O’Charley’s Inc. F2Q08 (Qtr End 07/13/08) Earnings Conference Call Transcript

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

O'Charley's Inc (NASDAQ:CHUX)

F2Q08 Conference Call

August 7, 2008 11 am ET


Gene Marbach - Investor Relations, Makovsky & Company

Gregory L. Burns - Chairman and Chief Executive Officer

Lawrence E. Hyatt - Chief Financial Officer, Secretary and Treasurer


Meredith Fowler – Wachovia Securities

Robert Derrington – Morgan Keegan

Jeff Omohundro – Wachovia

Bryan Elliott – Raymond James

Steve Anderson – MKM Partners

Mitch Speiser – Buckingham Research


Welcome to the O’Charley’s Inc. second quarter 2008 conference call. (Operator Instructions) I would now like to turn the conference over to Gene Marbach.

Gene Marbach

Thank you for joining O’Charley’s fiscal second quarter 2008 conference call. On the call today are Gregory Burns, Chairman and Chief Executive Officer, and Larry Hyatt, Chief Financial Officer. The order of business this morning will be some brief prepared remarks from Greg and Larry about the second quarter and the outlook for 2008. And then we’ll open the call to your 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 included risks described in the company’s filings 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, plans, 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 Gregory Burns, Chairman and Chief Executive Officer of O’Charley’s.

Gregory L. Burns

I want to welcome our many shareholders and team members to our second quarter conference call. Even though this is one of the most difficult economic environments we’ve ever experienced, I’m disappointed in our results for the quarter. Our results could have been, and should have been, better. My team and I have taken specific and aggressive actions to impact those things that are within our control.

For the quarter, our restaurant-level margins were at unsatisfactory levels primarily as a result of labor and benefit costs. We experienced very erratic sales throughout the quarter, as well as a significant July 4 holiday shift from last year, which certainly added to our challenge in managing operating costs for the quarter. Yet even with these negative sales trends I believe our margins should have been better. While Larry will provide greater detail on our second quarter results later in the call, let me discuss some of the key aspects of the quarter.

Stemming primarily from a weakened economy same-store sales declined at our restaurants during the quarter. However, we were pleased with the fact that the same-store sales performance of the O'Charley's concept in the second quarter was better than any quarter since the third quarter of 2006. A number of factors contributed to the same-store sales performance at O'Charley's restaurant in the second quarter.

As of the end of the quarter we completed 62 “Project Revolution” re-branding, including the Nashville, Indianapolis and the Atlanta markets. In aggregate, sales at those re-branded restaurants continue to outperform the rest of the concept. In addition to the positive same store sales performance, the re-branded O'Charley's restaurants have generated considerable excitement from our guests and more importantly our team members.

Besides the re-branding program, we are differentiating our brands for the addition of new and unique menu offerings. Our new ‘Twisted Chip’ appetizer was one of the most successful new product introductions ever. In addition, we added new beverage products to the menu, and as a result, alcoholic beverage sales at O'Charley's increased both in absolute dollars and as a percentage of total sales.

While electronic media, in particular TV, have positively impacted traffic, we are in an environment where all of us in casual dining are using everything in our marketing arsenals to get the attention of the consumer. At the same time, guest satisfaction has never been more important. And that is why I'm pleased to report that our GSI scores at both O'Charley's and Ninety Nine have had meaningful improvement year-over-year.

Year-over-year sales comparisons also benefited from the fact that the phase out of Kids Eat Free at most of the O'Charley's occurred more than one year ago. We began the gradual phase out of Kids Eat Free during the second quarter of 2006. And by the end of the second quarter of 2007, we had reduced its availability by approximately 80%.

O'Charley's same-store sales continue to be negatively impacted by the smoking ban in Tennessee where we have our largest concentration of restaurants. We estimate that this smoking ban, which was implemented on October 1, 2007, and does not apply uniformly to all eating and drinking establishments, reduced O'Charley's same-store sales by 0.7% in the second quarter. Our focus is clearly on driving profitable sales, and we plan to sharpen our value message as we continue our focus on great food and beverage offerings at O'Charley's which we believe are the best in our segment.

During the second quarter, we ran two limited time promotions, including our ‘Better Together’ platters, and our ‘Summer Time’ celebration. Both featured flavorful new menu items and were supported with television and print advertising focusing on the quality of the food and the great values offered. We continue to run our early week dinner special featuring two meals and two beverages for $20 and our ‘Make Every Meal Count’ loyalty program.

