| O CHARLEYS INC Item 1A Risk Factors |
| Risk Factors Some of the statements we make in this Annual Report on Form 10-K are forward-looking |
| Forward-looking statements are generally identifiable by the use of the words “anticipate,” “will,” “believe,” “estimate,” “expect,” “plan,” “intend,” “seek” or similar expressions |
| These forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief, plans or expectations including, but not limited to, the discussions of our operating and growth strategy, projections of revenue, income or loss, information regarding future restaurant openings and capital expenditures, potential increases in food and other operating costs, and our development, expansion, franchising and joint venture plans and future operations |
| Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results in future periods to differ materially from those anticipated in the forward-looking statements |
| Those risks and uncertainties include, among others, the risks and uncertainties discussed below |
| Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of these assumptions could prove to be inaccurate, and, therefore, there can be no assurance that the forward-looking statements included in this Annual Report on Form 10-K will prove to be accurate |
| In light of the significant uncertainties inherent in the forward-looking statements included herein, you should not regard the inclusion of such information as a representation by us or any other person that our objectives and plans will be achieved |
| We do not undertake any 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 |
| Changing consumer preferences and discretionary spending patterns could force us to modify our concepts and menus and could result in a reduction in our revenues |
| Our O’Charley’s and Ninety Nine restaurants are casual dining restaurants that feature menus intended to appeal to a broad spectrum of guests |
| Our Stoney River restaurants are upscale steakhouses that feature steaks, fresh seafood and other gourmet entrees |
| Our continued success depends, in part, upon the popularity of these foods and these styles of dining |
| Shifts in consumer preferences away from this cuisine or dining style could materially adversely affect our future operating results |
| The restaurant industry is characterized by the continual introduction of new concepts and is subject to rapidly changing consumer preferences, tastes and eating and purchasing habits |
| Our success will depend in part on our ability to anticipate and respond to changing consumer preferences, tastes and eating and purchasing habits, as well as other factors affecting the restaurant industry, including new market entrants and demographic changes |
| We may be forced to make changes in our concepts and menus in order to respond to changes in consumer tastes or dining patterns |
| If we change a restaurant concept or menu, we may lose guests who do not prefer the new concept or menu, and may not be able to attract a sufficient new guest base to produce the revenue needed to make the restaurant profitable |
| In addition, consumer preferences could be affected by health concerns about the consumption of beef, the primary item on our Stoney River menu, or by specific events such as E coli food poisoning or outbreaks of bovine spongiform encephalopathy (mad cow disease) or other diseases |
| Our success is also dependent to a significant extent on numerous factors affecting discretionary consumer spending, including economic conditions, disposable consumer income and consumer confidence |
| Adverse 12 _________________________________________________________________ [52]Table of Contents changes in these factors could reduce guest traffic or impose practical limits on pricing, either of which could harm our results of operations |
| We may experience higher operating costs, which would adversely affect our operating results, if we cannot increase menu prices to cover them |
| Our operating results are significantly dependent on our ability to anticipate and react to increases in food, labor, team member benefits, energy and other costs |
| Various factors beyond our control, including adverse weather conditions (including hurricanes), governmental regulation, production, availability, recalls of food products and seasonality may affect our food costs or cause a disruption in our supply chain |
| We cannot predict whether we will be able to anticipate and react to changing food costs by adjusting our purchasing practices and menu prices, and a failure to do so could adversely affect our operating results |
| In addition, because the pricing strategy at our O’Charley’s and Ninety Nine restaurants is intended to provide an attractive price-to-value relationship, we may not be able to pass along price increases to our guests |
| We compete with other restaurants for experienced management personnel and hourly team members |
| In addition, any increase in the federal minimum wage rate would likely cause an increase in our labor costs |
| We cannot assure you that we will be able to offset increased wage and benefit costs through our purchasing and hiring practices or menu price increases, particularly over the short term |
| Our continued growth depends on our ability to open new restaurants and operate our new restaurants profitably, which in turn depends upon our continued access to capital |
| A significant portion of our historical growth has been due to opening new restaurants |
| We opened 13 new company-owned O’Charley’s restaurants, ten new Ninety Nine restaurants and one new Stoney River restaurant in 2005 |
| We currently plan to open between three and five new company-owned O’Charley’s restaurants, between seven and ten new Ninety Nine restaurants, and two or three new Stoney River restaurants in 2006 |
