Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Famous Dave's of America (NASDAQ:DAVE)

Q4 2012 Earnings Call

February 14, 2013 11:00 am ET

Executives

Diana Garvis Purcel - Chief Financial Officer, Principal Accounting Officer, Vice President and Secretary

John F. Gilbert - Chief Executive Officer, Director and Member of Strategic Planning Committee

Analysts

Conrad Lyon - B. Riley & Co., LLC, Research Division

Shannon Richter

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Diana Purcel. Ma'am, the floor is yours.

Diana Garvis Purcel

Thank you. Good morning, everyone, and thank you for joining us for the Famous Dave's Fiscal 2012 Fourth Quarter Conference Call. I'm Diana Purcel, Chief Financial Officer, and with me today is John Gilbert, our Chief Executive Officer.

Before we begin, we'd like to remind those listening that certain matters discussed within are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Famous Dave's believes that the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained.

Factors that could cause the actual results to differ materially from Famous Dave's expectations include financial performance, restaurant industry conditions, execution of our restaurant development and construction programs, franchisee performance, ability of our franchisees to meet their development commitments, changes in local or national economic conditions, availability of financing and other risks detailed from time-to-time in the company's SEC reports.

Our earnings release, which contains the financial and other statistical information being discussed this morning, was issued yesterday afternoon after market closed and can be accessed by clicking on the Investor Relations link on our website at www.famousdaves.com.

As a reminder, this call is being recorded and will be available for replay for 7 days.

Now, I'd like to turn the call over to John Gilbert, Famous Dave's CEO. John?

John F. Gilbert

Hi, everybody. Thanks for joining us this morning. Appreciate the time that you're taking out of your busy day to spend with us.

Yesterday, after the market closed, Famous Dave reported revenue of $36.3 million and earning of $0.10 per diluted share for the fourth quarter. For the full year, revenue totaled $155 million and earnings were $0.57 per diluted share. Same-store sales in the fourth quarter, for company-owned restaurants were down 6% while our franchise restaurants were down 4%. For the full year, comparable sales at our company-owned restaurants were down 1.8% and comp sales at our franchise restaurants were down 2%.

2012 results fell well short of expectations, and it's really important to understand some of the primary factors that led to our results this year. Upfront would be that we entered 2012 on the heels of an interesting leading finish for fourth quarter 2011 where we had a 3.6% comp increase for that quarter for company-owned stores. So we were rolling over some pretty big numbers. Those sales, however, were driven primarily through heavy coupon discounting. They really had a negative impact on profits, and in my opinion, created a wrong impression for our business in the marketplace.

So as such, we proactively pulled back on the level of consumer-focused discounting in 2012 for the fourth quarter in order to both preserve our pricing integrity and have some positive impact on growth -- gross margin. In essence, we're really not, at Famous Dave's, a broad scale discount-driven brand, I think you've heard me mention that before, nor should we be. Really, 2 reasons for that: one, we don't have the marketing muscle to pull off the transaction-driving needs for discounting; and we really don't have the frequencies of brand for discounting to be effective. However, consumers do want to great value, and there are smarter ways to play the value game than the broad distribution of big discounts.

So we're going to continue to focus -- or shift our focus to ways of -- alternative ways of creating a consumer value proposition. In this economy, we need to do that, but it won't be as dependent on those big discounts driven by coupon offers.

Additionally, in 2012, our gross margins were negatively impacted by a difficult commodity environment, no surprise there. Anticipating some of those challenges, at the beginning of 2012, the team locked in some major protein contracts. Nevertheless, the rising commodity prices still took an undo toll on us. A big example of that was pork. Despite the fact that we were able to secure product at a price that proved favorable throughout the entire year in comparison to the market, we were still up 20% higher versus 2011 pork costs that was clearly secured during more favorable conditions.

Our margins were also negatively impacted by decisions made midyear to delay some important strategic initiatives for further testing. One example of that is we were shifting from a pre-smoked brisket to a house-smoked fresh brisket that had cost savings attached to it in order to make sure that product was perfect. This delay did cost us some margin in the year, but it allowed us to further develop the product and we were able to do some things with that product. So in essence, we did roll it out later, but we also developed a product called Famous Dave's Burnt Ends, which will be featured in a national promotion for us in April. We're really excited about the potential of this product. And what Burnt Ends allowed us to do was to use all parts of the brisket, improving margin even further while delivering for both the beef brisket and the Burnt Ends a product that was significantly better than what we had already. In addition, we get some terrific product news for our marketing calendar for April. Now, it's not an LTO. It'll be a permanent product for us, but we have seen this product perform very well in tests, so we're pretty excited about it.

Additionally, the decline in our margins year-over-year reflected sales deleverage on fixed cost categories such as manager, labor and rent. These challenges, combined with a difficult economic environment and an increasingly competitive landscape, really did create an opportunity for us to review our entire business from top to bottom and created a sense of urgency that led to several fundamental changes in the way the organization views our guests, including the addition of me to the team.