Within the next two weeks, we will introduce a new menu with a new design, and launch our ‘O'Charley's All Stars' limited time offer. This promotion will include some of our famous entrees and several new additions, and will include our first ever instant win scratch-off game.

Last year we saw a significant downturn in Ninety Nine sales due to the deterioration of the economic environment of New England and this has continued to the first half of 2008. The second half of this quarter was particularly challenging due to the change and the timing of July 4, and comparisons to strong same-store sales last year. Despite this environment, we are encouraged by the performance of our re-branded restaurants.

As of the close of the quarter, we complete 62 Project Dressed to the Nines re-brandings, including our core markets in Eastern Massachusetts and Southern New Hampshire. In the aggregate, sales at these re-branded restaurants continue to outperform the rest of the concept. The 37 restaurants re-branded during the past four quarters have had a positive same-store sales in aggregate in the second quarter.

These recently re-branded restaurants, under Project Dressed to the Nines are clearly a much more polished version of the Ninety Nine. Guests and team members have gone out of their way to share their excitement for the re-branded restaurants with me in recent visits. As with O'Charley's, we are quite proud of the Ninety Nine's varied and value-oriented menu, which continues to gain favor among our guests.

Our highly successful ‘Amazingly Adventurous Flavors' promotion, which featured new menu items such as cedar plank scallops, ‘Fiesta Grilled Chicken’, ‘Seared Ahi Tuna Chopstick Salad’, and return of the popular lobster roll, and ‘Imperial Casserole’, ended on August 3.

During the third quarter, we will offer our ‘Creatively Comforting flavors' promotion which will offer comfort food with a creative twist. Menu items will include ‘Chianti Braised Beef’, ‘Fire Grilled Ribeye’, chicken marsala, and an ‘Ultimate Steakburger’ with wild mushroom sauce. This promotion will be supported by radio and on-line advertising. We will also plan to offer a number of sports-themed promotions for the baseball and football bans in the Boston and Philadelphia markets.

A review in the quarter's performance for Stoney River, we note that upscale and polished casual restaurants have not been immune to the effects of the slowing economy. In order to continue strengthening the Stoney River brand we have launched a newly enhanced web site that allows our guests to experience the Stoney River lifestyle on-line. We expect the web site to attract additional members to our loyalty program, ‘The Red Canoe Society’.

We continue to offer our ‘Summer Sunday Fare’ menu which offers the Stoney River experience at a reduced price point. This fall we'll offer our new seasonal menu items, including shrimp and corn chowder, a class New York Strip Diane and a spicy beef stroganoff. Recently we were pleased that the Nashville's ‘Toast of Music City’ poll named Stoney River steak the best in the city.

Our outlook for the remainder of 2008 reflects our continued concern about the economy and its negative effect on our guests. We do not expect the casual dining environment to be any different in the near future than what we've experienced recently. In particular, industry traffic will most likely remain down as higher energy and food prices, lower home values and generally negative economic news have made consumers more cautious about their spending.

While the recent downturn in oil prices gives us some hope we'll see a reduction in gasoline prices, the outlook for commodities in 2009 continues to indicate even higher inflation. While obviously we can't control the economic environment, but we can effect our day-to-day execution and I continue to believe the best marketing is what we do within the four walls of our restaurants. While I'm hopeful that after we get through the presidential election cycle the economy will stabilize and the consumer sentiments may improve, we continue to plan as though the current environments will remain unchanged.

Therefore, in this uncertain environment we have decided to defer our re-branding initiatives for the balance of the year. This will give us greater opportunity to focus on what we do within our four walls, execute a great food and service standards. improve our restaurant operating costs and make further reductions in our general and administrative costs as well.

We continue to be very pleased with the performance of the restaurants we have re-branded during the past year. And believe that these initiatives are vital to the long-term success of both concepts. We will build profitable sales through strengthened execution, our great menu and our superior service. At the same time, we're going to work even harder on improving margins at our restaurants.

Our long-term strategies and initiatives continue to be directed around three key elements, build a winning team, improving the box economics and enhancing guest satisfaction. Despite the economic environment, we are focused on recruiting the very best talents, improving our training programs and our leadership development, and reducing capital expenditures at our new and re-branded restaurants, as well as making the box more efficient and looking for new ways to enhance the guests’ experience even further.

Finally, we have three strong concepts and remain firmly committed to executing a long-term business plan. We remain focused in generating profitable and sustainable growth and improving cash flow and operating margins while enhancing shareholder value. We understand the issues and are acting accordingly to improve our performance during these challenging times.

