwe took "Kids Eat Free" out that had -- were high volume restaurantsinitially and then we did the "RevO" or as part of that did"RevO" and those restaurants continue to be high volume restaurants.

So, in terms of, our core customers coming in, we're stillseeing strong interest in the things that we're doing. And then, we're alsoseeing a cycle out of the guest satisfaction scores improvement in thoserestaurants, once we get over the counter the "Kids Eat Free" hurdleand the reaction from that.

Bob Derrington - Morgan Keegan

Greg, also, you mentioned in your comments, I believe youtalked about Stoney River a little bit. Onething that I am curious about Stoney, it sounds us though, the enthusiasm forthe brands certainly doesn't appear to a wane within your organization. Youknow, should we interpret some of your comments earlier that we might see alittle bit more aggressive development on the Stoney River Brand?

Gregory Burns

Well, of course, for Stoney Riverin restaurants that we opened two or three restaurants that would be due topretty aggressive, I think some of the other steak houses, upscale steak houseconcepts have pretty limited growth plans for next year. One thing about Stoney Riveris that we've cornered over the last year a lot of interest in developmentswhere some of the high-end casual diners are located. We opened in Atlanta with next toCheesecake and P.F. Changs and so on. And we have several in the Hopper thatwere in the final negotiations of leases are of similar type developments.

So, I mean our interest, I still believe, I think everyonewould agree that those brands are less immune to some of the economicsituations. You know, having said that, I think it is even reaching into theupscale and then polished a more upscale steak houses in upscale concepts overthe last quarter.

Bob Derrington - Morgan Keegan

Got you. And one last thing, Larry, could you recap for usone more time on the O'Charley's and the Ninety Nine brand, how many of that doyou have the remodels or re-imaging you have completed at this point?

Larry Hyatt

Sure. Bob. We have today; have completed 27 "Dressed tothe Nines" in the Ninety Nine concept. We have completed 20 RevO'lution inO'Charley's and to get to a question that you had previously answered. Those 20include 12 restaurants that had not had "Kids Eat Free" and balancewhere we have taken "Kids Eat Free" out.

Operator

Thank. Your next question is coming from Chris O'Cull withSunTrust.

Chris O'Cull -SunTrust

Good morning, guys

Gregory Burns

Chris, how are you?

Chris O'Cull -SunTrust

Doing well. Greg, my first quarter relates to what we areseeing in the industry right now. We are seeing a number of restaurantcompanies franchise or re-franchise their system just given that you needeconomics deterioration and I guess the presumption that franchisees may have alower cost of capital, has the company considered re-franchising some of the O'Charley's markets, and if not, why?

Gregory Burns

Chris, our long-term strategy is to look at that. Wecertainly understand the dynamics of those numbers. What we want to do first isget, kind of, foothold in the franchise markets. Obviously, we talked aboutsome of those in the past we have franchisee who actually is to open up arestaurant next week up in area of Pennsylvania,Sam Covelli. And he has another one under construction.

So the answer, but not in, over they say a course of next probably18 months. You know, one other things that we also would like get done is theseRevO' and "Dressed to the Nines," I mean they have a lot of energyand focuses on that. And we believe that would enhance, if we decide to do a re-franchisingprogram that would enhance the value of those franchised re-franchisedrestaurants.

Chris O'Cull -SunTrust

Okay. And then, you may have mentioned this in the call butLarry, would you tell us how the stores that removed "Kids Eat Free"over a year ago how they are coping, in terms of, guest counts and checks?

Larry Hyatt

Chris, we are finding that for the restaurant where we removed"Kids Eat Free" so we are basically coping now with the balance ofthe concept. They are basically performing consistent with the non-RevO' storesthat are the balance of the concept.

Chris O'Cull -SunTrust

Okay, great. And then, lastly, Larry, the beef contracts youguys entered into in '08 seem to reflect much lower inflation or less inflationthan what the futures market suggest today. Were there any changes in like theproduct specs that may have kept inflation, the inflation rate low?