One of the core opportunities I identified early on, and I think will carry through for years to come, is simply that the fact that our guests access our brand in 4 different ways and they're different from each other significantly: dine-in, to-go, catering and retail. We're focusing heavily right now in dine-in and to-go and catering in terms of approaching the business differently. Not all consumers access the brand similarly across all these occasions. And so, by not taking advantage of the fact that a dine-in occasion is very different from to-go occasion, we've, in fact, been leaving money on the table. We've been leaving sales upside on the table. And so, we're going to approach these of occasions specific to how the consumer accesses those and we can certainly talk more about that in the Q&A.

As such, we've realigned our sales functions. What was once marketing now -- is now a hit called sales, and we've put a leader -- or put in leaders who eat, sleep and breathe their respective categories of dine-in, to-go and catering. Each of these line of business owners will be responsible for the strategy of that business from marketing insight, to planning, to execution. And so in fact, you would essentially have champions, many CEOs, if you will, of their line of business.

Additionally, a critical element to the success of our line of business strategy was the creation of support group called the Digital Services Group, and these guys really become the selling extensions of our IT functions. This group is specifically tasked with driving sales and creating traffic growth through the use of proven digital solutions. We're not going to be pioneers in this space, but we're going to certainly use what's out there to drive our performance. We'll use things like online ordering where, right now, we're less than 1% of sales and we know of people in our industry that are at 50% of sales. So we'll be using things like online ordering and catering call centers to really unlock potential across these lines of business. This Digital Group will transform the way we understand and engage the Famous Dave's guests. And this isn't a start-from-scratch opportunity for us. Keep in mind, we have about 10,000 e-mail members per restaurant in our database right now. So we have a head start on how we use this Digital Group to create shareholder value going forward.

In addition, despite the weak performance in 2012, we've managed to expand our brands in many other ways. We added 12 new restaurants including our first international location in Canada, Winnipeg, which has been a huge hit for us. During the fourth quarter of 2012, we opened 4 new franchise-operated restaurants in South Coast Metro in California, Overland Park in Kansas and in Fort Myers, Florida. And we did open our first Wyoming location in Casper.

And during 2012, while the restaurants that were committed to be developed decreased by 1 unit year-over-year, we did see the execution of 2 significant area development agreements as well as a number of smaller agreements. In 2012, we continue to evolve the concept including 2 successful openings of our smaller, quick casual footprint, what we call the shack, franchise location in Beaverton, Oregon and a new company-owned location in Evergreen Park, Illinois.

We also boosted our infrastructure through investments in people and systems and realign our businesses along the lines of business that I mentioned. All of these, we believe, will enable us to be more focused, agile, efficient and profitable for the future.

So 2012 was, indeed, a year of transition and focus for Famous Dave's. And despite the challenges, we took real and tangible steps towards becoming a better run business. Going forward, we will drive measurable results through smarter pricing decisions, data-driven promotions, improved cost management and sensible brand expansion.

During 2013, we'll grow through the addition of new locations, new franchise partners, new prototype designs including the shack and full service and new markets. We will leverage our size and our barbecue expertise and knowing that our guest experience and our brand is very specific in unique ways across these lines of business.

In 2013, we expect to open approximately 17 new restaurants, including 2 company-owned locations in addition to restaurants in Carolina, Puerto Rico expected to open in April. With these openings, we will surpass 200 restaurants and over $0.5 billion in system-wide sales in 2013.

We did experience 4 closures during the fourth quarter: a previously impaired company-owned restaurant in Yorktown, Illinois at the end of the natural lease term; and 3 franchise-operated restaurants in Hawaii, Texas and Minnesota.

Turning to a recap of our fourth quarter marketing efforts. We continued our menu evolution that we had mentioned in the last call with the continued tests of new menu designs in 3 different markets. The work of getting our menu correct with the right mix of products and pricing will continue into the first quarter of 2013 as we continue to test into additional markets. We would actually be rolling a new menu in April that's a result -- on a national basis, it's a result of our test that we feel pretty good about in terms of both content and how it looks and feels to the consumer. In conjunction with our partnership with RMS, the leading pricing science company in the industry, this test and this April launch, which will be informed by RMS will be forthcoming in April.

We are also very pleased to announce that starting in mid-February, we returned to our menu our famous catfish product. We have removed catfish from our menu in 2010 because of worldwide supply issues. Despite our aggressive sourcing efforts, we simply couldn't get the quality that we wanted in a reliable way, to our restaurants. And actually, of all the things I've heard about since becoming CEO, I think catfish was one of the most interesting ones in terms of pretty significant and consistent feedback from our consumers with a general theme of where the heck is it. We brought it back starting last week. And so far, we've received over 2,000 positive social media mentions about, thank goodness you brought catfish back.