We believe that once the economy improves, and it will, our company will emerge stronger as a result of the execution of our strategies. I continue to be very proud of our 24,000 team members and what they do every day to make our economy successful. Thank you for your dedication and hard work.

With that, I'm now going to turn the call over to Larry for some comments on our financial performance for the second quarter, and our outlook for the current fiscal year.

Lawrence E. Hyatt

I would like to discuss our financial performance for the second quarter of 2008, some items that impacted that performance, and our outlook for the current fiscal year. For the second quarter of 2008, revenue declined 3.3% to $221.1 million from $228.8 million in last year's second quarter. Same-store sales at our O'Charley's restaurants decreased by 1.4%, which was the result of an increase in average check of 3.2%, offset by a decrease in guest count of 4.5%.

Since the second quarter of 2007, we have increased our average menu prices at O'Charley's by 2.4%, while mix changes accounted for the rest of the increase in average checks. Average checks for company-operated restaurants in the second quarter were $12.91. Average weekly sales per restaurant were $50.8 thousand in the quarter, compared with $51.6 thousand in last year's second quarter.

For Ninety-Nine, same-store sales decreased 3.1% in the quarter, which was the result of a 2.9% increase in average checks, offset by a 5.8% decrease in guest count. Increases in average menu prices since the second quarter of 2007 accounted for all of the increase in average checks. Average check for Ninety Nine in the second quarter was $14.95. Average weekly sales per restaurant were $52.2 thousand in the quarter compared with $53.6 thousand in last year's second quarter.

For Stoney River, same-store sales declined 6.4% in the quarter as an 8.4% increase in average checks was offset by a 13.7% decline in guest count. Since the second quarter of 2007, we have increased our average menu prices at Stoney River by 5.4%, while mix changes accounted for the rest of the increase in average checks. Average check in the quarter was $46.25. Average weekly sales per restaurant were $69.5 thousand in the quarter, compared with $74.4 thousand in last year's second quarter. All ten Stoney River restaurants are now included in the same-store sales base.

Restaurant-level margins, which we define as restaurant sales, less cost of food and beverage, payroll and benefit costs, and restaurant operating costs declined to 15% of restaurant sales from 17.5% in the prior year quarter. Our income from operations in the second quarter was $0.4 million, or 0.2% of revenue. In comparison, our income from operations in the prior year quarter was $0.4 million, and included charges of $7.6 million related to the restructuring of our supply chain.

A number of factors contributed to our margin performance in the second quarter of 2008. Our cost of food and beverage was $64.8 million, or 29.3% of restaurant sales in the second quarter, compared with $66.4 million or 29.3% of restaurant sales in the second quarter of the prior year.

On a constant mix basis, our commodity costs were 2.8% higher in the current year quarter compared to the prior year, driven primarily by increases in the cost of wheat products, dairy products and poultry. Higher fuel-related distribution costs also contributed to the increase in our food costs. Although offset by higher commodity and fuel costs, we continue to realize the anticipated savings from the sale of the commissary and the restructuring of our supply chain that we completed last year.

For the balance of the current fiscal year, we have locked in our pricing for approximately 95% of our estimated requirements for beef, poultry and pork. And approximately 40% of our requirements for seafood. Given current conditions in the markets for food commodities, and the uncertain outlook for next year, we have not yet locked in any pricing for our 2009 requirements.

Our restaurant-level payroll and benefits costs were $78.7 million or 35.6% of restaurant sales in the second quarter of 2008 compared with $77.3 million or 34.2% of restaurant sales in the second quarter of 2007. Higher employee benefits and workers compensation expenses, higher management labor expense on a reduced sales base, and the impact of reduced guest counts on labor productivity contributed to this 140 basis point change.

Restaurant operating costs in the quarter were $44.3 million, or 20% of restaurant sales compared to $43.1 million, or 19% of restaurant sales in the second quarter of the prior year. Increases in utility costs combined with the deleveraging impact of reduced sales on rent and other fixed costs accounted for most of this 100 basis point change.

Advertising and marketing expense was $7.8 million or 3.5% of revenue in the second quarter of 2008, compared with $8.1 million or 3.5% of revenue in the second quarter of 2007. Our general and administrative expenses in the quarter were $10.3 million or 4.7% of revenue compared with $11.3 million or 4.9% of revenue in the second quarter of 2007. This $1 million, or 20 basis point improvement, was primarily the result of organization changes, and tight control in most spending categories.