| Our ability to open new restaurants will depend on a number of factors, such as: • the selection and availability of quality restaurant sites; • our ability to negotiate acceptable lease or purchase terms; • our ability to hire, train and retain the skilled management and other personnel necessary to open, manage and operate new restaurants; • our ability to secure the governmental permits and approvals required to open new restaurants; • our ability to manage the amount of time and money required to build and open new restaurants, including the possibility that adverse weather conditions may delay construction and the opening of new restaurants; and • the availability of adequate financing |
| In addition, we have historically generated insufficient cash flow from operations to fund our working capital and capital expenditures and, accordingly, our ability to open new restaurants and our ability to grow, as well as our ability to meet other anticipated capital needs, is dependent on our continued access to external financing, including borrowings under our credit facility and financing obtained in the capital markets |
| Our ability to make borrowings under our credit facility will require, among other things, that we comply with certain financial and other covenants, and we cannot assure you that we will be able 13 _________________________________________________________________ [53]Table of Contents to do so |
| Accordingly, we cannot assure you that we will be successful in opening new restaurants in accordance with our current plans or otherwise |
| Furthermore, we cannot assure you that our new restaurants will generate revenues or profit margins consistent with those of our existing restaurants, or that the new restaurants will be operated profitably |
| Our growth may strain our management and infrastructure, which could slow our development of new restaurants and adversely affect our ability to manage existing restaurants |
| Our growth has placed significant demands upon our management |
| We also face the risk that our existing systems and procedures, restaurant management systems, financial controls and information systems will be inadequate to support our planned growth |
| We cannot predict whether we will be able to respond on a timely basis to all of the changing demands that our planned growth will impose on management and these systems and controls |
| In May 2000, we acquired Stoney River and, in January 2003, we acquired Ninety Nine |
| The development of the Stoney River concept and the integration and operation of the Ninety Nine concept will continue to place significant demands on our management |
| These demands on our management and systems could also adversely affect our ability to manage our existing restaurants |
| If our management is unable to meet these demands or if we fail to continue to improve our information systems and financial controls or to manage other factors necessary for us to achieve our growth objectives, our operating results or cash flows could be materially adversely affected |
| Unanticipated expenses and market acceptance could affect the results of restaurants we open in new and existing markets |
| As part of our growth plans, we may open new restaurants in areas in which we have little or no operating experience and in which potential guests may not be familiar with our restaurants |
| For example, in the fourth quarter of fiscal 2005, we expanded our Ninety Nine concept into the Philadelphia, Pennsylvania market |
| As a result, we have incurred and may continue to incur costs related to the opening, operation, supervision and promotion of those new restaurants that are substantially greater than those incurred in other areas |
| Even though we may incur substantial additional costs with these new restaurants, they may attract fewer guests than our more established restaurants in existing markets |
| As a result, the results of operations at new restaurants may be inferior to those of our existing restaurants |
| The new restaurants may even operate at a loss |
| Another part of our growth plan is to open restaurants in markets in which we have existing restaurants |
| We may be unable to attract enough guests to the new restaurants for them to operate at a profit |
| Even if we are able to attract enough guests to the new restaurants to operate them at a profit, those guests may be former guests of one of our existing restaurants in that market and the opening of a new restaurant in the existing market could reduce the revenue of our existing restaurants in that market |
| We could face labor shortages that could adversely affect our results of operations |
| Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified team members, including restaurant managers, kitchen staff and servers, necessary to continue our operations and to keep pace with our growth |
| Given the low unemployment rates in certain areas in which we operate, we may have difficulty hiring and retaining qualified management and other personnel |
| Any inability to recruit and retain sufficient qualified individuals may adversely affect operating results at existing restaurants and delay the planned openings of new restaurants |
| Any delays in opening new restaurants or any material increases in team member turnover rates in existing restaurants could have a material adverse effect on our business, financial condition, operating results or cash flows |
| Additionally, we have increased wages and benefits to attract a sufficient number of competent team members, resulting in higher labor costs |
| 14 _________________________________________________________________ [54]Table of Contents Our restaurants are concentrated geographically; if any one of the regions in which our restaurants are located experiences an economic downturn, adverse weather or other material change, our business results may suffer |