Catfish is not an LTO, it's a permanent item, so we expect to have some very strong performance over time based on catfish. And one thing you should think about when you think about catfish. Even though it sounds like a fairly small thing, and in terms of our menu mix it is significant, but not huge. What it does for us is it enables us to have a, what we would call, a frequency enabler. It gets customers to come in more often because they have something dramatically different that's still natural on a barbecue restaurant, but there's something different for their palate. So we're very excited about catfish.

Going forward, my commitment to shareholders that -- is that in 2013 we'll have a different story to tell than the one I'm telling now. Fiscal 2013 will reflect improved sales; the adoption of new analytical disciplines across the enterprise to improve our profitability, wise discounting as an example; and acceleration of franchising growth; and the continuation of building an organization that fits our current and future needs.

First, our focus on improving sales in the face of a difficult consumer environment will be supported by our new company leadership and through our line of business models, smart value propositions that work for both our customers and our shareholders and this investment in digital strategy. This approach will drive our marketing programs and initiatives including many with promotional outreach, pricing and new product news that will become apparent in better investments in our off-premise business.

Second, a focus on equipping our analytical disciplines to increase profitability. I mentioned that we announced that we've hired RMS over the past quarter. Menu optimization, for any full-service restaurant, is a significant part of their strategy. RMS's pricing recommendations will enable us to take pricing in a more effective way. Ideally, we take pricing without losing traffic; that's the track record with RMS. And these pricing recommendations will complement the menu work I already mentioned.

Additionally, we'll continue to aggressively seek opportunistic purchasing situations and flexibility in our 2013 commodity contracting. We have become significantly more aggressive in identifying barbecue-suitable products at favorable prices to add to our menu in order that both satisfy customer demand, but also to drive down our COGS. There are a couple of initiatives underway right now that are in tests that we'll talk more about later in the year that leverage this strategy very, very well and the result -- the early results are very positive.

Third, we'll continue to focus on franchise growth. As a company, we continue to manage an appropriate balance of company-owned and franchise-owned restaurants. As a franchisor, we are attracted to franchisee -- we are attracting to franchisees -- excuse me, attractive to franchisees by virtue of testing and proving in our own stores before we require our system to invest in a particular course of action. That makes us a more attractive investment for franchisees. That being said, we also remain committed to accelerating franchise growth. We will, as a brand, create a leading market proposition for franchisees including increasing the leverage of our brand through international development. This is a strategy that might provide us with the opportunity to re-franch company units where and when strategically appropriate in order to stimulate or seed additional franchise market growth. Today, over 70% of our locations are franchise-operated locations, and with this focus, we would expect to see that percentage grow.

Lastly, we'll continue to build a high-performing organization, I've talked a little bit about this, that can deliver against our new strategies. This work began in 2012 with the restructuring I talked about and the new lines of business and it will continue this year as we continue to invest in the right people and systems to support our growth and success. The one thing I can say that will remain the same is the consumer-oriented culture, which our founder, Dave Anderson, really a man whose life was defined by success in the midst of challenge, put forth. And the 2 cornerstones of that really are award-winning, highest quality food possible and fantastic service. And that won't change and that is the strength of this organization that I hope to be able to enhance.

So in sum, I speak for the entire enterprise, both franchisor and franchisee, when I say we are certainly up for the challenge.

I'm going to turn it back over to Diana for a recap of our financial performance, and then of course, we'll open it up for your questions. Diana?

Diana Garvis Purcel

Thank you, John. To those on the call, please refer to our press release issued yesterday as I summarize our results.

Famous Dave's reported revenue of $36.3 million and net income of $750,000 or $0.10 per diluted share for the fourth quarter of 2012 compared to a revenue of $37.5 million and net income of $414,000 or $0.05 per diluted share for the fourth quarter of 2011.

For the full fiscal year 2012, revenue was $155 million, and net income was $4.4 million or $0.57 per diluted share, which include $0.04 of closure costs in a lease reserve for restaurants that closed during 2012. Additionally, there was a $0.07 favorable impact to earnings per share as a result of the cumulative effect of the recapture of prior year tax credits in the third and fourth quarters of 2012. This compares to revenue of $154.8 million and net income of $5.6 million or $0.68 per diluted share for 2011, which includes $0.05 noncash charges for the impairment of specific restaurant assets.

Adjusted EBITDA for fiscal 2012 was $12.6 million and compared to adjusted EBITDA of $15.5 million for fiscal 2011, reflecting a decline in income from operations.

The year-over-year decline in fourth quarter sales reflected a comparable sales decrease of 6% off a strong base of 3.6% for the prior year and a closure of 3 company-owned restaurants. These decreases were partially offset by the addition of 2 new company-owned restaurants since the end of the fourth quarter of 2011 and a weighted average price increase of approximately 2.5%. On a weighted basis, dine-in represented 5.5% of the sales declined and to-go represented 1.2% of the sales decline. These were partially offset by 0.7% increase in catering sales.

