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| CHUX > SEC Filings for CHUX > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
RESULTS OF OPERATIONS
Note Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, all statements regarding our intent, belief and expectations such as statements concerning our estimated results in future periods, operating and growth strategy, and financing plans. These forward-looking statements may be affected by certain risks and uncertainties, including, but not limited to, the adverse effect on our results from operations of decreases in consumer spending; our ability to comply with the terms and conditions of our financing agreements; our ability to successfully implement and realize projected sales increases from our re-branding efforts; our ability to increase operating margins and increase same store sales at our restaurants; the effect that increases in food, labor, energy, interest costs and other expenses have on our results of operations; our ability to successfully implement changes to our supply chain; our ability herein and to sell closed restaurants and other surplus assets; the effect of increased competition; the resolution of outstanding legal proceedings; and the other risks described in our Annual Report on Form 10-K for the fiscal year ended December 30, 2007 under the caption "Risk Factors" and in our other filings with the Securities and Exchange Commission ("the Commission"). Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.
Overview
We are a leading casual dining restaurant company headquartered in Nashville, Tennessee. We own and operate three restaurant concepts under the "O'Charley's," "Ninety Nine" and "Stoney River Legendary Steaks" trade names. As of October 5, 2008, we operated 231 O'Charley's restaurants in 16 states in the Southeast and Midwest regions, 116 Ninety Nine restaurants in nine states throughout New England and the Mid-Atlantic, and ten Stoney River restaurants in six states in the Southeast and Midwest. As of October 5, 2008, we had nine franchised O'Charley's restaurants, including four franchised O'Charley's restaurants in Michigan, two franchised O'Charley's restaurants in Ohio, one O'Charley's franchised restaurant in Iowa, one O'Charley's franchised restaurant in Pennsylvania and one O'Charley's franchised restaurant in Tennessee at the Nashville International Airport. As of October 5, 2008, we had two joint venture O'Charley's restaurants in Louisiana, and one joint venture O'Charley's restaurant in Wisconsin, in all of which we have an ownership interest. Our fiscal year ends on the last Sunday of the calendar year. We have one reportable segment.
Three years ago we began our turnaround and transformation process. Our strategy continues to be anchored by three key elements: building a winning team, improving box economics and achieving high guest satisfaction.
Strengthening the organization with a new core of talent and building a winning team. We have assembled a core of executive talent over the past few years with key additions throughout our support, supply chain and operations areas. We believe that we have in place a management team that will be able to execute successfully our turnaround and transformation efforts, and guide the Company through this difficult economic environment. We believe that the success of our Company depends on demonstrating "A Passion to Serve" SM with every guest, at every restaurant, every day.
Improving box economics through the execution of product and labor cost management and increasing same store sales through our re-branding initiatives, new product offerings, new marketing, and a more analytical approach to menu pricing. Box economics is the relationship between the investment in our restaurants and the sales and related operating margin that those sales should produce. We are continuing to leverage our development teams, operational teams, and supply chain teams in controlling the capital costs and the ultimate expense associated with our re-branding programs. Our product development teams at all three concepts continue to deliver great tasting menu offerings. As part of the re-branding initiative, we have trained and implemented new service standards, and introduced new kitchen technology and menu engineering. Another important aspect of our re-branding is the introduction of concept specific elements including new uniforms, plateware, menu designs, and Curbside-To-Go service. However, while our re-branding programs have been successful, in light of the current economic conditions and the impact on consumer spending, and to maintain financial flexibility, we do not plan to re-brand any additional restaurants for the remainder of 2008 or 2009. During the third quarter of 2008, we did not complete any 'Project RevO'lution' or 'Dressed to the Nines' re-brandings at our O'Charley's and Ninety Nine restaurants. As of the end of the third quarter of 2008, we have completed 62 'Project RevO'lution' re-brandings at our O'Charley's restaurants, and 62 'Dressed to the Nines' re-brandings at our Ninety Nine restaurants.
Achieving high guest satisfaction and intent to return by instilling "A Passion to Serve" SM. In 2005, we adopted a vision statement: 'A Passion to Serve' SM. This statement describes our commitment to our guests, each other, our stakeholders and our communities. Our vision is to be the best of class in food and service in our segments of the restaurant industry. We are holding ourselves to higher standards as measured by our Guest Satisfaction Index or "GSI" as we believe that the best marketing takes place within the four walls of our restaurants. Many of our initiatives are designed to improve the guest experience. Our senior management teams at Ninety Nine and O'Charley's have implemented a combination of in-store and market focus groups designed to solicit feedback about how we can continue to improve our delivery of great food and service. We believe that increases in check average and guest counts require sustainable improvement in the guest experience. 'Project RevO'lution' and 'Project Dressed to the Nines' are key elements in our effort to achieve higher guest satisfaction. While recent economic conditions have had a negative impact on our financial performance, we believe that we are taking the appropriate steps to generate profitable and sustainable growth while enhancing shareholder value. In addition to our core strategy, we remain focused on the cost effectiveness of our support functions and on reducing general and administrative expenses.
