Industry News | May 9, 2002

Schlotzsky's Reports a Systemwide Decrease in Same Stores Sales During the 1Q of 2002

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AUSTIN, Texas—May 9, 2002—Schlotzsky's, Inc. (Nasdaq:BUNZ) today announced results for the first quarter ended March 31, 2002 that reflect the Company's continuing emphasis on profitability, cash flow, recurring revenue and refilling the pipeline for new restaurants.

For the quarter ended March 31, 2002, Schlotzsky's reported net income of $628,000, or $0.08 per diluted share, an increase of 6.1 percent from $592,000, or $0.08 per diluted share, in the first quarter of last year. Revenues for the quarter were $15.2 million, a slight decrease of 0.7% from the first quarter of 2001.

"We are mid-way through a three-year strategic plan that began with a transition to a recurring revenue business model in 2000, a return to solid profitability in 2001, and should position us well for quality growth at the end of this year," said President and CEO John C. Wooley. "Our first-quarter results demonstrate that we are right on track with where we want to be. Since January, we have been aggressively advertising for franchisee candidates, and we're very encouraged by the qualifications, experience and capitalization of our new prospects. They see that we have an extremely strong concept and business proposition, as evidenced in our high performance company-owned restaurants, primarily in Austin, Texas."

Significant developments for the quarter include:

* Operating income before depreciation and amortization from Company-owned restaurants was $739,000, up 23.8 percent from $597,000 in the prior year.

* General and administrative expenses were $4,480,000, a decrease of 4.3 percent compared to $4,683,000 in the prior year.

* Systemwide sales, including both Company-owned and franchised restaurants, were $100.2 million, down 6.5 percent from the prior year quarter.

* Recurring revenue from royalties, brand contribution and net restaurant sales were approximately 97.6 percent of total Company revenue, up from 95.0 percent last year.

* Earnings before interest, taxes, depreciation and amortization (EBITDA) was $2.5 million, about the same as the prior year quarter.

* Commercial bank debt reduction continued, with $2.0 million paid down in the quarter. The Company's commercial bank debt as of March 31, 2002 was $8.3 million. Total debt decreased $2.4 million for the quarter.

* The Schlotzsky's Deli system ended the first quarter with 672 restaurants (33 Company-owned and 639 franchised) systemwide.

* Systemwide same store sales declined 5.4 percent from the first quarter of 2001.

"The decrease in systemwide same store sales during the first quarter was due to the economic downturn, our concentration in markets with a heavy technology employer base, and comparisons to our best-ever sales in the year-ago quarter," explained Wooley. "Also, our national advertising fund spent less on television advertising than in prior years as it is repaying the debt that financed the initial national television launch in 1999. We are confident that we understand what is causing the negative trend in sales, and we believe some of these factors will correct themselves in the near future. We intend to stick with our strategic plan and make the investments necessary to increase the number of franchised and company-owned restaurants, position Schlotzsky's for growth, and build value for our shareholders."

Wooley also noted that consumers are moving away from traditional hamburgers and fried foods toward the fast casual category, a category in which he considers Schlotzsky's a founding member and leader.

"We are investigating co-branding opportunities to increase the reach of the Schlotzsky's brand, both through franchised and company-owned restaurants. We are also continuing to develop our branded presence in the retail channel," said Wooley. "We believe that both of these areas offer significant potential for the future."

Additionally, the company is currently working with its lenders to design credit facilities that will fund the growth in company-owned restaurants and accommodate the exercise, by June 30, 2002, of its option to reacquire the territorial rights of the company's largest area developer. These growth initiatives are expected to begin positively impacting earnings and cash flow during in the second half of 2002 and into 2003.

Schlotzsky's will conduct a conference call to discuss information included in this press release and related matters at 9:30 a.m. (Central time) on Thursday, May 9, 2002. The conference call will be hosted by John C. Wooley and will be available for analysts and institutional investors at (800) 341-2319 (PIN 1080). The conference call will be available simultaneously, and in its entirety, to all interested investors and news media through a web cast at www.cooldeli.com.

News and information presented in this release has not been corroborated by QSR, Food News Media, or Journalistic, Inc.