For the fourth quarter of fiscal 2012, off-premise sales were 35.8% of total sales with to-go representing 24.1% and catering representing 11.7%. This compares to off-premise sales of 33.7% for the prior year.

Our per-person average for the fourth quarter of fiscal 2012 was $15.83 and this compared to $15.49 for the fourth quarter of 2011, primarily reflecting the weighted average price increase. The breakdown by daypart was $13.98 for lunch and $17.03 for dinner.

For the full year, total restaurant sales reflected a 1.8% comparable sales decrease and a closure of 3 company-owned restaurants. This was partially offset by the full year impact of 2 company-owned restaurants that opened in fiscal 2011 and the partial-year impact of company-owned restaurants that opened in fiscal 2012 as well as the weighted average price increase of approximately 2.85%. Of the 1.8% comparable sales decrease on a weighted basis, dine-in sales accounted for 2.1% of the decline while catering increased 0.3% and to-go remained flat.

For the full fiscal year, off-premise sales were 33.4% of total sales with catering at 10.5% and to-go at 22.9%. This compares to 2011's off-premise sales of 32%.

For fiscal 2012, our per-person average was $15.73, compared with an average of $15.38 for 2011. The breakdown by daypart for 2012 was $13.84 for lunch and $16.89 for dinner.

On the franchise side, the year-over-year increase in fourth quarter and full year 2012 royalty revenue reflected 10 new franchise-operated restaurants that opened at higher sales volumes than the 8 restaurants that closed. Additionally, franchise royalties reflected a comparable sales decline of 4% and 2% for the fourth quarter and the full year, respectively.

As previously mentioned, 4 new franchise-operated restaurants opened during the fourth quarter: South Coast Metro, California; Overland Park, Kansas; Fort Myers, Florida; and Casper, Wyoming. And 3 franchise-operated restaurants closed in Lahaina, Hawaii; Abilene, Texas; and Baxter, Minnesota. Subsequent to the end of fiscal 2012, a franchise-operated restaurant closed in Burnsville, Minnesota and is expected to be relocated in early 2013 in Cottage Grove, Minnesota. At the end of fiscal 2012, we had 53 company-owned restaurants and 135 franchise-operated restaurants for a system-wide total of 188 restaurants in 34 states and 1 Canadian Province.

By comparison, at the end of 2011, we had 54 company-owned restaurants and 133 franchise-operated restaurants for a system-wide total of 187 restaurants in 37 states.

As of today, we have 53 company-owned restaurants and 134 franchise-operated restaurants for a system-wide total of 187 restaurants in 34 states and 1 Canadian Province.

I'll now take a few moments to review final expenses for fiscal 2012 and discuss some items pertaining to fiscal 2013. Our food and beverage costs for fiscal 2012 were 31.3% of net restaurant sales, compared to 29.8% for the same period in fiscal 2011.

Managing food cost volatility in 2012 proved more difficult than originally anticipated. We continue to face pressure on our margins, primarily due to historically high corn prices, which is a key ingredient in many of our products as well as livestock feed. Also, as John mentioned, we strategically slowed the progress for further testing of some of the initiatives mentioned earlier on in 2012 to ensure their long-term success, both in terms of dollar savings as well as delivering a value proposition to our guests. While we believe this to be a prudent move, the result was that we were not able to realize the savings for 2012 we originally anticipated. Additionally, continuing a trend we saw throughout the year, as guests looked for greater value we saw a shift towards lower-priced, lower-margin items. This is why our menu tests currently underway in addition to the work that we are doing with our pricing consultant, RMS, are so critical towards our future menu and margin initiatives.

For 2013, based on what we have contracted to date and in combination with many of the strategic initiatives that began in 2012, on a same-store basis, we currently anticipate a 2% decline in our contracted food and beverage cost dollars, year-over-year. This decline does not include the purchasing volume of any new restaurant openings for 2013.

As a reminder, we already executed a contract for the majority of our pork product for all of fiscal 2013, which positions us well to capitalize on future savings, should we seek further opportunities in 2013 to blend and extend our contract into fiscal 2014.

Additionally, we also anticipated decrease for our brisket and other items such as hamburger, seafood and french fries and expect that these will be partially offset by higher chicken prices year-over-year. Please note that certain of our key proteins such as chicken and brisket have been contracted through the first quarter of 2013. And while our guidance reflects a projection of these, we are still negotiating final pricing up for the remainder of 2013 on these items.

With all indications pointing to continued higher commodity prices across the industry, we plan on mitigating the impact with a number of initiatives. At this time, we anticipate taking a price increase of approximately 1.5% on selected menu items in April concurrent with our menu redesign. However, this will be validated based on information obtained as a result of the analysis currently being performed by our pricing consultant, and we expect to receive the results of this analysis and recommendations later this month. As we move through 2013, we will determine whether or not we will take additional price later in the year based on greater insight obtained from our work with RMS.