Larry Hyatt

Chris, no. That, quite honestly, reflects a great job on thepart of Larry Taylor and the supply chain team and additionally reflects theadvantages of the relationship we now have with the amounts that he made withour outsourcing processes.

Operator

Thank you. Your next question is coming from Jeff Omohundrowith Wachovia.

Jeff Omohundro -Wachovia

Thanks. I am just mainly interested in talking a little bitabout the value equation you are looking at right now. Just thinking aboutwhere average check is moving, thinking about the steak promo right now.Thinking about pulling "Kids Eat Free" out, how that impacts thatequation and really all that in the context of a growing bar segment, casualdining segment, where we're seeing increases in discounting and price drivenpromotional efforts. So, perhaps, you can share with us a little bit of yourthinking around guest aspects and value given these dynamics.

Gregory Burns

Well, Jeff, I have probably not enough time on this call togo into the in-depth discussion and I know some people would like to do this.And this is the strategy that we started out several years ago. We went througha lot of work in looking at both brands O'Charley's Ninety Nine and long-term,how we can both increase sales and at the same time improve margins, and buildbrand loyalty and guest satisfaction.

Certainly, the current state of the consumer environment isnot something that I think, lot of us predicted. And there is no doubt that thefuture with Notting Hill presumed to be probably $100 barrel of oil, is goingto get any easier. I do think that you got to go back and look over thelong-term for lot of us in the industry, when we get into the coupon anddiscounting thing. At the end of the day it may drive sales for a period oftime but reduces our operating profit.

And on the flip side, if you go totally away and buildmarket to brands, you can improve margins but have reduction in your salesperformance. So you got to find a balance. Currently at O'Charley's, we areusing TV, radio, some direct mail, and e-Club, which is our Internet to lot ofour members and we've got nearly 700,000 folks signed up and we're using alsothe Internet to tell people about the value in our menu. We're highlightingitems at 899. We also have a good portion, almost 38% of our media buy isfocused on our 699 based with almost soup and salad, bowl and bread atO'Charley's.

Our LTOs also reflect, Jeff, price ranges in the 899 all theway up to 1799 price range so we got a large variety of products there, samething can be said at Ninety Nine an LTO that were just about getting ready tocomplete that has items in the 699, 799 up to 12, 1499 range. So we have a widevariety of items. We're also using the radio, direct mail, and also doing an e-Clubthere.

And one of the questions you asked about the currentpromotion need and we are not the only ones that are running stake promotionsduring this period of time. And traditionally, going into the holiday period weexpect to see check average go up, because of diners going out. I still believethat’s going to happen even though we are going to probably have a smallerretail environment. So during this period of time we think the appropriatehighlight at both concepts at Ninety Nine and O'Charley's from a variety side.

And in my last comment, as going into next year while wecontinue to focus on the value message we’ve got some terrific LTOs with somegreat food quality, items and great price value that are going to come out in2008 that we also think will enhance our guest PO for our food. We will beusing media and more aggressively next year again we are not getting into our2008 plan at this point to tell people about this and on top of that, and Iknow this is a long answer to your question. I’m more aggressive both on the"Project RevO" and "Dressed To the Nines" will also help usdeliver a rebranding image that will also drive guest satisfaction, ourappearance of our restaurants and ambiance and food quality.

So, that’s a long answer to your question and you may have afollow up on that.

Jeff Omohundro -Wachovia

No, no that’s very helpful. Thanks.

Larry Hyatt

Hey, let me note on this subject of "RevO" and theDTN that there was a question about Derrington, asked and I gave him a mistakenanswer. We so far have completed 23 "RevO's" and 36 "Dressed Tothe Nines" I had mistakenly answered Bob's question with a lower number. Iapologize.

Operator

Thank you. Your next question is coming from Matt DiFriscowith Thomas Weisel and Partners.

Matt DiFrisco -Thomas Weisel and Partners

Thank you. Got a couple of questions, first on the lastcomment you just made about the 36 and the 23, the "Dressed to theNines" and "RevO'lution". Can you tell us what the sales liftyou are experiencing specifically with those stores after they are done?

