O'Charley'S Inc. Business Information, Profile, and History

Company Perspectives:

The commitment to quality drives everything we do at O'Charley's, Ninety Nine, and Stoney River. It is evident in the smiling faces of our servers; the fresh and specialty items for which we are famous; and the broad appeal of our appetizers, entrees, and desserts. Most of all, it is expressed by the trust our customers place in us and the satisfaction they get from high quality and attentive customer service.

History of O'Charley'S Inc.

O'Charley's Inc. operates a chain of casual dining restaurants that feature aged prime rib, chicken, seafood, pasta, and homemade rolls and salad dressings. The restaurant was developed by David K. Wachtel, who purchased one existing O'Charley's unit in 1984 and quickly built it into a regional chain. During the early years of the new millennium, O'Charley's added the Ninety Nine Restaurant & Pub and Stoney River Legendary Steaks chains to its arsenal. The O'Charley's family includes more than 260 restaurants clustered in New England, the Southeast, and Midwest.

Origins

Two distinct eras described O'Charley's first three decades of existence. One was a period of little change and the other was a period of constant change and ambitious growth that transformed a solitary restaurant into a chain of restaurants generating nearly $200 million a year in sales. Not surprisingly, the two contrasting eras were led by different individuals pursuing different objectives. First came Charlie Watkins, the founder of O'Charley's, who opened the company's first restaurant in 1969. Watkins ran his lone O'Charley's for the next 15 years. Watkins sold his restaurant in 1984, marking the beginning of O'Charley's era of steady expansion and the arrival of the company's second leader.

Watkins sold his restaurant to David K. Wachtel, whose professional life had been spent in the restaurant business. For 23 years Wachtel had worked for Shoney's, a Nashville, Tennessee-based family dinner house chain. Wachtel eventually became president and chief executive officer of the restaurant company, resigning his twin posts in 1982. Two years later, he struck the deal with Watkins and gained control of the solitary O'Charley's restaurant; he had in mind, however, plans different from operating a single restaurant. Wachtel was intent on developing O'Charley's into a restaurant chain and, in less than three years, he accomplished much toward expanding the dining concept that he had acquired. In mid-1987, the 12th O'Charley's opened in Lexington, Kentucky, occupying a site formerly used by the Bennigan's chain of restaurants. While the Lexington grand opening was under way, Wachtel was working on plans to convert two more Bennigan's units into O'Charley's by the end of the year--one in Huntsville, Alabama and the other in the company's headquarters city of Nashville.

Quickly, Wachtel had developed one restaurant into a small regional chain that operated as a casual-theme dining concept featuring fresh fish, cut and aged meats, hamburgers, and fresh baked products. Although expansion had been rapid, it had not been wide-ranging. Of the 12, 180-seat O'Charley's units in operation during the summer of 1987, all were located within 200 miles of each other. It was a strategy Wachtel planned to follow in future expansion. "We'll concentrate on our current O'Charley's cities in the Southeast," he informed a reporter from Nation's Restaurant News, "which should keep us busy for three years but will interfere with my golf game." Wachtel's hours away from the restaurant business were a precious few, indeed, leaving little time for recreational pursuits. In addition to opening his 12th O'Charley's and planning the establishment of two others, he opened his first Trapper's restaurant in Nashville in 1987, a "red-meat-and-alcohol" concept that he planned to expand in the southeastern United States. Wachtel's involvement with business ventures aside from O'Charley's would eventually lure him away from leading the company, but during the immediate years ahead he spearheaded the expansion of his flowering O'Charley's chain.