During 2013, we will continue our strategy of growing our supplier network, particularly in the West. These new suppliers will allow us to optimize our freight costs since our restaurants will be closer to the distribution centers, thereby lowering freight costs across the rest of the system.

Another key initiative for 2013 will be the transition to selling some of our key proteins in the same unit of measure we receive them, protecting us from the variability of size and weights for these key items. An example of this is selling wings by weight as opposed to by the piece. It's important to note that although this will not change portion sizes, or frankly, the value delivered to our guests, this will allow us to standardize food costs by reducing the weight variations of the products we sell and it will also open us to bringing additional vendors into our system.

Lastly, we will strategically manage menu mix and margin through key core item promotions as well as through opportunistic commodity purchases. These are high-margin items that make sense to our guests that can be inserted quickly into our promotional calendar.

As such and with what we know today, we anticipate food and beverage costs for fiscal 2013, as a percentage of net sales, to be approximately 120 to 125 basis points lower than fiscal 2012's percentage.

For fiscal 2012, labor and benefits, as a percentage of net restaurant sales, were 110 basis points unfavorable to fiscal 2011. This increase was primarily due to higher direct labor costs, medical claims, payroll taxes and worker's compensation premiums year-over-year in addition to sales leverage.

Primarily due to a purposely lower level of discounts expected for fiscal 2013, we anticipate labor and benefit costs, as a percentage of sales, to be 30 to 35 basis points favorable to fiscal 2012's percentage.

Operating expenses for fiscal 2012 were 28.3%, which were 30 basis points unfavorable to the prior year due to sales deleverage, partially offset by lower utility and R&M costs year-over-year. Advertising, as a percentage of sales, was approximately 3.4%, which was flat to 2011's level.

Predominantly due to the carryover of funds from 2012, the company made the decision to decrease the 2013 marketing ad fund contribution to 0.75% from 1% for fiscal 2012. Including the contribution to the marketing ad fund, advertising expense, however, will remain at approximately 3.4% of net sales as the amount saved from a lower ad fund contribution will be redeployed to support sales-building efforts within our lines of businesses.

We are projecting operating expenses, as a percentage of net sales for fiscal 2013, to be approximately 50 to 55 basis points lower than 2012's percentage. The majority of this decline relates to decreased supply costs from a packaging initiative and an expected decline in other direct operating costs.

Our G&A expenses, as a percentage of total revenue for fiscal 2012, was 10.9% compared to 10.6% for fiscal 2011. As a reminder, 2012 did not contain a bonus accrual and this compared to a bonus accrual of approximately $1.3 million for fiscal 2011. As John discussed, the increase in G&A reflects the additions and changes to the corporate infrastructure to support our line of business strategy. Additionally, it reflects a year-over-year increase in required -- franchise opening assistance.

For 2013, we expect G&A expenses, as a percentage of revenue, to be approximately 150 to 155 basis points unfavorable to 2012's percentage, reflecting a 145 basis point increase for the full accrual for bonus achievement and the previously mentioned investments, particularly in areas that support growth.

Fiscal 2012 had $474,000 of preopening expenses and this compared to $412,000 for fiscal 2011. We anticipate preopening costs for 2013 to be approximately $523,000 for the opening of 2 ground-up full-service company-owned restaurants.

Interest expense for fiscal 2012 was flat as a percentage of revenue compared to the prior year. And for 2013, we expect interest expense to remain essentially the same.

During 2012, we realized the benefit from the cumulative impact of tax credits for employee-reported tips for the current year as well as for previous tax years that were amended. This resulted from a more precise calculation methodology for this tax credit and will continue to benefit us in the future. As such, for fiscal 2013, we anticipate our tax rate to be approximately 29%.

Now turning to our balance sheet. Our unrestricted cash and cash equivalent balance at the end of 2012 was approximately $2.1 million. We ended the quarter with a balance of $13.6 million on our revolving line of credit. We were in compliance with our adjusted leverage ratio and cash flow covenants at the end of the fourth quarter. However, as a result of working collaboratively with a franchise partner in a payment plan on amounts owed, we were not in compliance with our royalty covenant at this time. Our credit facility requires that the amount of franchise royalties aged past 30 days not exceed 25%. And at the end of fourth quarter, our aging was at 26%. We are currently in discussions with our bank regarding an amendment or a waiver with regard to this covenant. As of today, we have a balance of $14.7 million on our line.

We generated $9.6 million in cash from operations during fiscal 2012, compared to $11.9 million for fiscal 2011 with a year-over-year decline primarily related to lower net income. Of the cash generation, we used approximately $6.7 million for capital expenditures, reflecting continued investments in and remodeling projects for our existing restaurants as well as the conversion costs for 2 new company-owned restaurants in Gainesville, Virginia and Evergreen Park, Illinois and various corporate infrastructure projects.