Larry Hyatt

Yeah Matt, the way we are measuring sales-lift is, we arecomparing the before sales and the after sales for the rebranded stores withthe before sales and the after sales for a control stores. With respect to DTN,that's an easier calculation to do when you have positive same-store sales. Thesales for the non-DTN stores for Ninety Nine were basically flat. A sale forthe DTN store showed about a 6% lift and so that's the conclusion that we drawon DTN is uniformly positive. For the "RevO'lution" stores, since theoverall chain had shown negative same-store sales for the past few quarters thecomparison to the control group is really a question of what the relativeimpact of "RevO'lution" is and in particular when there is a furthernoise of the "Kids Eat Free" phase out. But again, looking at our"RevO" stores to the control stores, the conclusion is that"RevO" has a positive sales impact in the midst of highsingle-digits.

Gregory Burns

And Matt, I’m going add on to that and without getting intodetails, to say again, the overall the plan is paying for the investment totalthat we are making. And then, just illustratively, there are restaurants inthat group that are having very large sales increases. There are some that arenot, but even the some that are not, I know that right now on top of my head,three of the most recent "RevO's" are in the top ten in the company,really probably the top five in sales volume. But those three are allrestaurants that had incredible amount of competitive intrusion as well as"Kids Eat Free" taken out. So, they are still playing at the highlevel, those stores have, certainly a return that are covering the costs. Idon't want anybody to get the idea that because of what we described that we'reless excited about the performance of the RevO'lution restaurants.

Matt Difrisco -Thomas Weisel Partners

Great, and I understand that obviously there is some noisegoing on as you take out "Kids Eat Free", and certainly it’s a dragor [mute that] clouds the situation, but looking at Ninety Nine and I guesswhat I understand is, of the 114, 36 have been done and of the ones outside ofthose 36 you just said that they're doing a flat comp. So the comp from thebrand is basically reflecting the up tick in those 36 "Dressed To theNines"?

Gregory Burns

Yes, Matt

Matt Difrisco -Thomas Weisel Partners

Okay. I have another question after this, but jut as far asunderstanding the charges there is the table and then there is the number isgiven as $6.5 million as adjustments when it’s aggregated, but then you have afootnote with a table breaking out three charges, that add up to $6.9 million.I am presuming that you are not having in that table more aggregated out butbroken out by the three charges you are excluding the pre-opening associatedwith the re-imaging as well as the bonus accrual being reversed out of G&A.Is that correct?

Larry Hyatt

No, it's not Matt. Looking at the two tables you arereferring to which were the third and fourth of the five tables that we'veprovided in this morning. We see third of those tables there is a middlecolumn, the adjustment column, which shows income from operations at $6.545million. Then, if you go to the fourth table, which is the explanation of that$6.545 million, it basically waves out what the five adjustments item are andthose items total to $6.545 million. So I am not sure that I understand yourquestion.

Operator

Thank you. The next question is coming from Barry Stoufferwith BB&T Capital Markets.

Barry Stouffer -BB&T Capital Markets

Good morning, gentlemen. I had two questions on the G&Anumber. I was wondering if there is anything else unusual in there because wetook your G&A numbers. We excluded the bonus reversal and the charge andthen we added back what would have been our guess as to what a normal bonusaccrual would have been. And we still showed G&A down about 5% sequentiallyand also year-over-year. So, just curious if there is anything else in thatnumber that was reversed, because it still looks unusually low?

Larry Hyatt

Yeah. I know there is nothing else that is unusual there.Let me walk you through what the main components of the year-over-year changefrom the third quarter of '06 to the third quarter of 2007.

Stock compensation as a percentage of the company's revenuesis about flat. The change in incentive comp, which is the bonus reversal thatwe have been talking about, is a favorable variant of that, 60 basis points.

Legal expenses are a favorable variance of about 20 basispoints, and then from the old laundry list that varies and sundry other things,is about 70 basis points going the other way.

Barry Stouffer -BB&T Capital Markets

Okay. And then just want little more color on the guidance.You gave us the full year guidance. We know what the year-to-date GAAP numberis, so we can assume what the fourth quarter implied EPS guidance is. What'sthe tax rate assumed in that?