1990 Public Offering

From the end of 1987 to the beginning of the 1990s, 13 new O'Charley's restaurants were opened, with expansion expected to pick up pace following the company's July 1990 initial public offering (IPO) of shares. The conversion to public ownership represented the second tool used by Wachtel to speed expansion. The first had been establishing a franchising program, which had engendered eight franchised restaurants by the time of the July public offering, but the timing of the stock sale reduced its effectiveness as a means for expansion. The timing could not have been worse. O'Charley's made its debut in the public spotlight just before tensions in the Persian Gulf flared and the United States implemented Operation Desert Storm. Many of the company's 27 restaurants at the time were situated near military bases with populations drained by the transfer of troops to the Middle East, and patronage at the company's restaurants declined as a result. Further, a national economic recession was under way, exacerbating the effects of O'Charley's ill-timed IPO.

In the wake of O'Charley's July 1990 offering, per restaurant sales and profits plunged, falling to among the lowest in the restaurant industry nationwide. At the same time, investors decided to risk their dollars elsewhere, and O'Charley's stock price fell to roughly two-thirds of its initial value. Changes were clearly needed, as the company took faltering steps under the eye of public scrutiny and into the new decade. Wachtel and other company executives assessed their position, looking at O'Charley's operations and the demands of its customers. In early 1991, management made the moves it hoped would restore vitality to the ailing chain.

What management found were problems associated with the restaurants' menus, which, as one industry observer noted, were beginning to resemble tomes the size of War and Peace. O'Charley's was not alone in this practice--it was an industrywide phenomenon--but the company's commonality with its competition did not lessen the effects of its burdensome menus. As part of the effort to find a solution to O'Charley's difficulties in late 1990, Wachtel hired Charles F. McWhorter, Jr., as senior vice-president and chief operating officer to help improve service and bolster customer traffic. A longtime employee of the Ryan's and Quincy's steakhouse chains, McWhorter noted that O'Charley's lengthy menu "was hard to execute 100 percent all the time; we were trying to be all things to all people." The solution was a smaller menu, which the company began testing in February 1991 in Knoxville, Tennessee and in Biloxi, Mississippi. The scaled-down menu was then refined and tested at a restaurant in Atlanta in preparation for chainwide distribution, which occurred in mid-1991.

The smaller menus offered roughly half of the entrees listed in the larger menus. "We looked at what was selling and what wasn't," McWhorter explained, "and dropped all the marginal items." Dropped from the old menu were four appetizers, five hamburger and sandwich selections, four steak and rib entrees, and items from the soup and salad listings, leaving O'Charley's with a pared-down menu that enabled quicker service and heightened food quality because kitchen staff had fewer menu selections with which to contend. "With the smaller menu we can do more things from scratch, and it frees up more time to do different things," McWhorter explained, declaring the switch to a more concise menu a success. Further adjustments were made in 1991, including a reduction in prices for dinner entrees to lunchtime prices and the addition of an Express lunch menu featuring 13 entrees priced under $6 that were guaranteed to be on the diner's table in less than 10 minutes.

While these changes were being made and company officials waited to gauge their success in sparking customer traffic, sales, and profits, expansion of the O'Charley's concept continued. Five new restaurants were opened in 1990 and another five debuted in 1991, entrenching the company's presence in Atlanta; Jackson and Memphis, Tennessee; and Brandon, Florida. By mid-1992, O'Charley's was a 37-unit chain with restaurants clustered in eight states, having blanketed the southeastern United States in less than a decade. Three more restaurants were slated for openings by the end of 1992 and another five units were scheduled to be developed in 1993, as Wachtel steadily added more links to his fast-growing chain. Part of the renewed optimism regarding the company's expansion plans was attributable to the first financial results recorded after the menu and pricing changes were made in 1991. For the first fiscal quarter of 1992, O'Charley's reported a 30 percent jump in sales and a more encouraging 37 percent gain in profits, convincing management that the switch to a smaller menu had been the right move.

On the heels of the welcomed financial news, Wachtel led O'Charley's in a new direction that promised to strengthen the company's financial clout. In June 1992, O'Charley's signed a letter of intent to form a partnership to purchase Logan's Roadhouse restaurant, a casual steakhouse restaurant with a grill in public view, concrete floors, muraled walls, and buckets of peanuts in a "honky-tonk" atmosphere. Under the terms of the deal, the partnership called for the establishment of a minimum of five additional Logan's Roadhouse restaurants during the ensuing five years, with the second unit targeted for its grand opening in Nashville in August 1992. O'Charley's became a 20 percent owner in the partnership with the remaining 80 percent belonging to a small group of investors that included Wachtel and McWhorter.