Expenses relating to the company's re-branding initiatives reduced income from operations in the quarter by $2.5 million and reduced net earnings by $0.07 per diluted share, calculated at our estimated marginal tax rate. These expenses include depreciation of $1.7 million as well as pre-opening expenses of $0.6 million and advertising expenses of $0.2 million. Of the $1.7 million of depreciation, $0.1 million is attributable to the accelerated depreciation of assets removed from service and $1.6 million is attributable to the depreciation of the new investment made in all restaurants re-branded to date.

In comparison, expenses relating to our re-branding initiatives reduced income from operations in the prior year quarter by $1.3 million and reduced net earnings by $0.03 per diluted share. During the quarter, we recorded impairment charges of $1.9 million or $0.06 per diluted share as the company's estimated marginal tax rate for the impairment of two O'Charley's restaurants and one Ninety Nine restaurant. All three of these restaurants will remain open. We also recorded a gain of $0.2 million or $0.01 per diluted share on the sale of the surplus property.

Our interest expense for the second quarter was $2.7 million compared with $2.7 million in the second quarter of 2007. Lower short-term interest rates on the company's variable rate debt was offset by higher debt levels, as the continuing pay down of our capital leases was more than offset by new revolver borrowings. At the end of the quarter we had $22.1 million of borrowings on our revolving line of credit. At the end of the prior year quarter, we did not have any borrowings under the line.

During the quarter we repurchased 0.7 million shares of our common stock, bringing our total year to date stock repurchase to 2.2 million shares. The need for the revolver drawing is attributable to these share repurchases.

On a year to date basis, our earnings before income taxes were $2.5 million. We estimate that our tax credits, which are primarily the FICA tip credit and Work Opportunities tax credit will be between $7 and $8 million for the 2008 fiscal year. On a year to date basis, the value of these credits offsets our tax liability at the statutory rate resulting in the year to date income tax benefit of $0.1 million.

In order to adjust the year to date amount, we reversed substantially all of the tax benefits that was recognized in the first quarter of this year, resulting in a tax expense in the second quarter of $5.6 million. This treatment is in accordance with FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods.

Our resulting net loss for the quarter was $7.8 million or $0.38 per diluted share, compared to a net loss of $1.1 million or $0.05 per diluted share in the prior year quarter. Results for last year included charges of $0.22 per diluted share relating to the supply chain changes.

Our capital expenses in the quarter were $21.4 million, including $8.9 million for new restaurants, and $9.7 million for our re-branding initiatives. In comparison, capital expenditures were $11 million in the prior year quarter. With the deferral of the re-brandings that were planned for the balance of the year, the company now expects to spend a total of between $50 and $55 million for capital investments during 2008.

For the full year, we expect to open four new O'Charley's restaurants, two new Ninety Nine restaurants and one new Stoney River restaurant. By the end of the second quarter, five of these seven planned new restaurants had already opened. Since the beginning of the year we have completed the re-branding of 33 O'Charley's restaurants, and 20 Ninety Nine restaurants.

In this morning's release, we revised our previously issued guidance to reflect our year to date financial results, current and anticipated future economic conditions, and the deferral of the re-branding initiatives. We now expect to report net earnings per diluted share of between $0.08 and $0.16 for the fiscal year ending December 28, 2008.

Projected results for the full year anticipate same-store sales decline in all three concepts for the balance of the year. And include expenses of approximately $0.25 per diluted share, calculated at our estimated marginal tax rate related to the re-brandings completed by the end of the second quarter.

For the full year, we expect a tax benefit of between $2.5 and $3.5 million or between $0.12 and $0.17 per diluted share. The company's guidance for the 2008 fiscal year does not reflect any impact for additional share repurchases or organizational changes that the company may make in the second half.

And with that, Greg and I can answer your questions. Thank you very much for listening.

Question and Answer Session


(Operator Instructions) Your first question comes from Meredith Fowler, - Wachovia Securities.

Meredith Fowler – Wachovia Securities

Can you outline your cash priorities going forward? Do you continue to see your focus on share repurchase activity? Or could it maybe shift to paying down debt going forward?

Lawrence E. Hyatt

We have repurchased a total of 2.2 million shares of our stock since, since the beginning of the year. And a total of four million shares since we began buying back shares in 2007. This total represents almost 17% of the shares outstanding as of the end of the 2006 fiscal year.

Under our existing share repurchase authorization, and the restricted payments basket and our bond indenture and revolving line of credit agreement, we can repurchase approximately $15 million worth of additional shares, although under the restricted payments basket, any dividend payments would reduce that.