We expect total 2013 capital expenditures to be approximately $7.1 million, reflecting 2 new ground-up full-service restaurant openings, continued investments in our existing restaurants including a remodeling project and continued investments in corporate infrastructure systems.

In 2012, we used approximately $5.9 million to repurchase 539,596 shares at an average price of $10.68 excluding commissions under our current share repurchase program and the share repurchase program that was completed this past May. While we are still under a stock repurchase authorization and still consider our stock to be a good investment, for 2013 our 3 primary uses for our capital will be to invest in and grow our system as well as reduce our debt level, and when appropriate, repurchase our shares.

At this point, we would like to take your questions. Melinda, if you could open it up for questions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Conrad Lyon.

Conrad Lyon - B. Riley & Co., LLC, Research Division

So a lot of information there. Let me first talk about just the performance in the fourth quarter, the same-store sales. Do you know what percent of that drop on the company's side was related to the lack of couponing, is that what I heard? Or lack of direct mail, is that what I heard correctly?

John F. Gilbert

No, we did direct mail. We had 2 components, Conrad, in 2011 that were highly effective at driving traffic and sales, but not as effective in flow-through. There was a bounce-back, which is essentially a coupon that's handed out at the restaurant level and then there was direct mail. In 2012, we executed both of those tactics. We just pulled back dramatically on the discount level in the bounce-back, which was really the source of probably 2/3 of the, call it, wasted discount. So that's where the manifestation of the, let's say, noneffective or nonproductive discounting mostly showed up. Although it's fairly clear that even with a similar discount level in the direct mail piece in 2012 versus 2011, it was significantly more cannibalistic -- 2 elements to it, it was significantly more cannibalistic in 2012; and it was also redeemed at a lower rate. So there were multiple dynamics going on as it relates to the overall print strategy that kind of combined to create the negative impact.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Okay. Let me ask this then. So the reduction in the level of, say, discounting any sense what that cost or how much of that was reflected in the comp, like it was 1/2 of that? And really, the overriding question is this whenever I see a comp drop to that degree, I start to wonder, are costs -- is the brand becoming less relevant to consumers, and that's really the main question. And perhaps you can even talk about that. Do you feel that that's the case? Or is it just more just simply the structure of the way you tried to drive sales?

John F. Gilbert

I think the answer to the relevancy question is I don't believe we're less relevant. I think, given the occasions we can satisfy and the success of some of the new prototypes, I think, if anything, we're more relevant. I do think there are issues with year-over-year comparisons as it relates to the discount strategy that are more, let's say, transient in impact. And I think that's what you're getting at. It's hard to quantify the actual -- the value of the, let's say, the impact of reducing the discount because redemption rates are influenced by a lot of things including how aggressive we are discounting. We certainly -- we didn't plan for a decline in the redemption rate. In fact, we did get one and so it could be a number of contributing factors to that. We would contend that at least one of the contributing factors is the less aggressive nature of the discount that we've put out there this year.

But in terms of relevancy, I think that's why I'm here. I think that it is about consistently finding ways to surprise and delight consumers across what I would argue as a substantially wider range of occasions than most of our peers are useful for. And so I do feel there is a relevancy question associated with every brand. I've spent a long time working on those and I don't sense that's an issue here.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Okay, fair enough. Let me take sort of some of your thoughts earlier you said about driving sales. It sounded like you're pretty confident that you can drive sales in 2013, and I think, meaningfully. Can you provide some color about some of the aspects that you plan to do to drive sales? Is it just simply a better menu? Obviously, you talked about marketing and kind of keeping that as a percent of sales down, but allocating, I think, more resources to look differently, but...