Slightly less than a year after Wachtel signed the Logan's Roadhouse agreement, he began to fade from the foreground at O'Charley's. In May 1993, Wachtel relinquished day-to-day control as president and chief executive officer to devote more time to other business projects, but continued to serve as chairman of O'Charley's. In his place, Gregory L. Burns was named president and selected to the additional post of chief financial officer, while McWhorter climbed the corporate rungs to the chief executive position. Although the orchestrator of O'Charley's resolute expansion for the previous nine years had stepped aside, the pace of expansion did not slacken in his absence. Five new O'Charley's were opened in 1993, giving O'Charley's a total of 45 restaurants. By the end of the year, future expansion seemed destined to be brisk.

In December 1993, Burns and McWhorter announced the formulation of a growth strategy designed to carry the 45-unit chain into the ranks of the country's largest regional dinner-house chains. "Over the past two years, we strengthened many of our internal programs and execution," Burns explained before vowing, "We plan to aggressively grow this company." According to the projections of the five-year plan, the company would lift its restaurant count to 100 units by 1998, a goal that would require it to exceed the expansion rate of the previous years. The company also announced plans to open a minimum of two Logan's Roadhouse units to add to the three restaurants already in operation.

Mid-1990s Lawsuit

Heading into 1994, the company planned to open at least eight new O'Charley's restaurants, situating the new units primarily in southeastern markets such as Cookeville, Tennessee; Louisville and Paducah, Kentucky; and Palm Harbor, Florida. It was a year expected to be filled with news of new restaurant openings, but as the calendar flipped to 1994 other headlines grabbed the attention of both those inside and outside the company. In February 1994, Wachtel resigned as chairman of O'Charley's, citing his "pressing commitments" with other business interests, the most notable of which was the 300-unit Western Sizzlin' budget steakhouse chain he had acquired in 1993. Wachtel's full departure from O'Charley's made room for advancement for Burns and McWhorter. Burns was named chief executive and co-chairman and McWhorter was tapped as president and co-chairman. One month after Wachtel's resignation, the company received devastating news when it was announced that four former O'Charley's employees had filed a federal lawsuit charging the restaurant chain with racial discrimination practices against African Americans in the company's hiring, assignment, and promotion procedures. Burns flatly denied the charges, saying the lawsuit was "without merit and the company intends to defend it vigorously."

Brighter news for O'Charley's management arrived in 1995 when the company's involvement in the Logan's Roadhouse partnership turned into a source of cash to fund expansion during the year. The partnership completed an IPO in July 1995, netting O'Charley's $11 million, or more than half of the money needed to open the 11 new restaurants scheduled for grand openings in 1995. Meanwhile, to Burns's and McWhorter's consternation, the attorneys for the plaintiffs in the racial discrimination lawsuit were seeking to win class-action status, which threatened to broaden the scope and deepen the damage of the lawsuit. The attorneys were successful in winning class-action status.

With the specter of the lawsuit casting a dark cloud over corporate headquarters in Nashville, senior executives moved forward with their expansion plans, striving to open between 12 and 14 new O'Charley's restaurants in 1996. By July 1996, there were 60 O'Charley's restaurants in operation and a new concept as well. The company opened a more upscale restaurant called Rhea Station Grille in historic downtown Nashville that featured herb-encrusted salmon, lemon artichoke chicken, and pasta and fresh fish in a setting decidedly unlike O'Charley's. Inside, piano entertainment was offered, as well as a room for private parties able to accommodate as many as 100 people. The Rhea Station Grille restaurant basked in the limelight for barely more than a month, its debut occurring weeks before O'Charley's agreed to settle the racial discrimination lawsuit it had been facing since 1994. In agreeing to settle the suit, and pay what eventually would amount to $6.2 million, Burns was adamant in his denial that there was any truth supporting the charges, declaring, "We agreed to this settlement because of the significant distraction the lawsuit has had on management and the uncertainty it has caused in the marketplace." One month after the settlement was announced, another management shakeup occurred when McWhorter resigned as president after his six-year tenure at the company. His departure left Burns in full power, occupying the posts of chief executive officer, president, and chairman of the board.