Decisions on future share repurchases, of pay down of the revolver, or other uses of our cash flow will be based on our financial performance, expected cash position, and cash requirements and conditions in the capital market.

Meredith Fowler – Wachovia Securities

Can you talk about any new actions you're taking to help reduce the labor and food costs going forward?

Gregory L. Burns

As I said earlier, obviously this is a difficult environment for everyone, but during these difficult times we've got to still look for opportunities. If you start from top to bottom, certainly pricing is an opportunity. We feel like we can add price to our menus, but we're very sensitive to our guests today and sensitive that they have in their every day life. So we're being very careful about that.

And we see opportunities on the food side. Certainly we're delivering the best food that we've ever had in all three concepts. But we believe there's opportunity in portion sizing or the opportunity in plate and presentation and things like that. We're looking at a lot of those things in our everyday R&D process.

From a labor side, we put in some pretty good tools in place over the last year. Certainly this quarter will be a difficult one because of the erratic sales that we saw. And certainly in particular Ninety Nine we saw some pretty strong sales reductions in the second half of the quarter. But there's no doubt that we can do better controlling our labor, overtime hours and our labor productivity. And we're in process.

We've got some actions to improve our back office systems that we'll be rolling out over the next 12 months that will give significant improvement tools to our operators. But having said that, we're in very close, we're watching day-to-day, week-to-week, period-to-period our labor management very closely.

And then, finally, certainly from a G&A side, we've made, as you've probably heard in the past, we've made some G&A reductions that's reflected in today's release. We have some further actions planned on the G&A side the remainder of this year and in to next year. So we see some opportunities there.

In the offset side, there are some things that we don't have control over. We try to manage our utility calls very closely. We do a lot of things on restaurants to make good use of our systems and controls on managing that. But having said that, you're seeing utility costs go up. Today TVA announced this morning that they're taking a 10% to 20% increase in utility rates, and, of course that affects the Southeast United States. So there are things like that are offset some of these changes that we're making.

So it’s a pretty broad range of opportunities. There's no doubt if you've talked to other operators, they're focused on the very same thing. I think this past several weeks you've seen a number of folks with drops in restaurant operating margins due to the environment. But having said that, there's still opportunities and we're going to go after them pretty hard.

Meredith Fowler – Wachovia Securities

Around your pricing opportunity, do you have any scheduled price increases, or are you still evaluating if you need to take any additional price increases?

Gregory L. Burns

In terms of pricing opportunities, we really don't talk in advance of those. But, certainly in comparison to we track our menus against our competition, and we also look closely at restaurant menu pricing from a regional side. And we believe we have some opportunities. There's no doubt if you go to the grocery store today, you're seeing higher commodity costs. You're seeing products being priced so much higher level, and expect that inflation that we're seeing in the commodities, and in way trades, it’s going to be passed on by restaurants and retailers in 2009.


Your next question comes from Robert Derrington - Morgan Keegan.

Robert Derrington – Morgan Keegan

Greg, you mentioned that one of the best ways to market the business is within the four walls. Yet I also hear you say that your labor costs were too high and you were disappointed during the quarter. How do you reconcile tightening labor costs at a time where you’re trying to market within the store?

Gregory L. Burns

Very delicately, look, you’ve got to really watch your sales trends very carefully and manage your labor so that you have the people on hand to do the job. I would say to you, Bob, even over the last year we’ve seen our GSI scores move up and we’ve been very pleased about that. And in particular restaurants where we have really focused on our labor and been able to make some strong movements there, we’ve actually seen GSI go up even more. So, we don’t think that the two are contradictory.

I think a lot of operators are seeing trends such as good early shifts. You see traffic at six, five, six, seven, and eight o’clock pretty good. But the late night crowd business has really slowed down out there in casual dining segment, and this not just our restaurants, but some of our competition. You’ll notice that late night trend there.

So you have to really make sure you’re gauging back your labor productivity. And that’s tough on our people. Those are tough decisions. A lot of our team members are looking for the same opportunities to earn a strong wage and so on. But, that’s the delicate balance that you have to do.

I’m convinced though, and certainly our operator’s convinced, because we’ve seen it just in the last several weeks that we can make further improvements in our labor management. And we will do better. Again, we can’t control the cycle of sales. But we will be very focused on a day-to-day basis on proper labor management.

Robert Derrington – Morgan Keegan

Can you tell us, Greg, how did the sales trends through the course of the second quarter, and has the trend changed here in the third quarter to date?