John F. Gilbert

Right. Yes, I can certainly talk about general strategies there. I have not, but we haven't kept those a secret. And I think the -- perhaps the most effective way to answer the question is to talk about the business by line of business. So we are a casual dining company and there are ways -- proven ways to drive casual dining -- dine-in traffic, and those clearly lever off of product news and menu mix management. One of those product news is more of a traffic-driving approach. We have had product news as part of our historical approach to our business. I would only say that the risk in that is that if you get it wrong, you've got a big problem. And I think, in 2012, we had a couple of examples where we didn't really click on product news. We were heavily reliant on product news and in discounting in 2012. We will have those elements in our calendar in 2013, but we will not rely on them as much as we have in the past. So we have a calendar this year that promises at least from sort of early indicators in terms of some of the traction we're getting with catfish, for example, or the enthusiasm and traction we're getting with -- and that catfish is at a national level now, Burnt Ends, at a test level, is performing very well. So we think that we have that first tier a better proposition from a product news calendar standpoint than we did in 2012. From a discount or value strategy, we are clearly backing away from the use of $10 Off of $30, which is a huge discount, face value of 33% discount. It ends up being a little bit less than that because people add a little more to the ticket. But that's still a monster discount and I think we can be effective with lower discounts that are better positioned in the markets, so we're actively looking at that right now. So those are the 2 tiers that are similar last year. Then I guess I would add, well we're doing things in addition to what we did last year. So this line-of-business approach allows us to now, let's just assume those were both dine-in focused areas. We have a whole to-go platform in our business right now that we haven't even addressed in the past. To-go, as a category, is growing organically at a match faster rate than dine-in across-the-board. Those aren't our numbers, although it's true for us as well. And so our marketing calendar this year has an added component where we'll actually have to go outreach using our huge e-mail database, but also more classic marketing outreach like broadcast, but that'll be directed specifically at to-go. And then catering has the same sort of incremental approach this year. So we're not as reliant in that case on having the big home run LTO. In fact, we don't have any LTOs on our calendar as we sit right now. All of our product news activities are permanent activities, which is also for a company with our low-frequency, a very strong proposition. And we're also adding 2 more things and then I can wrap it. But we have a layer of what I would call beverage initiatives this year that we simply haven't had in the past. Our beverage mix is low relative to our competition. Beer and barbecue go together as well as any 2 food products I'm aware of and yet we don't seem to have captured the current trends around beer growth. So that's going to be a big part of our calendar this year. You won't see that till summer when we're in peak barbecue season. And then lastly, this whole menu optimization. I mean, we've applied science and test markets to our menus, that we simply haven't done in the past. And that's an evolving "getting more from the customer in the restaurant" type strategy. But we believe there's upside there. And so if you kind of take this somewhat deconstructed calendar and add it all back together, it's more of a portfolio approach. It's less risky on the big bets. It's more nimble. It gives us more opportunities. Since we're not doing LTOs, we don't have to sink our system into a commitment for 2.5 months worth of inventory on something and then worry about it not working. So we feel like we have a much broader platform for growth than we have in the past. And I would also conclude with, that's not a 2013 thing, that's a permanent thing.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Got you, okay. This might be too early to ask, but Diana does a very thorough job detailing how the P&L is going to look, but -- I know historically the company doesn't talk about top line, but is there something you can help us, at least guide us given the dynamic in the fourth quarter? Are we seeing something similar moving forward here, or do you expect to see more of a gradual improvement deeper into the year from a top line perspective?

Diana Garvis Purcel

Well, I think, as John had indicated -- I'll take this, Conrad. I think, as John has indicated, a lot of the initiatives are starting to ramp up. So I would envision that we would start seeing a more pronounced level of improvement, still within a difficult environment as we move through the year and start moving through barbecue season. A lot of the initiatives including the menu optimization and all the work we're doing on pricing, I think, they are going on now. And so we're midway through the first quarter, so I'm not quite sure we're going to see a lot of improvement in the first quarter, but we should start seeing traction as we start moving certainly into early in the second quarter. And we compare ourselves to the industry. It's not lost on us that a lot of our competitors are reporting sluggish results and we have the benefit of seeing some of them report them on a monthly basis. And it's a tough environment out there. I think people are somewhat underestimating the impact of the 2% Social Security tax impact on people's paychecks and we have to figure out, to your point, to use your word, relevant, we have to make sure that if our consumers are going to be really scrutinizing the occasions that they are going to use casual dining, we want to make sure that we're relevant and that we capture one of those occasions. And as John indicated, we have a great variety through our lines of business to be able to capture them in a variety of ways. So that's what we're aiming for.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Okay. The April menu, did you guys discuss how much price is going to be coming out on that?

Diana Garvis Purcel

Right now -- yes, we did. So right now we said we're anticipating 1.5%, but that is going to be validated based on the work that we get from RMS as we're just starting to get that data and digging through it. So right now, that's what we're expecting. And then based on further insights gained from them, we'll make a better determination on what price looks later in the year.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Okay. Let me just talk about some of the indicators you provided with the P&L, COGS, labor, OpEx, all very encouraging. How -- if you were to put a confidence indicator on that, do you feel pretty comfortable that you'll be able to achieve that, especially at the COGS line? Because historically, it seems like there's always been things that kind of sneak up and cause some variability there.

Diana Garvis Purcel

Yes. Well, as we had indicated, we're still contracting some of our major proteins. As I indicated, brisket and chicken are only locked through the first quarter. But our purchasing team does a really phenomenal job working with our vendors and really gaining insights from the market. And so, their predictions are based on what we see the balance of the -- through the balance of the year. One of the keys, too, as we guided, just to give you a feel for order of magnitude, so when we guided for cost of goods sold of 120 to 125 basis points down, right now contracting is expected to be 50 to 60 basis points of that. The remainder is really as a result of initiatives frankly that internally we control. And these are initiatives we believed in. John talked at length about our fresh in-house brisket and while we would have loved to capture those savings in 2012, frankly it was the right decision to delay the rollout so that we can actually capture the product in the right way from a guest feedback perspective, make sure that we have the correct yield, make sure that the recipes were right. And by the way, a terrific byproduct was, as he has mentioned, these Burnt Ends. So that's just one of the initiatives that were started in 2012 that we'll see the results from in 2013.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Okay. Question about LTOs. I like what John had said as it relates to COGS. I think he said that there's going to be no LTOs in '13 and that lessens the need to stock inventory, and from my perspective, less waste. Is that part of the theory there that perhaps maybe waste in 2012 was greater than expected and it's going to be much less and baked into your COGS assumption?