The settlement of the lawsuit struck a decisive blow to O'Charley's profit total for 1996. After recording $10.6 million in profits for 1995, which had been inflated by the money gained through the sale of its stake in Logan's Roadhouse, O'Charley's registered a $1.15 million loss for 1996 on an 11 percent gain in sales to $164.5 million. The lawsuit was behind it, however, as it entered 1997, freeing the company to concentrate on expansion. A total of 12 new O'Charley's were added during the disruptive 1996 year, and in the first two months of 1997 four more restaurants were added to the chain. With 72 restaurants in operation in early 1997, Burns was anticipating adding between 12 and 14 more restaurants by the end of the year. Sales for 1997 surpassed $200 million, a sure sign that the company's efforts were paying off.

Continuing Growth: Late 1990s and Beyond

With its problems in the past, O'Charley's looked to significantly expand in the following years. By 1999 store count had surpassed 106 units. Led by Burns, the company began to entertain the idea of a growth-through-acquisition strategy. The firm made a play for the J. Alexander's chain in 1999 but its attempts were rebuffed by the J. Alexander's board of directors. At the same time, O'Charley's itself opted to turn down a buyout offer made by Wachtel, who believed the chain's shareholders would best be served by taking the chain private through a management-led leveraged buyout.

Undeterred by the failed acquisition attempt in 1999, O'Charley's forged ahead with its growth plans and made several key moves in the early years of the new millennium. The company added the upscale Georgia-based Stoney River Legendary Steaks chain to its arsenal in 2000, planning to open three new locations each year until 2005. O'Charley's then took its strategy one step further with the purchase of the casual-dining Ninety Nine Restaurant & Pub, an 80-unit chain with locations in Massachusetts, New Hampshire, Rhode Island, Maine, Vermont, and Connecticut. Announced in late 2002 and completed in early 2003, the deal bolstered the company's holdings by nearly 40 percent and gave it a solid foothold in the northeastern U.S. market. Burns commented on the deal in a January 2003 company press release stating, "The remarkably similar operating philosophies and strategies of O'Charley's and Ninety Nine as well as the wealth of new locations available in Ninety Nine's core market create a unique opportunity to sustain the historic growth of the Ninety Nine concept and diversify the growth of O'Charley's Inc."

During 2002, O'Charley's opened 24 new restaurants, bringing its total store count to more than 180 locations. The company was named to Forbes's "200 Best Small Companies in America" list for the third consecutive year in 2002, a testament to its successful expansion efforts during a considerable downturn in the U.S. economy. With sales and profits climbing steadily, management remained focused on strengthening its position as a multi-concept operator. The company also was looking into franchise options as a vehicle for future growth.

Principal Operating Units: Stoney River Legendary Steaks; Ninety Nine Restaurant & Pub.

Principal Competitors: Applebee's International Inc.; Brinker International Inc.; Darden Restaurants Inc.

Chronology

• Key Dates:
• 1969: Charlie Watkins opens the company's first restaurant.
• 1984: Watkins sells his restaurant to David K. Wachtel.
• 1990: O'Charley's goes public.
• 1994: Wachtel resigns; former employees file a federal lawsuit charging the restaurant chain with racial discrimination against African Americans.
• 1996: O'Charley's agrees to settle the racial discrimination lawsuit.
• 2000: The Stoney River Legendary Steaks chain is acquired.
• 2003: The company completes its purchase of the Ninety Nine Restaurant & Pub chain.