Gregory L. Burns

Yes, Bob, let me just first about the quarter trends. O’Charley’s was pretty consistent through the quarter. We saw some, pretty good improvements in terms of when we ran television. And of course throughout the quarter we had some great promotion going on. We had, as I said earlier, some strong improvements in liquor sales. In the Ninety Nine and Stoney River in the second half of the quarter, we certainly saw sales dip further soften further. And of course the July 4 weekend, which was at the tail end of the quarter, also affected all three concepts, so that’s tough. In terms of commenting on this quarter, we don’t really talk about the quarter during the quarter.

I would tell you it’s a difficult economic environment out there. We see erratic sales during the quarter. But with the recent improvement in gasoline prices or you’ve seen some improvement in similar markets, I’m hopeful that we’ll see some improvement in sales, the second half of this year. But, right now we’re operating as though the trends at the end of the second quarter continue the rest of the year.

Robert Derrington – Morgan Keegan

The only reason I ask Greg is I was trying to gauge whether there’s a rebate check benefit within the reported numbers and whether that trend might be something other than that as we go forward.

Lawrence E. Hyatt

Yes, Bob, we like most mid-scale casual dine-in restaurant companies really didn’t see a rebate check bump, that was in any way, [inaudible]. We conclude, as I believe many economists and observers have concluded that mid-scale family was spending that rebate check on gasoline purchases and on paying down credit card balances.


Your next question comes from Jeff Omohundro - Wachovia.

Jeff Omohundro – Wachovia

On the sales trends in the second quarter given the improvement, I’m just wondering if you get a little more color perhaps on where that improvement’s occurring, lunch versus dinner, mid-week, early week versus weekend.

Gregory L. Burns

Jeff, I really don’t want to slice and dice the quarter. I can say starting from O’Charley’s in particular because we are very excited about the performance of O’Charley’s restaurants during the quarter, and obviously that was the best trend that we’ve seen since in 2006. And we had a strong promotion in the ‘Twisted Chips’ that we ran, Southwest ‘Twisted Chips’ was very strong, and continues to be very strong. So we saw that improvement hold up.

I would say generally early week sales have continued to be soft this year. I think there’s a certain group of consumers who are continuing to go out Friday, Saturdays. That’s important as far as their overall life experience. As I said earlier, late nights, we’re seeing softer sales, that second, that third turn. We’re not necessarily getting that in the restaurants. And I’ve talked to other operators who have seen the similar situation.

I’m pleased with alcohol sales have improved. New England the sales situation up there has really started last fall. If you go back and look, we have had pretty strong sales over the last several years in the New England market. But last fall it took a decided downturn and it’s continued to be soft through this year and I think that’s reflected in some of the information that you’ve heard it come out of Boston in terms of the really big downturn in home prices up there, home heating oil going up significantly.

In terms of the Stoney River concept, it’s somewhat inconsistent and we’ve had some decent large parties. But it’s clearly businesses are cutting back on travel arrangements. Jeff, you’re seeing that significant convention cutbacks. I know that one of our large operators located here runs a big convention business announced yesterday that they’re seeing some downturn in convention business. So for the upscale restaurants, I think it’s related to a lot of the business and large party segment.

And I know that doesn’t give you as precise into lunch and to dinners and trends and overall. But it gives you an overall look at what happens, that late night business.

Jeff Omohundro – Wachovia

You mentioned the strengthening in the beverage alcohol portion. How is that mix as a percentage of sales tracking, and do you see the improvement largely in new products or something tied to promotion?

Gregory L. Burns

O’Charley’s we went from, in the mid-7%, 7.6% to an 8% liquor mix. Ninety Nine basically was flat. Considering the same-store sales downturn that’s good. First off, I think a few consumers are probably in this tough environment are having a cocktail or two or more. But seriously from a promotion side, we’ve got some great products out there.

And we’ve done some things between all three concepts, particularly Ninety Nine, O’Charley’s where we shared a drink, some drink items. And then, some of the newer items are things that we feel like are helping bring our beverage sales up. We’ve seen it in some of the more upscale cocktails that we ran during the quarter. We also have new drink menus at both concepts. Particularly the O’Charley’s we went to a new drink format. And that’s been very helpful.

And then the last thing is just much more awareness among our servers. Certainly with lower traffic, our servers are very well aware that the opportunities to have an upscale on liquor has never been more important. And so I think you’re seeing servers address that in a strong method. Both the Dress to the Nines and the Project Revolution re-brands, it’s a big emphasis there in our process. And both of those projects we’ve seen improvement in liquor sales as well.


