Schlotzsky’s, Inc. today reported second-quarter results that reflect continued performance improvements by company-owned restaurants.

For the three months ended June 30, Schlotzsky’s reported net income of $489,000, or $0.07 per diluted share, on revenues of $15.9 million. This compares with net income of $751,000, or $0.10 per diluted share, on revenues of $16.1 million, in the prior-year period.

For the six months ended June 30, Schlotzsky’s reported net income of $1,116,000, or $0.15 per diluted share, on revenues of $31.1 million. This compares with net income of $1,342,000, or $0.18 per diluted share, on revenues of $31.4 million, in the prior-year period.

Schlotzsky’s company officials said the decline in revenues was due primarily to comparisons to a record second quarter a year ago, less national television advertising than a year ago, and continued economic weakness in some of Schlotzsky’s key markets.

“We are solidly profitable, though affected by the economy, and we continue to invest in building our brand for the future,” said John C. Wooley, president and CEO of Schlotzsky’s, Inc. “We have significant new restaurant development, technology, supply chain, and training initiatives underway. We’re making improvements to new restaurant designs, both for franchisees who prefer shopping center spaces as well as for our company-owned restaurants, for which we are developing a larger bakery/cafe format. We’re also strengthening our marketing team to help position for growth. We expect to see the benefits from these initiatives as the economy improves.”

Company-owned restaurants continue strong performance

Operating income from company-owned restaurants before depreciation and amortization increased 38.9 percent. Revenue from these locations increased 8.1 percent year-over-year. During the quarter Schlotzsky’s acquired two additional restaurants, for a total of five more restaurants than it owned on June 30, 2001. Company-owned restaurants accounted for 52.0 percent of total revenues during the quarter, compared to 47.6 percent in the same period last year.

“A key part of our strategy is to develop a stronger base of company-owned restaurants to lead and support our franchisees and their growth. Just as important, we expect our company-owned restaurants to continue to deliver directly both to our revenue and profitability growth,” said Wooley.

Schlotzsky’s currently operates 35 restaurants in 12 states, of which 20 were developed for or purchased from franchisees and are available for sale. The remaining 15 company-owned restaurants represent the leadership group and averaged $27,754/week in the second quarter.

Wooley said Schlotzsky’s foresees building new company-owned restaurants in as many as 25 major markets around the U.S. over the next several years. “These will be our larger restaurant design, which we believe can compete very well in the bakery/cafe arena and will be an important part of our franchise support infrastructure.”


“In addition to new restaurants within our system, co-branding opportunities have the potential to boost future royalty and licensing revenue and contribute to our advertising program,” said Wooley. He said Schlotzsky’s is interviewing potential co-branding partners.

“We believe that the pizza category offers Schlotzsky’s a good opportunity as our unique sandwiches complement their need for a stronger lunch daypart. We are also looking at chains that have minimal geographic conflict. We are particularly interested in the West, Northwest, East or Northeast.”

Schlotzsky’s is also interested in chains that have a presence in smaller towns in Texas, the Southeast or Midwest where it does not intend to build company-owned restaurants. The company also anticipates purchasing its largest area developer territory later this month, which will make co-branding in many key markets both more attractive and more feasible, said Wooley.

On August 13, Schlotzsky’s completed repayment of its commercial bank debt to the group led by Wells Fargo Bank by mortgage financing of certain real estate and restaurant property. With those transactions complete, Schlotzsky’s intends to exercise its option by August 30 to purchase the territory, which covers much of Texas and ten other states, primarily in the South and Midwest.

Other significant developments during the second quarter included the following:

* Recurring revenue from royalties, brand contribution and net restaurant sales was 97.6 percent of company revenues during the second quarter, compared to 95.5 percent in the prior-year period.

* General and administrative expenses decreased 3.4 percent compared with the year-ago period. As a percentage of total revenues, general and administrative expenses fell 80 basis points compared with the second quarter of last year.

* Systemwide sales, including both franchised and company-owned restaurants, were $102.6 million for the quarter, a decrease of 6.5 percent from the prior year quarter.

* Systemwide same store sales declined 5.5 percent from the second quarter of 2001.

* The Schlotzsky’s® Deli system ended the second quarter with 671 restaurants (35 Company-owned and 636 franchised) systemwide, compared with 702 restaurants at the end of the second quarter of 2001.

Stock option accounting

Schlotzsky’s announced that it is adopting, effective January 2003, a policy of expensing stock options. Previously, the company had been reporting the effect of stock options as a note to its financial statements, consistent with FASB 123. Schlotzsky’s does not expect this change in accounting principle to have a material impact on its reported results of operations.

The company also announced that CEO John Wooley and CFO Rick Valade will be signing the certification required by the Sarbanes-Oxley Act of 2002 and that those certifications will be included in the Form 10-Q for the Quarter ended June 30, 2002, which will be filed later today.

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