Larry Hyatt

Yeah. The tax rate that's assumed for the full year is the5.1% that I mentioned in my prepared remarks. Now, that 5.1 is as low as it is,as a result of these five items that we have been talking about adjusting housefor those five items. As if those five items had never happened the effectivetax rate would have been 22.5 %. So the difference being 22.5% and the 5.1% isa result of these five adjustment items and in the adjustment table isaccounted for in those adjustment items. So, that we have tried to give you anapples-to-apples comparison.

Barry Stouffer -BB&T Capital Markets

My question is specially on the fourth quarter, should we beassuming a 5% tax rate?

Larry Hyatt

Yes.

Barry Stouffer -BB&T Capital Markets

Okay. And just to clarify, we should take the GAAPyear-to-date results, to get and apply fourth quarter number and then use a 5%tax rate?

Larry Hyatt

Yes. That's precisely what you should do.

Barry Stouffer -BB&T Capital Markets

Thank you.

Operator

Thank you. Your next question is coming from Steve Andersonwith MKM Partners.

Steve Anderson - MKM Partners

Good morning. Two very brief questions, with regard to whatwe have seen at the end of "Kids Eat Free," do you have any -- canyou quantify what has happened to your team turnover at the restaurant level? Andsecond, I want to ask what you are seeing, in terms of, grain prices given whatwe have seen as the increase in wheat prices.

Gregory Burns

I'll answer the first one. I'll answer it this way, it'shard. Anecdotally, it's better, but keep in mind we are taking "Kids EatFree" along with RevO'. And part of RevO' process is that we basicallyretrain, rehire everyone. I know we shouldn't rehire -- rehire is a wrong word.But we retrain; we interview everyone, so we are flushing out some peoplethrough that process. Steve, that sort of all the number is showing some higherincreases in turnover as a result of that while we are doing "Kids EatFree." But anecdotally, when you go to our restaurants, you talk to ourpeople as particularly our servers. They are very excited about it. Obviously,they want to see sales improve, but their ability to manage the food -- get thefood out of the table, deliver higher guest satisfaction is been enhanced byremoval of "Kids Eat Free."

Larry Hyatt

Yeah. And Steve, as far as what the impact of grain pricesare, yes, grain prices are certainly a higher and are anticipated to remainhigh through 2008. As the major impact of grain prices is also, as that wouldimpact wheat prices and that would impact the costs of beefs and the costs ofpoultry. And as I had said earlier, we have obtained our beef prices. We arelooking at year-over-year. On a mix constant basis that increases will be inthe 0% to 2% range. We have locked in our poultry prices and because we hadsuch attractive poultry pricing in 2007, because we were able to lock in bothpricing in supply early in 2007, we're actually seeing 8% to 9% increase.

Obviously, grain prices have an impact on the lot of otheritems as an impact on dairy pricing and things of that nature. And we arefacing all of the challenges in those areas. But, again, the good news is thatwe have walked in and have visibility on our two main protein items for 2008.

Operator

Thank you. Your next question is coming from Bryan Hunt withWachovia Securities

Bryan Hunt - WachoviaSecurities

Thank you. I just have a few bookkeeping questions, Larry,and then, I've got a question for you, Greg. Could you tell us what therevolver balance and availability was at the end of the period, Larry?

Larry Hyatt

Yes. We had drawn nothing down on the revolver balance atthe quarter end. We do have our routine of letters of credit outstanding. Thosetend to be in the $10 million to $12 million range, so that we basically hadavailability in other $112 million to $115 million range.

Bryan Hunt - WachoviaSecurities

And could you tell us what the CapEx was for the period aswell?

Larry Hyatt

I think we mentioned what CapEx was on a year-to-date basis.Capital expenditure for the third quarter was $13.3 million, including $4.2million for new restaurants and $6 million for RevO'lution and DTN.

Bryan Hunt - WachoviaSecurities

Alright, and then, the $1 amount you spend on sharerepurchase?

Larry Hyatt

That's the number that we've not specifically disclosed thatyet, expect to disclose in the other Q. It is by order of magnitude in the $30million range.