Your next question comes from Bryan Elliott - Raymond James.

Bryan Elliott – Raymond James

I’d like to look forward a little bit in to ’09. And you said you have, and think about new unit commitments. You have two more stores scheduled to open this year overall. How many commitments are there for 2009 at this point from a new store perspective?

Lawrence E. Hyatt

The management team will be meeting with the Board in the next few weeks to develop our annual strategic and systems plans.

Bryan Elliott – Raymond James

Larry, I’m not asking in the interest of time to tell me that you’re not ready to speak. I’m asking how many commitments do you have at this point.

Lawrence E. Hyatt

Yes. We have, without being very specific, very, very few Bryan.

Bryan Elliott – Raymond James

Okay, so there’s some, but not many, okay.

Lawrence E. Hyatt


Bryan Elliott – Raymond James

Also, could you confirm if, given all the remodels and everything that we’ve done, you’ve, in the past indicated a maintenance CapEx number in the $15 to $20 million annualized range. And I wouldn’t assume that there’s any reason that number would be materially different going forward. Can you speak to that?

Lawrence E. Hyatt

Yes. Going forward for what one would define narrowly as maintenance CapEx, or R&R [inaudible]. We still think on an annual spend basis. Say that’s in the $25 to $35 thousand per restaurant range, which is roughly $9 to $12 million a year, Bryan.

Gregory L. Burns

We’ve had a much more modest development schedule this year. I think that’s in line with the industry and our company along with others, you can expect a much more modest development through the next couple years. And I think that’s in line with the environmental situation. We’re focused on, obviously, the execution in our existing restaurants. But the re-brands are so, so important. And that’s where our focus will be going forward.


Your next question comes from Steve Anderson - MKM Partners.

Steve Anderson – MKM Partners

Is there any further guidance to that, and can you talk about any progress on KDS.

Lawrence E. Hyatt

In reference to the kitchen display system?

Gregory L. Burns

Yes, we rolled it out, basically to all of the Ninety Nines. We’ve rolled it out to a large number of the O’Charley’s. We are in the process, in one of the things I didn’t speak on earlier is, as the question came up about labor. We do feel like we’ve got some opportunities in some kitchen processes at O’Charley’s, and so we got a big project working on that, that will get some added strength to the KDS.

And we’re seeing positive out of KDS in the O’Charley’s concept. But we think we’ve got some further opportunities there. So we’re in the process of going through that today. And, at some point down the future we’ll announce a continue rollout. Right now, I’d expect most of the KDS will get rolled out in 2009. But we haven’t developed a final schedule on that yet.

Steve Anderson – MKM Partners

So as far as for the rest of this year, is there any, I know we’ve talked about some guidance for [inaudible] numbers. But is there any costs that’s being associated with your investment in KDS so far this year?

Gregory L. Burns

There is some this year. I don’t know that we’ve got that specific number. Maybe we’ve talked about it in the past. But like I said, in terms of the project that we’re working on, that’s a lot of just basically human talent focused on some re-setting up our line and moving some things around.

I know that there are some other operators who’ve announced some changes in the kitchen format and process. And we think there’s some more opportunities. We parenthetically have done some, in a recent restaurant opening made some changes in our kitchen which we’re pretty excited about. It’s too early to get into the details on that. But that opens up some opportunities for us longer term.


Your next question comes from Mitch Speiser - Buckingham Research.

Mitch Speiser – Buckingham Research

Can you quantify at all the same-store sales impact of the July 4 shift?

Gregory L. Burns

We don’t have that really at hand. We can get back with you, but I know at both concepts because of the strong Friday, Saturday sales that we normally have it’s going to be $300,000 plus sales, but that’s just a guesstimate. We need to tighten that number down, and we’ll get back with you about that.

Mitch Speiser – Buckingham Research

Can you give us a sense at the O’Charley’s concept, how many of the stores, if any, are cash flow negative?

Lawrence E. Hyatt

Mitch, we look at that on a quarterly basis. In fact we look at that on a monthly basis. And, right now there is no restaurant that is operating in the company that, for the 2007 fiscal year was not EBIDAR positive. Now that means it was contributing to its fixed costs. That doesn’t necessarily mean they were all EBIDA positive. There are a very small number that are not EBIDA positive that we evaluate on a restaurant by restaurant basis, looking at what the alternative uses might be for those sites. Looking at what the prospects are for the trades area are, etc.


Your next question is a follow up from Robert Derrington - Morgan Keegan.

Robert Derrington – Morgan Keegan

Can you help us understand is the slowdown in the remodel program, is it more a capital preservation program? Or is it the fact that you’re just not satisfied with the returns you’re seeing on the newer re-branded stores?

Gregory L. Burns

It’s absolutely not having to do with the returns of the re-brand stores. The Atlanta markets we’re very pleased about. We’ve, and I made comments in my opening remarks about the sales trends at those restaurants. Larry can speak in terms of how we go through the computations, but we’re certainly excited about that. It really is looking at the headwinds the rest of the year and some of the uncertainties. And the fact of where we want our people focused on with not less than half of the year to go.

We were not going to do re-brands right before the holidays anyway. We wanted our people focused on their business. And so we felt like that way we’d be better off resetting our schedule for next year. And understanding a little bit more about the commodities outlook, and where sales trends are headed.

If we’re getting positive results in a negative environment imagine what results we’d get in a more positive environment. So this is certainly a decision that I and my management team made. And it wasn’t addressed as a reflection of the re-brands.

Robert Derrington – Morgan Keegan

Then generally Greg, I’d conclude that your expectation is that 2009 is going to be another tough year?

Gregory L. Burns

Yes, everybody at the first of the year said, “Well this thing will get through, the second half of the year will be better”. And then we got into March and everybody said, “Well it’s not going to be better.” The big thing about next year is the commodity pressures. I think there was an article in the Wall Street Journal a couple of days ago that said that vendors are not willing to commit. And then buyers are not willing to commit. And so you’ve got a little bit of a standoff going on there.

Having said that, we’re all pleased to see the oil prices come down. That affects so much of the situation. You’re seeing global demand come down. Restaurant demand come down. You saw the Bennigan’s situation. Obviously that takes a lot of demand for food out there. So the question of are we going to see some of these prices come down in the corn and wheat and so on. And we have seen a decrease. I think that we haven’t recovered anything close to the big, big drop, or the big increase, but we’ve certainly made a big inroads in to it.

So if we get some better indications of lower gasoline prices and better commodities 2009 could be a rebound year. But I think we’ve got to act like the trends are going to continue at least into the early part of next year.

Robert Derrington – Morgan Keegan

Has the success of the ‘Twisted Chips’ changed your perspective on how you look, for example could we see a similar type promotion over at Ninety Nine?

Gregory L. Burns

Ninety Nine’s got several things like that in test. Certainly, the hero that Jeff and his team brought with the ‘Twisted Chips’ has been a big deal. It’s helped bring some attention to, along with our, it all starts with a row promotion with some of the great food that we’re doing. So, yes, I think there’s some opportunities at Ninety Nine. There are some things that we’re doing at Stoney River as well that will bring some guests in.

Again, I went back to my prepared remarks. The challenge is that there is a segment of folks that are going out to dinner, and eating out. And there’s a group that just, as USA described, how many billions of miles got cut back, that just staying home, stayed vacation and not going out. And a lot of that is, like I said earlier is in that, those late shifts, that it’s not just people cutting back and saying, “I’m not going to order an appetizer.” It has a lot to do with people just saying, “We’re not going to go out to eat as much during these tough times.”


Your last question is a follow-up from Steve Anderson – MKM Partners.

Steve Anderson – MKM Partners

Are you seeing any impact on your sales from the recent closures at Bennigan’s in the second half? Or is it too early to comment.

Gregory L. Burns

Yes I think it’s too early to comment. Look all of us in the industry hate to see that happen. Certainly Bennigans and that [inaudible] and the whole Steak and Ale was really the rebirth, or the birth of causal dining. So it’s terrible to see. Having said that, a lot of the locations in the Bennigans were older locations not necessarily linked in to market areas or competitive areas with our restaurants. But certainly I think there’s a story there that is keeping the concepts fresh. Great looking restaurants, keeping the menu up to date those are all good emphasis stories surrounding that situation that we all hated to see.


That does conclude the question-and-answer session.

Gregory L. Burns

I want to thank you for participating in today’s call. Your continued interest in the company is greatly appreciated. We plan to continue to execute the initiatives we discussed this morning. I know there was a couple questions. If there’s follow-ups, please we welcome your phone call and your questions.

Certainly we’re going to strive to achieve a very consistent, profitable growth and enhance shareholder value as we discussed on our call today. We certainly understand the challenges that we face. But we’re ready to react to those and improve our results. Larry and I, again, stand ready to answer any of your questions and look forward to speaking with you in the near future.

Thank you and good day.

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