| Our O’Charley’s restaurants are located predominately in the Southeastern and Midwestern United States |
| Our Ninety Nine restaurants are located in the Northeastern United States |
| As of December 25, 2005, we operated 35 of our 225 O’Charley’s restaurants in Tennessee and 60 of our 109 Ninety Nine restaurants in Massachusetts |
| As a result, our business and our financial or operating results may be materially adversely affected by adverse economic, weather or business conditions in these markets, as well as in other geographic regions in which we locate restaurants |
| Our restaurants may not be able to compete successfully with other restaurants, which could adversely affect our results of operations |
| The restaurant industry is intensely competitive with respect to price, service, location, nutritional and dietary trends and food quality, and there are many well-established competitors with substantially greater financial and other resources than us, including a large number of national and regional restaurant chains |
| Some of our competitors have been in existence for a substantially longer period than us and may be better established in the markets where our restaurants are or may be located |
| If our restaurants are unable to compete successfully with other restaurants in new and existing markets, our results of operations will be adversely affected |
| To the extent that we open restaurants in larger cities and metropolitan areas, we expect competition to be more intense in those markets |
| We also compete with other restaurants for experienced management personnel and hourly team members and with other restaurants and retail establishments for quality sites |
| Any disruption in the operation of our commissaries could adversely affect our ability to operate our restaurants |
| We operate a commissary in Nashville, Tennessee through which we purchase and distribute a substantial majority of the food products and supplies for our O’Charley’s and Stoney River restaurants |
| We also operate facilities in Woburn and Bellingham, Massachusetts, through which we purchase and distribute a portion of the food products and supplies for our Ninety Nine restaurants |
| If the operations of our commissaries are disrupted, we may not be able to deliver food and supplies to our restaurants |
| If our commissaries are unable to deliver the food products and supplies required to run our restaurants, we may not be able to find other sources of food or supplies, or, if alternative sources of food or supplies are located, our operating costs may increase |
| Accordingly, any disruption in the operation of our commissaries could adversely affect our ability to operate our restaurants and would adversely affect our results of operations |
| We may incur costs or liabilities and lose revenue as the result of government regulation |
| Our restaurants are subject to extensive federal, state and local government regulation, including regulations related to the preparation and sale of food (such as regulations regarding labeling, allergens content and other menu information regarding nutrition), the sale of alcoholic beverages, zoning and building codes and other health, sanitation and safety matters |
| All of these regulations impact not only our current restaurant operations but also our ability to open new restaurants |
| We will be required to comply with applicable state and local regulations in new locations into which we expand |
| Any difficulties, delays or failures in obtaining licenses, permits or approvals in such new locations could delay or prevent the opening of a restaurant in a particular area or reduce operations at an existing location, either of which would materially and adversely affect our growth and results of operations |
| In addition, our commissaries are licensed and subject to regulation by the United States Department of Agriculture and are subject to further regulation by state and local agencies |
| Our failure to obtain or retain federal, state or local licenses for our commissaries or to comply with applicable regulations could adversely affect our commissary operations and disrupt delivery of food and other products to our restaurants |
| If one or 15 _________________________________________________________________ [55]Table of Contents more of our restaurants were unable to serve alcohol or food for even a short time period, we could experience a reduction in our overall revenue |
| The costs of operating our restaurants may increase if there are changes in laws governing minimum hourly wages, workers’ compensation insurance rates, unemployment tax rates, sales taxes or other laws and regulations, such as the federal Americans with Disabilities Act, which governs access for the disabled |
| If any of the above costs increase, we cannot assure you that we will be able to offset the increase by increasing our menu prices or by other means, which would adversely affect our results of operations |
| We may incur costs or liabilities as a result of litigation and publicity concerning food quality, health and other issues that can also cause guests to avoid our restaurants |
| We are subject to complaints or litigation from time to time from guests alleging illness, injury or other food quality or health concerns |
| Litigation or adverse publicity resulting from these allegations may materially adversely affect us or our restaurants, regardless of whether the allegations are valid or whether we are liable |
| We were subject to numerous lawsuits arising out of the exposure in September 2003 of our guests and employees at one of our O’Charley’s restaurants located in Knoxville, |