Bryan Hunt - WachoviaSecurities

Okay. And then lastly, Greg, my question for you, that youmentioned during your comments that you are changing your labor scheduling toreduce overall, it sounds like cost associated with some of the benefits youare getting our of Project RevO'lution and some of that are menu changes thatare taking place. Just looking at a better understanding on the other potentialbenefits you are seeing, did you talk about the program in a little bit ofdetail?

Gregory Burns

Bryan,really I'd like to do that as part of our 2008 outlook. When we do that, I willsay just is that the program has been thoroughly tested. We've had a number ofour operators and well as some of our technical people working on this forseveral months. And it really focuses on having the right people in place atthe right time. It's a very detailed planned focused on sales activity and eachrestaurant, by day, by shift and making sure that we have a right people in allthe appropriate areas not just service production area on the line.

And what we've seen today in the markets that we put it inand obviously some of this is we are starting to show off in our numbers, is animprovement in productivity and improvement in guest satisfaction, and inoverall in just improvement in terms of how people feel about their staffing,managers. How they feel about being able to have the restaurant staff to thedegree that they can do the business when the sales are there.

This is getting rolled out to all of our markets right now,but O'Charley's Ninety Nine to move a little bit further behind on that process.But we are doing in some of the detailed roll outs and tests in Ninety Nine andexpect to advance it through the Ninety Nine system next year as well.

When we roll our 2008 plan, we'll probably talk a littlemore detail about our expectation for labor cost. But we don't think we are alldealing with this. We are going to see labor rate inflation again, I believe,next year in 3% to 4% range, which also includes some minimal wage increasesthat are already scheduled. So, that's all the challenging things, while we areimproving productivity we are also seeing rate increases in all three concepts.

Operator

Thank you. Your final question is a follow-up question fromMatt DiFrisco with Thomas Weisel Partners.

Matt DiFrisco -Thomas Weisel Partners

Thank you. Could you give us the number, I think, you havereferred to it as 80% of your operating weeks of restaurants have the"Kids Eat Free" now throughout the O'Charley's system removed fromit. Can you tell us as a reference point, what it was for the similar period ayear ago?

Larry Hyatt

Yeah. Matt, when we started to phase out at the beginning,we had "Kids Eat Free" in about 55,000 restaurant days. We now havethat left in about 11,000 restaurant days, which is how we get to the numberthat we were talking about.

Matt DiFrisco -Thomas Weisel Partners

Is that in the quarter?

Larry Hyatt

Yeah.

Matt DiFrisco -Thomas Weisel Partners

So 55,000 days.

Larry Hyatt

Yeah. 55,000 days when we started this in May of 2006. Bythe end of the '06 fiscal year we had had that out between about 25% to 30%, ofthose days. So, we had taken out about 12,000 to 15,000 restaurant days byyearend '06.

Matt DiFrisco -Thomas Weisel Partners

Right and I am looking for a comparable number for the thirdquarter because you had a negative traffic number in the third quarter of lastyear. And I just want to be refreshed on how far down the line were you at thatperiod of third quarter, whether it was the beginning and then the end, howmany of them did you pull out throughout third quarter '06?

Larry Hyatt

Matt, let me get that number for you and get back to you. Idon't have that number now and I'd prefer not to misspeak.

Matt DiFrisco -Thomas Weisel Partners

Okay. Thank you.

Operator

Thank you. There appear to be no time for any furtherquestions. I'll turn the floor back to management for any closing remarks.

Gregory Burns

This is Gregory Burns. I want to thank you for participatingin today's call, and your continued interest in our Company is greatlyappreciated. We plan to continue to execute those initiatives that we discussedthis morning, and certainly we are going to strive to achieve consistent profitablegrowth while enhancing shareholder value. We certainly understand thechallenges we face and remain committed to improving our results. Larry and Istand ready to answer any questions that you might have, and we look forward tospeaking with you in the near future. Again, thank you for being on our calltoday.

Operator

Thank you. This does conclude today's O'Charley's ConferenceCall. You may now disconnect your lines.

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