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Overview of Q1

This marks the first quarter in which the results of Ninety Nine Restaurant and Pub are included.

Revenues in Q1 increased 43.7% to $215 million. Net income increased 10.4% to $8.9 million. EPS was unchanged at $.41.

Results at the O'Charley's restaurants were “disappointing.”

Ninety Nine contributed nicely. Stoney River continues to struggle.

Company is Executing Well in a Difficult Environment

CEO Greg Burns said that operations are running smoothly at the store level. But the financial results won't be there until the economy improves.

One bright spot: customer reviews have been positive, the best ratings the company has seen in years. In the past, favorable customer reviews have been a leading indicator…the good reviews that your get now mean better traffic at the restaurants in the future.

Another bright spot was the low employee turnover at Ninety Nine. Management turnover was 13% last year, and hourly employee turnover was 43%. Lowest turnover in the industry.

The slow economy continues to affect all casual dining operators, including O'Charley's. Customer traffic at O'Charley's was down 4.5 % in the quarter.

The war also had an impact. Eleven markets that O'Charley's serves are located near military bases. The company has seen no real improvement in traffic at those locations since war's end.

O'Charley's Restaurants

Sales for the quarter increased 9.9%. But same store sales decreased 2%. (For all of 2002, SSS was essentially flat.) Burns was disappointed with this performance and indicated that boosting sales is the top priority now.

The average check was up 3% in Q1. “Big spenders” continue to eat out despite the uncertain economy. “Value oriented” customers have been staying at home more than they have in the past.

Advertising — The company will adjust message slightly to emphasize the “value/reasonable price” theme. In the past, the company's ads did not address the value issue. (Typical ad showed groups of people just having a good time eating out.)

Food costs were very favorable in Q1, and are expected to remain favorable for the rest of year. Poultry prices are at a five year low and are less volatile than they've historically been.

The company plans to add about 27 to 28 O'Charley's stores in 2003. Burns prefers not to add more stores until the economy picks up. He acknowledged that, with SSS running at depressed levels, adding 28 restaurants will not produce the kind of revenue and income numbers that shareholders have come to expect, at least not this year. (Over the past 10 years, revenue has grown 20% on average, and earnings growth has been 27%.) He remains optimistic long term.

Ninety Nine

SSS increased 1% for the quarter.

Three new restaurants opened in Q1, bringing the total to 80. Will add 7 more stores this year. All new stores will be in existing markets except for one in western NY.

Ninety Nine's management was given a new deferred compensation plan upon joining the company earlier this year. No details provided. Burns thought it was necessary to offer this inducement in order to get the Ninety Nine acquisition done.

Stoney River Steak House

SSS fell 5.6%.

Six restaurants are now operating. A new store that the company had planned to add this year has been put on hold until the economy improves. Two Chicago stores, located in upscale suburban malls, are not doing too well.

General Discussion about Adding New Restaurants

Planning and building a new store is a two-year process.

Some of the newer stores have separate “To Go” entrances for greater customer convenience. (Carry out is 4.3% of sales.)

Cannibalization can be a problem if a new store is built within 5 to 7 miles of an existing store.

An analyst asked a question about the Nashville commissary. (This centrally-located commissary saves money by buying food in large quantities for shipment to the individual stores.) The analyst asked if the commissary, for all its strengths, is actually an impediment to expansion. That is, might the success of the commissary somehow cause the company to overlook attractive new markets just because they lie beyond the commissary's delivery area?

Burns dismissed this as a non-issue. (Although he didn't say so, I assume the company will someday reach a size where a second commissary would be necessary.) He did cite the St. Louis store as an example of a distant location that the commissary buys for, and can easily ship to, in a cost-effective way.


Franchising is “not up on our radar screen now.” A number of candidates have submitted business plans. Decision will be made “in the near term.”

Not easy for candidates to get financing these days. There are only two providers of franchise money in the country now, Burns said.

Debt/equity ratio

CFO Chad Fitzhugh said the goal is to keep the debt/equity ratio below 50%. With the ratio now at 47%, he believes the current capital structure is fine. No equity or convertible offering is in the works at this time.

Outlook for Q2 and Beyond

Recent weekends have been strong. Mother's Day was strong.

Revised EPS estimate for 2003—the mid $1.40s. (Earlier guidance from the company was $1.55 to $1.60.) The revised EPS estimate assumes 0 to -1% SSS change for O'Charley's and 0 to +1% for Ninety Nine.

Capital expenditures for 2003 will be in the mid $80 million range. (Earlier guidance from the company was $100 million.)
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