Following is an explanation of certain items in our consolidated statements of operations:
Revenues consist primarily of company-operated and joint venture restaurant sales and, to a lesser extent, royalty and franchise revenue. Restaurant sales include food and beverage sales and are net of applicable state and local sales taxes and discounts. Franchise revenue and other revenue consists of development fees, royalties on sales by franchised units, and royalties on sales of branded food items, particularly salad dressings. Our development fees for franchisees in which we do not have an ownership interest are between $25,000 and $50,000 per restaurant. The development fees are recognized during the reporting period in which the developed restaurant begins operation. The royalties are recognized in revenue in the period corresponding to the franchisees' sales.
Payroll and Benefits include payroll and related costs and expenses directly relating to restaurant level activities including restaurant management salaries, bonuses, share-based compensation, hourly wages for restaurant level team members, payroll taxes, workers' compensation, various health, life and dental insurance programs, vacation expense and sick pay. We have various incentive bonus plans that compensate restaurant management for achieving certain restaurant level financial targets and performance goals.
Restaurant Operating Costs include occupancy and other expenses at the restaurant level, except property and equipment depreciation and amortization. In addition to occupancy costs, supplies, straight-line rent, supervisory salaries, bonuses, share-based compensation and related expenses, management training salaries, general liability and property insurance, property taxes, utilities, repairs and maintenance, outside services and credit card fees account for the major expenses in this category.
Advertising and Marketing Expenses include all advertising and marketing-related expenses for the various programs that we utilize to promote traffic and brand recognition for our three restaurant concepts. This category also includes the administrative costs of our marketing departments.
General and Administrative Expenses include the costs of restaurant support center administrative functions that support the existing restaurant base and provide the infrastructure for future growth. Executive management and support staff salaries, bonuses, share-based compensation, benefits, and related expenses, data processing, legal and accounting expenses, changes in the liabilities associated with our non-qualified deferred compensation plan, and office expenses account for the major expenses in this category. This category also includes all recruiting, relocation and most severance-related expenses. Severance costs associated with the 2007 supply chain restructuring are included in the "Impairment, Disposal and Restructuring Charges, net" line.
Depreciation and Amortization, Property and Equipment primarily includes depreciation on property and equipment calculated on a straight-line basis over the estimated useful lives of the respective assets or the lease term plus one renewal term for leasehold improvements, if shorter. Based upon the size of the investment that we make, the economic penalty incurred by discontinuing use of the leased facility, our historical experience with respect to the length of time a restaurant operates at a specific location, and leases that typically have multiple five-year renewal options that are exercised entirely at our discretion, we have concluded that one five-year renewal option is reasonably assured. It also includes accelerated depreciation expenses taken on assets to be disposed of during our 'Project RevO'lution' and 'Project Dressed to the Nines' re-branding activities.
Impairment, Disposal and Restructuring Charges, net includes the various costs associated with restructuring our supply chain, asset impairments, asset disposals and gains and losses incurred upon the sale of assets. Impairment charges are taken for land, buildings and equipment and certain other assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the assets. Impairment charges for assets that are held for sale represents the difference between their current book value and the estimated net sales proceeds. Disposal charges include the costs incurred to prepare the asset or assets for sale, including repair and maintenance; clean up costs; broker commissions; and independent appraisals. Gains and/or losses associated with the sale of assets are also included in this category.
We evaluate restaurant closures for potential disclosure as discontinued operations based on an assessment of quantitative and qualitative factors, including the nature of the closure, potential for revenue migration to other company-operated and franchised restaurants, planned market development in the area of the closed restaurant and the significance of the impact on the related consolidated financial statement line items.
Goodwill Impairment represents the impairment associated with goodwill as events and circumstances result in a carrying value in excess of fair value. In addition, the determination of a goodwill impairment, in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets"("SFAS No. 142"), consists of a two-step process. The first step consists of comparing each reporting unit's fair value to its carrying value. If the carrying value exceeds the fair value, the goodwill is considered to be impaired. If a possible impairment exists, a second step is performed to measure the amount of the impairment. Given the extensive process necessary to complete the second step of the goodwill impairment process, we may record an estimate during the interim period if an impairment is deemed necessary, and in the subsequent interim period, record any adjustments deemed necessary to the final impairment charge upon conclusion of this final valuation.
Pre-opening Costs represent costs associated with our store opening teams, as well as other costs associated with opening a new restaurant. These costs are expensed as incurred. These costs also include straight-line rent related to leased properties from the period of time between when we have waived any contingencies regarding use of the leased property and the date on which the restaurant opens. The amount of pre-opening costs incurred in any one period includes costs incurred during the period for restaurants opened and under development. Our pre-opening costs may vary significantly from period to period primarily due to the timing of restaurant development and openings. Pre-opening costs also include training, supply, and other incremental costs necessary to prepare for the re-opening of an existing restaurant as part of 'Project RevO'lution' and 'Project Dressed to the Nines' re-brandings.
Interest Expense, net represents the sum of the following: interest on our revolving credit facility; interest on our 9 percent Senior Subordinated Notes due 2013 (the "Notes"), including the impact of the interest rate swaps on the $78.0 million notional amount of the Notes; amortization of prepaid interest and finance charges; changes in the assets associated with our non-qualified deferred compensation plan resulting from gains and losses in the underlying funds; interest on capital lease obligations; fees for certain unused credit facilities; and interest income from our investments in overnight repurchase agreements.
Income Tax Expense (Benefit) represents the provision for income taxes. For the third quarter of 2008, the income tax provision included a charge of $35.4 million to establish a valuation reserve for substantially all of our deferred tax assets.
12 Weeks Ended 40 Weeks Ended
October 5, October 7, October 5, October 7,
2008 2007 2008 2007
Revenues:
Restaurant sales 99.9 % 99.2 % 99.9 % 99.0 %
Commissary sales 0.0 0.8 0.0 1.0
Franchise and other revenue 0.1 0.0 0.1 0.0
100.0 % 100.0 % 100.0 % 100.0 %
Costs and Expenses:
Cost of restaurant sales: (1)
Cost of food and beverage 30.3 29.1 29.7 29.2
Payroll and benefits 35.3 34.2 34.9 34.1
Restaurant operating costs 20.8 19.5 20.1 18.9
Cost of restaurant sales (2) 86.4 82.8 84.7 82.1
Cost of commissary sales (3) 0.0 0.9 0.0 1.0
Advertising and marketing expenses 3.6 3.6 3.7 3.4
General and administrative expenses 4.4 5.1 4.6 5.0
Depreciation and amortization 5.6 5.4 5.3 5.1
Impairment, disposal and
restructuring charges, net 0.0 2.2 0.2 1.8
Goodwill impairment 22.9 0.0 6.6 0.0
Pre-opening costs 0.4 0.4 0.4 0.3
(Loss) Income from Operations (23.2 ) 0.5 (5.4 ) 2.1
Other Expense:
Interest expense, net 2.1 1.2 1.5 1.2
(Loss) Earnings before Income Taxes (25.3 ) (0.8 ) (6.9 ) 0.9
Income Tax Expense (Benefit) 6.6 (0.6 ) 1.9 0.0
Net (Loss) Earnings (31.9 )% (0.2 )% (8.8 )% 0.9 %
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(1) Shown as a percentage of restaurant sales.
(2) Exclusive of depreciation and amortization shown separately.
(3) Cost of commissary sales as a percentage of commissary sales was 109.0 percent and 95.9 percent, respectively, for the 12 weeks and 40 weeks ended October 5, 2007. Severance cost associated with the closing of our commissary was recorded in the impairment, disposal and restructuring charges line item.
12 Weeks Ended 40 Weeks Ended
October October October October
5, 7, 5, 7,
2008 2007 2008 2007
($ in millions) ($ in millions)
O'Charley's Concept: (1)
Restaurant Sales $ 132.8 $ 137.7 $ 464.3 $ 482.5
Cost and expenses: (2)
Cost of food and beverage 30.1% 29.0% 29.4% 29.0%
Payroll and benefits 35.6% 34.3% 34.9% 33.9%
Restaurant operating costs (3) 20.3% 19.0% 19.5% 18.3%
Cost of restaurant sales (4) 86.0% 82.3% 83.7% 81.3%
Ninety Nine Concept:
Restaurant Sales $ 68.9 $ 72.8 $ 235.0 $ 242.0
Cost and expenses: (2)
Cost of food and beverage 29.7% 28.2% 29.2% 28.4%
Payroll and benefits 35.4% 34.8% 35.8% 35.1%
Restaurant operating costs (3) 22.0% 20.4% 21.6% 20.3%
Cost of restaurant sales (4) 87.0% 83.4% 86.6% 83.9%
Stoney River Concept:
Restaurant Sales $ 7.8 $ 8.5 $ 28.2 $ 30.0
Cost and expenses: (2)
Cost of food and beverage 39.2% 38.7% 37.8% 37.6%
Payroll and benefits 28.8% 28.1% 28.7% 27.8%
Restaurant operating costs (3) 19.3% 18.6% 18.5% 17.2%
Cost of restaurant sales (4) 87.3% 85.4% 85.0% 82.6%
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(1) Includes restaurant sales from O'Charley's joint venture operations of
approximately $1.7 million and $2.0 million for the 12 weeks ended
October 5, 2008 and October 7, 2007, and approximately $5.9 million and $7.2 million
for the 40 weeks ended October 5, 2008 and
October 7, 2007, but excludes revenue from franchised restaurants.
(2) Shown as a percentage of restaurant sales.
(3) Includes rent, where 100% of the Ninety Nine restaurant locations are leased (land
or land and building) as compared to 58% for
O'Charley's and 60% for Stoney River.
(4) Exclusive of depreciation and amortization.
During the quarter ended October 5, 2008, we tested our goodwill and intangible
assets for possible impairment in accordance SFAS No. 142. Quoted market prices
in active stock markets are often the best evidence of fair value; therefore, a
significant decrease in our stock price could indicate that an impairment of
goodwill exists. Also, we believe that the current economic environment and the
negative financial performance of other casual dining restaurant companies, as
well as lower sales and higher commodity costs at the Ninety Nine Restaurants,
are indicators of potential impairment. As a result of these indicators, we
performed an interim test to determine the estimated fair value of Ninety Nine
Restaurants and if the carrying amount of goodwill related to the acquisition of
Ninety Nine Restaurants was impaired. The estimated fair value of the Ninety
Nine Restaurants was based on the average of three valuation methodologies:
market multiple, comparable transaction, and discounted cash flow. The results
indicated an impairment as the current carrying value exceeded the estimated
implied fair value of the Ninety Nine Restaurants. We then performed a
preliminary impairment test by allocating the estimate of the fair value of
Ninety Nine Restaurants to the underlying assets and liabilities, and an
estimated non-cash impairment of $48.0 million was recorded to adjust the
carrying value of goodwill to its estimated fair value. This impairment is an
estimate as the second step of the goodwill impairment process will be completed
during the fiscal fourth quarter of 2008. Per SFAS No. 142, a company is
required to record a goodwill impairment estimate if the amount is probable and
reasonably estimable. Our press release of October 30, 2008 indicated that the
estimated goodwill impairment charge was $46.4 million. Subsequent to the
issuance of that release, we discovered that an error was made in the initial
assessment of the goodwill impairment. As a result of the correction of this
error, our current estimate of the goodwill impairment charge is $1.6 million
higher than the amount reported in the October 30, 2008 press release. The
calculation is expected to be finalized during the fiscal fourth quarter of
2008, and any adjustment, if necessary, will be recorded in our year-end
financial statements. This non-cash charge does not impact our operations or
cash flow. We expect to finalize our calculation of this impairment charge by
the end of the current fiscal year.
Including the impairment charge, we reported a loss from operations in the quarter of $48.6 million, and a loss before income taxes of $53.0 million. Excluding the impact of the impairment charge, the loss from operations in the third quarter of 2008 was $0.6 million, and the loss before income taxes was $5.0 million. In comparison, income from operations in the same prior year quarter was $1.0 million, and the loss before income taxes was $1.7 million. Results for the same prior year quarter included restaurant impairment and disposal costs of approximately $3.6 million, and charges related to supply chain changes of approximately $1.4 million.
We reported tax expense in the third quarter of $13.8 million, which includes a non-cash charge of $35.4 million related to a valuation allowance on the Company's deferred tax assets. As a result of the goodwill impairment charge, we now have a three-year cumulative pretax loss. SFAS No. 109, "Accounting for Income Taxes," requires that such recent losses be given more weight than our expectations of future earnings, and therefore requires the establishment of this allowance.
October 5, October 7,
2008 2007
Number of Restaurants:
O'Charley's Restaurants:
In operation, beginning of quarter 229 229
Restaurants opened 2 1
Restaurant closed - (1 )
In operation, end of quarter 231 229
Ninety Nine Restaurants:
In operation, beginning of quarter 116 113
Restaurants opened - 1
Restaurants closed - -
In operation, end of quarter 116 114
Stoney River Restaurants:
In operation, beginning of quarter 10 10
Restaurants opened - -
Restaurants closed - -
In operation, end of quarter 10 10
Franchised / Joint Venture Restaurants (O'Charley's)
In operation, beginning of quarter 12 11
Restaurants opened - -
Restaurants closed - -
In operation, end of quarter 12 11
Average Weekly Sales per Store:
. . .
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