Diana Garvis Purcel

Certainly, we have -- I will tell you that we have some LTOs that didn't perform to expectations. And I think the strategy that John is putting in place clearly is creating news on our menu with core items that we have that can be easily absorbed or used elsewhere so that we aren't making those commitments and then having to figure out how to deplete them. And it's less of a distraction for the organization.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Yes, so -- or let me say it differently. Was waste much worse than you had anticipated in '12 and you think it can do much better in '13?

Diana Garvis Purcel

I think, there's always that lens on reducing waste as much as possible. So I would they that, yes, that is part of the strategy.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Okay. G&A, is this the big delta there? It's something going to be the accrual on the bonus side?

Diana Garvis Purcel

Yes, so of the -- we guided 150 to 155 basis point increase and 145 basis points of that was an expected bonus accrual for the organization at 100% attainment.

Conrad Lyon - B. Riley & Co., LLC, Research Division

And that's based on a new plan that I think you filed just recently, correct?

Diana Garvis Purcel

That's -- it's not necessarily based on a new plan. It's based on our annual incentive plan that we've had in place. Clearly, we have some new additions that will participate in that and so that's where the uptick comes in.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Okay. Last question here and it has to do with the filing of, I think, it was -- let me just make sure here I get the name right, PW Partners Fund. The fund has an interesting history. Has there been any communication with that fund and the company yet, or is there anything that you can talk about related to that?

John F. Gilbert

Well, there's really nothing we can talk about. I can say that our Chairman, Dean Riesen, has had active in various conversation with Patrick Walsh. But at this point, there's really nothing to talk about.

Operator

Our next question comes from Mark Smith.

Shannon Richter

This is Shannon Richter in for Mark Smith. I just have a couple of questions for you, guys. First, your operating -- your restaurant operating expenses were lower than expected. Can you go through why that was?

Diana Garvis Purcel

Yes, and that was predominantly -- and I wouldn't say materially, so I think it was a 20 basis point decrease from our prior guidance. And really, it just had to do with the lower percentage of advertising expense in the fourth quarter. Even though it was -- even through the year, if you recall, at 3.4%, we had that shift in third and fourth quarter. So fourth quarter just came in a tick lower than anticipated.

Shannon Richter

Okay. And then the second question is your unit growth expectations for 2013? Can you go over which -- are the both of these store-owned and which it will be franchises as well as the cadence of the opening?

Diana Garvis Purcel

Yes. So we're expecting 17 units in 2013. Two of those will be company-owned, and the company-owned ones right now are slotted 1 in third quarter and 1 in fourth quarter. The remainder of the 15 are slotted with 1 in first quarter, 2 in second quarter, 3 in third quarter and the remainder in fourth quarter. So it certainly is more back end loaded than we would like to see. But as we've seen through the year, many of these restaurants can move in, move up, and frankly, move out. So that's the best information that we have today.

Operator

[Operator Instructions] And there appear to be no questions coming from the phone lines at this time.

John F. Gilbert

Thank you so much, guys, for taking the time out to visit with us today. I would just close by saying, and I think Conrad sort of tipped it off here and certainly got my juices flowing, this brand is still very relevant. The promise is probably more relevant now than ever. There aren't a lot of places in the market where you can get the combination of benefits that we offer, which is really high-quality food. In fact, one of the most awarded foods in the industry in terms of sort of competition, and that's relevant to a degree. The food that goes where consumers want it to go -- now, we love our dining guests, make no mistake, but we also fully recognize and are excited by the opportunity to serve customers wherever they are. That's an incredibly relevant proposition right now. And the third point and last point about relevancy is it's ready when they want it. So this is a batch-and-hold process where food is ready when they want it whether it's a dine-in or a to-go occasion. And I think that's incredibly important in the market today. And if you guys do this -- all do this, but you watch the market and watch for trends, it's no secret that food stuff that works well across a wide range of consumer occasions, off premise, those brands are doing very well. So really going forward, the difference would be in our strategy and how we leverage all these good stuff to create shareholder value. I hope you take it from this call while we hate delivering bad news, the work is already underway with a new leadership team, a new organizational structure, new analytical tools and a growing and engaged franchise and company-operating community that really have our sites set on driving sales and profitability. I would encourage you to get out and visit our restaurants. We'd love to have you. I know most of you do. But again, thanks very much for taking the time, and I guess, this wraps it up for us. Thanks.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Famous Dave's of America Management Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts