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Author: kh Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35  
Subject: 2003 Q2 Conference Call Notes Date: 8/9/2003 10:48 PM
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O'Charley's Segment

The sales trends at the O'Charley's segment have not been good:

1. Same Store Sales declined 2.3%, marking the sixth consecutive quarter in which SSS has either declined or remained flat. Moreover, the drop in SSS grew larger as the quarter went on, falling to -4% to -5% in the last month. The SSS decline was evident in all regions, not just one or two regions.

2. The average store now gets about 4,500 customer visits/week, down from 4,700 visits/week.

3. Average weekly sales is now $51,800/store, down about 4%.

CEO Greg Burns acknowledged that the turnaround will take several quarters at least.

What went wrong?

For one thing, the company increased menu prices by 3% in 2002. Burns now believes the company underestimated the impact of the price increase on value-oriented customers who make up a large part of CHUX's base. In recent months, those customers have been staying away in increasing numbers.

Another problem area has been lunch. Customers have complained about slow service.

Another thing is that the “feel” of the restaurants (i.e., ambiance) may have become a little too upscale for some customers. Burns did not say how the company plans to address the “too upscale” issue when adding new stores in the future.

Sales Initiatives

To get the value-oriented customer back to O'Charley's, a new “Lunch Club” menu—featuring 10 items starting at $5.99—will be introduced in the near future. Service times at lunch should improve if a good number of customers order off this menu. (The limited number of offerings helps improve efficiency in the kitchen.)

In addition, managers will focus more on getting customers in and out faster at lunch, which should lead to better service times.

Also, the “regular” menu is being redesigned. Some of the more popular items that were dropped in the last menu update are being brought back.

There will be some new marketing/advertising initiatives that focus on the new menu and on “Limited Time Only” offers. These new efforts will cost an additional $2 million.

New Stores

Burns still thinks O'Charley's can be a 700+ store concept. The “Town and Country” approach to growth has served CHUX well over the years, he said. (Fully penetrate large Metropolitan markets, then backfill into smaller markets).

The Company is seeing some evidence of saturation in Nashville, Knoxville, and Indianapolis. Burns thinks this is a temporary phenomenon but did not elaborate.

Despite the SSS decline, the company plans to continue adding stores according to plan for the remainder of 2003. In keeping with past practice, the company will not announce the plan for next year until November. I got the impression that Burns was laying the ground work for a less ambitious building plan.

Other

The Ninety Nine Restaurants segment, which represents about one-third of total sales, continues to do well. Burns did not think the time and effort that went in to managing the Ninety Nine acquisition caused management to neglect the O'Charley's segment.

Franchising – nothing really new here. The Company is still looking at potential franchisees. The Company also is considering whether joint venture relationships might offer additional growth opportunities, although Burns provided no details.

Food To-Go - At the Ninety Nine segment, carryout is 8% of sales. At O'Charley's, its 4% of sales. One analyst suggested that the Company spend some marketing dollars promoting carryout, but Burns thinks it's best to focus on “dine in” customers.
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