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Famous Dave's of America, Inc. (NASDAQ:DAVE)

Q2 2013 Earnings Call

July 25, 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

Mark E. Smith - Feltl and Company, Inc., Research Division

Conrad Lyon - B. Riley Caris, Research Division

Justin Ruiss - Sidoti & Company, LLC

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to your Second Quarter 2013 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, Rich. Good morning, everyone, and thank you for joining us for the Famous Dave's Fiscal 2013 Second 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 will turn the call over to Famous Dave's CEO, John Gilbert. John?

John F. Gilbert

Thanks, Diana, and thanks to everybody on the call. We appreciate you guys taking time out of your day to be with us. We're pretty excited to be with you today.

Just over 9 months ago, I became Famous Dave's CEO with a mandate from the board: increase shareholder value by reversing persistent sales declines while improving both the unit level economics and G&A, and do all of that with a real sense of urgency. As I look at the second quarter, I'm generally satisfied with the progress we're making, and our performance confirms that we're absolutely on the right track.

We have demonstrated a sense of the urgency in pursuit of our stated goals for the year, which are: grow same-store sales system-wide; improve store level profitability; and bring G&A expenses in line with the size of our business.

While the industry continues to face significant top line challenges, we saw a return to same-store sales growth for company restaurants with a positive 3.8% versus last year. And although our franchises' sales were still negative at a negative 1.9% for the quarter, their trends have improved as well.

According to Black Box Intelligence, which is a sales index service we subscribe to, Famous Dave's company restaurants have gone from the bottom quartile for our fourth quarter of 2012 to the top quartile for the second quarter of 2013. We're not only comp store positives at the company stores, but we're gaining share again in the markets where we do business. By the end of the second quarter, our year-to-date same-store sales performance was a positive 1.1%.

Our sales growth for company restaurants, an improvement from first quarter for franchise restaurants, are due to a number of important initiatives, some of which we talked about the last quarter we got together. As we talked about, we made significant changes in our menu being in April that included a launch of several new products, a simpler easy-to-use menu design with actually fewer items overall and price changes informed by our ongoing optimization program.

We initiated a more effective data-driven promotional strategy, which eliminated unproductive discounts while driving harder at creating incremental consumer behavior. And we elevated the brand using the new advertising campaign, with a very hard emphasis on authenticity in barbecue experience.

Driven by this improvement in sales enhanced by other unit level initiatives, we delivered strong restaurant-level profit improvements. Our second quarter restaurant-level operating margin improved by 360 basis points over Q2 last year. As you recall, last quarter, we committed to finding between 250 and 300 basis points with improvement in our unit level economics. And I believe this quarter's results show we're on the right track towards achieving that outcome.

Also during the quarter, we benefited a great -- from a great deal of sales leverage with the top line increase that we saw. But there were also a number of initiatives that have been employed. They also have a material impact on our restaurant-level profits. We redeployed -- significantly redeployed our marketing spend in more effective ways and actually in some cases, pulled back on spending altogether. As previously mentioned, our discounts are working harder and smarter for us even though the total number -- total amount of discounts is down.

We've identified and tested, and now rolled, out a way to reduce cost associated with our to-go packaging supplies by introducing a package that actually works better for our customers in terms of heat retention and green quality, and yet is less expensive. And if you recall, we do actually over 25% of our sales in to-go, and so that to-go packaging category is a big one for us. This package is now being launched across the system, including franchise restaurants.

Our off-premise call center test, which we mentioned last quarter, has moved into the second stage of testing. We've seen a sales lift from actually having -- in our test restaurants -- from having the call center and now based on this, we now expand this initiative to a greater number of stores. One of the challenges is understanding the labor up-sell and customer satisfaction impact of what we're going to have, which is a more intense customer sell-in experience as we use that call center to up-sell items versus calls that go directly to the restaurant.

We reduced G&A by a meaningful amount this quarter by eliminating nearly 15% of the budgeted home office positions. Famous Dave's is a performance-based organization. However, the G&A improvements were somewhat masked by the favorable impact of a bonus recapture that happened last year because we did not meet our performance expectation as a reorganization. And then additionally, this quarter's numbers were negatively impacted by the 1x severance costs associated with that reduction in force. Regardless, there will be a meaningful savings reflected in the balance of the year for fiscal 2013 and beyond as we are targeting to drive G&A under 10% of revenue.

These are just a few examples. And while our efforts this year have produced results, clearly, our work is nowhere near done. The programs and initiatives that drove second quarter performance were not transient in nature. We will continue to leverage the benefits going forward. We really have just started our long-range plan, and this is really the first quarter where elements of that have been in place.

It is imperative that we continue with urgency to prove out the merits of this great brand in order to achieve our vision of becoming a great franchise business model. This team, including the board, has been reconstituted in recent years with new members, new leaders and fresh perspectives. Most notable in this transition is going from a company operator to becoming a franchise-dominant system, and that is our aim. Achieving this transformation requires creating a compelling business case, as both an effective competitor at the economics level plus being an innovator in terms of systems and programs that we offer to both current and potential new franchisees. It is also critical that we drive sales in franchise units as effectively as we are in company units.

With this in mind, we will continue to drive forward with what's already working for us, but also continue to test new initiatives aimed at creating relative advantage within the franchise or competitive sets, so us versus our competitive franchisors. Let me give you some examples of those things that we're testing.

As we talked about, actually for 2 quarters now, we will continue to leverage our unique portfolio effect of having multiple lines of businesses -- and just as a reminder, those are: to-go; dine-in; catering; and retail -- with innovative go-to-market solutions in each one of those lines of business. We will also continue to test this off-premise call center, which really handles calls for to-go and catering, at least the initial call for catering, for all of our -- well, ultimately, for all of our stores, with an aim to improve both sales and restaurant-level profits and ultimately launch this thing system-wide based upon the results that we see from the expanded tests.

Another thing we're testing is new media strategies with an aim toward having more of our system restaurants fall under the umbrella of our new, improved ad campaign. Only a small fraction of our restaurants, company and franchise, actually get the benefit of having the terrific campaign with the founder speaking to consumers about the wonderful products in Famous Dave's. So we intend to have and are testing for a lot more of our restaurants falling under that umbrella.

We're testing, on a perpetual basis, new menus with new products, new designs and pricing with an aim to continue our same-store sales momentum. We're also testing new restaurant equipment and back-of-house operating systems to both leverage our multiple lines of business, as well as to improve restaurant-level economics.

In terms of restaurants themselves, we are testing new prototypes, from our quick casual shacks to full service restaurants, in both cases, using simpler, lower cost and more contemporary brand expressions. Both of our 2013 new company restaurants will feature elements of this new prototype as we seek to prove out the business case for future franchisee development. In addition to the 2 company restaurants, we expect to see the total of 9 franchise units opened this year, with 1 planned opening shifting into early 2014. We improved cash flows provided by operating activities by approximately $4.9 million, and Diana will really get into the details of that.

In addition to our tests, we still have the rollout of activities that tested well in our recent past ahead of us. So we have a sequence of activities that we've already tested, and I'll kind of go through those. These promise to perform for us in the third and fourth quarter.

During the fourth quarter, we'll roll out on a much larger basis, system-wide, our holiday ham and turkey program that we tested last year. And it tested very well. So Famous Dave's will be in the bulk family meals for the big holidays in the fourth quarter. We'll roll out mobile ordering capability as part of our digital strategy to further accelerate to-go sales. The number of sales coming from mobile devices, the growth rates are amazing. So we want to be well positioned to take advantage of that.

We'll roll out a campaign management tool for our catering sales leads. Up till now, our catering sales leads have been basically using Excel spreadsheets to manage catering orders, and there's been no real database tools available to them. We just actually rolled out this campaign management tool for catering and are seeing terrific impact from that already.

We've just executed an exciting, what we would call, opportunistic protein buy that will allow us to introduce a brand-new, high-profit protein product, center-of-the-plate, for permanent inclusion on our menu. And we have just completed the rollout of our new beverage strategy, which features craft beer selections, actually optimize to local stores. So if we have a restaurant that's near a microbrewery, we'll have that microbrewery product on draft if it's the right thing for that store. In many cases, we shifted to that very local presence. We've also introduced a new line of moonshine-based cocktails that are extremely -- performing extremely well for us.

We really feel like our second quarter performance proves what we're capable of when we address our core opportunities: same-store sales; unit level economics; and G&A. We really can deliver exciting returns. Our job is to continue this trend. We are highly sensitive to the market's expectations regarding revenue and profitability and our urgent agreement that more must be done.

I'm going to turn the call over to Diana, and she can provide further clarity and more detail on some of the key items for the quarter. 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 $43.4 million and net income of $2.1 million, or $0.27 per diluted share for the second quarter of 2013, compared to revenue of $41.3 million and net income of $1.9 million, or $0.25 per diluted share for the prior year. Net income for the second quarter of fiscal 2013 includes a bonus accrual or expense of approximately $540,000 or $0.05 per share, while the results for the second quarter of fiscal 2012 included the favorable impact or a credit of approximately $431,000 due to a bonus recapture, or approximately $0.04 per share. So in essence, a $0.09 delta.

Additionally, the recent quarter included severance costs as a result of a recent reduction in force of approximately $271,000 or $0.02 per share. For the year-over-year comparison, this was essentially offset by closure costs in the second quarter of 2012 of $183,000, or $0.02 per share, for a company-owned location closed during the quarter.

Our adjusted EBITDA for the first 6 months of fiscal 2013 was $6.7 million compared to an adjusted EBITDA of $7.9 million for the comparable time frame in fiscal 2012, reflecting the challenging results that we saw from the first quarter of 2013.

We generated $9.4 million in cash flows provided by operating activities during the first 6 months of fiscal 2013 compared to $4.5 million for the first 6 months of 2012. Now this year-over-year cash generation reflects second quarter strong results, as well as increased cash flows in 2013 due to no corporate bonus for 2012, in addition to payments made during the second quarter of 2012 to repurchase shares that were not replicated in the current year.

During the quarter, restaurant sales increased approximately 5.5% year-over-year, reflecting the comparable sales increase of 3.8%, the annualized impact of the 2 new company-owned restaurants that opened in the third and fourth quarter of 2012, in addition to our weighted average price of 2.5%. These increases were partially offset by the closure of the Lombard, Illinois restaurant.

We were pleased with the gains made in dine-in and to-go sales, which increased on a weighted basis by 1.5% and 4%, respectively. However, we were challenged by a 1.7% decline in catering sales. Led by strong to-go sales performance, we saw growth in off-premise sales, which grew to 35.4%, of which to-go represented 26% and catering represented 9.4%. This compares to off-premise sales of 34% for the prior year.

Our dine-in per person average for the second quarter of fiscal 2013 was $16.69 compared to $15.79 for the second quarter of 2012, reflecting the weighted average price increase. The breakdown by day part was $14.73 for lunch and $17.86 for dinner.

On the franchise side, royalties decreased year-over-year, reflecting the comparable sales decline of 1.9%. During the quarter, we had a very successful franchise-operated restaurant opening in Carolina, Puerto Rico, and we had a closure in New York, New York. Subsequent to quarter end, we had 3 franchise-operated restaurants opened in: Holt, Michigan; Benson Park, Nebraska; and Hayward, California. Additionally, we had 1 franchise-operated restaurant closed in Overland Park, Kansas as a result of a relocation opportunity.

Please refer to our press release for a detailed breakdown of the number of restaurants at the end of each quarter. As of today, we have 53 company-owned restaurants and 136 franchise-operated restaurants, for a system-wide total of 189 restaurants in 34 states, the Commonwealth of Puerto Rico and 1 Canadian province.

As a result of a restaurant originally scheduled to open in 2013 slipping into early 2014, we now expect the total of 11 openings this year, including 2 company-owned locations. During the first quarter, we indicated that by year end and on an annualized basis, we expected to see 250 to 300 basis points of improvement in our restaurant-level operations. And during the second quarter, we realized strong positive momentum towards that initiative, and saw a 360 basis point improvement in restaurant-level margin compared to the prior-year second quarter.

For the second quarter in a row, food and beverage cost declined year-over-year and was 30.1% of net restaurant sales compared to 31% for the second quarter of fiscal 2012. Food and beverage cost benefited from a strategic and purposeful decline in discounts, as John has mentioned, as well as the positive impact from some of the strategic initiatives that we've been working towards.

Our food contract continued to perform as expected for the second quarter, with the exception of brisket purchases. A higher-than-anticipated demand for our Burnt Ends product, frankly a good thing, resulted in a fairly significant increase in brisket purchase volume. And while these sales were incremental, they were at a higher food cost than most of our other core proteins. As a result, our purchase volumes had to increase in order to support demand.

It's important to note that embedded in our contracts are still some of the effects of the historically high corn and soy prices of 2012, which are key ingredients in many of our products, as well as livestock feed. We continue to see these prices soften, and we'll see some modest relief in fiscal 2013 as it relates to contracts that are still being negotiated for the remainder of the year. And as we look beyond to 2013, we're optimistic that we will see greater savings in fiscal 2014.

On a same-store sales basis for fiscal 2000 -- on a same-store basis, excuse me, for fiscal 2013 and based on our 6 months results as well as the current visibility we have to our contracts and initiatives, we're updating our previous guidance and now anticipate an approximate 1.5% to 2% decline in our contracted food and beverage cost year-over-year. This decline does not include the purchasing volume of any new restaurant openings for the remainder of 2013.

As a reminder, we are under contract for our pork product for all of fiscal 2013 at a decrease of 1.3%. During the third quarter, we will begin negotiating our fiscal 2014 pork contract, and should we see opportunities to capitalize on future savings in 2013 by blending and extending our contract into fiscal 2014, we will do so.

With regard to our other key products, we're benefiting from a decrease for our brisket, which is contracted through the rest of 2013, as well as other items, such as hamburger, seafood and corn. With regard to chicken, the feed and the processing components are now locked in through the end of the year. As a result, there will be a slight increase in chicken cost year-over-year.

In addition to the anticipated decrease in contracted food costs, we will continue our efforts to further improve margin through key core item promotions, as well as through opportunistic commodity purchases and strategic menu mix management. As John had previously mentioned, we were able to secure, at favorable pricing term, a key protein that we plan to test in the fourth quarter.

For our fall menu launch in mid-September, we anticipate taking a price increase of approximately 1.5% on selected menu items based on the data and insight provided by demand optimize price increases and results obtained through various tests. Based on our results over the first 6 months, which included a significant mix shift to brisket as previously mentioned, we are moderating our previous guidance for food and beverage costs for fiscal 2013 to be approximately 100 to 105 basis points lower than fiscal 2012's percentage.

For the second quarter of fiscal 2013, labor and benefits as a percentage of net restaurant sales were 70 basis points favorable to the comparable period in fiscal 2012, primarily due to sales leverage on fixed labor, partially offset by increased manageable and that's due to the year-over-year increase in sales and an increase in benefits due to higher claims experienced. For the full year, we affirm our previous guidance and still anticipates 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 the second quarter as a percentage of net sales were 23.9% or 80 basis points favorable to the prior year, predominantly due to sales leverage on fixed costs. These cost savings were partially offset by a $310,000 shift in TV advertising costs from the third quarter of 2012 to the second quarter of 2013. During the quarter, we made the decision, in order to be more comparable to other public restaurant company, to reflect multiunit supervision expenses within G&A expenses as opposed to operating expenses where it previously had been reflected. The prior-year results have all been reclassified to be comparable with the current year presentation, and we will continue to do so throughout the year for all periods presented.

As John had mentioned, we have been testing new media strategies and consequently, have redeployed our marketing spend more effectively. For 2013, we expect advertising expense to now be approximately 2.75% of net sales for all of fiscal 2013, which includes a 0.75% contribution to the marketing fund. This compares to a 2012 spend of 3.4% in net sales, which included a 1% contribution to the marketing spend -- marketing fund.

As a result of our 6 months result, in addition to the anticipated decline in advertising spend, we're updating our previous guidance and now anticipate operating expenses as a percentage of net sales for fiscal 2013 to be approximately 135 to 140 basis points lower than 2012's percentage.

G&A expenses, as a percentage of total revenue for the second quarter were 14.1% compared to 11.2% for the comparable quarter of fiscal 2012. Approximately all of the 290 basis point increase in G&A as a percentage of revenue reflects the previously mentioned year-over-year impact of 2013 bonus accrual and 2012 bonus reversal, as well as severance in 2013. For the first 6 months of fiscal 2013, the bonus accrual was approximately $1 million, or $0.09 per diluted share.

As an update to our previous guidance, we now anticipate G&A expenses a percentage of revenue to be approximately 105 to 110 basis points unfavorable to the prior year, predominantly due to the full year impact of the support center bonus accrual, partially offset by the reduction in force. So models can be appropriately updated, please note that total supervision expense for fiscal 2012, which has now been reclassified in G&A, was equal to approximately $1.9 million.

Fiscal 2013 second quarter had $70,000 of preopening expenses, compared to $280,000 for the second quarter of 2012. We now anticipate preopening costs for 2013 to be approximately $535,000 for the opening of 2 ground-up, full-service company-owned restaurants, 1 late in the third quarter and 1 in the fourth quarter.

Interest expense for the second quarter of fiscal 2013 was essentially flat in both dollars and as a percentage of revenue compared to prior year, and we expect this trend to continue for the remainder of fiscal 2013. We now expect an approximate 29.5% effective tax rate for 2013, reflecting the results of the first 6 months of 2013.

Now with regard to our balance sheet, our unrestricted cash and cash equivalent balance at the end of the second quarter 2013 was approximately $2.9 million. We ended the quarter with a balance of $6.8 million on our revolving line of credit, reflecting a 50% decline from year end as well as the prior-year second quarter. Since year end, we had paid off approximately 32% of total debt, and as of today, we are flat to the quarter with a balance of $6.8 million on our line. We were in compliance with all of our covenants during the quarter.

We used approximately $1.5 million of cash for capital expenditures, primarily reflecting continued investments in our existing restaurants. We affirm our previous guidance and still expect total 2013 capital expenditures to be approximately $7 million, reflecting: 2 new ground-up, full-service restaurant openings; continued investments in our existing restaurants, including a remodeling project; and investments in corporate infrastructure system. Lastly, we anticipate that we will once again be repurchasing shares under our current authorization during the third quarter.

At this point, we'd like to take your questions. Rich, could you please queue for questions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mark Smith with Feltl and Company.

Mark E. Smith - Feltl and Company, Inc., Research Division

A handful of questions for you. First, Diana, thank you for clarifying the supervision expense. Can you tell us what that would have been here in the quarter?

Diana Garvis Purcel

Yes. So actually, it's a -- we're restated on the 6-month period. So Mark, for the quarter and the current year, the best thing to do is to -- I'm sorry, it was -- I don't have that number at hand right now. I have the reclassification in the quarter and the prior year. So for the 6 months in the prior year, it was $930,000 that was reclassified in the 6 months time frame, which is about $460,000 in Quarter 1 and $471,000 in Quarter 2, and it's commensurate with what we're seeing this year. So I can't get you a more final number for the current year. Since we've reclassified the presentation, we're reporting along those lines in the current year. But the best indicator is the prior year's reclassification amount.

Mark E. Smith - Feltl and Company, Inc., Research Division

Okay. But we should look for that to be somewhere in the $450,000 to $0.5 million roughly on kind of on a go-forward basis?

Diana Garvis Purcel

Correct. Correct.

Mark E. Smith - Feltl and Company, Inc., Research Division

Okay. Perfect. And your guidance that you gave is for, what was it, 100 -- 135 to 140 bps lower, that's including that reclassification as well as in Q1?

Diana Garvis Purcel

Correct. So that's an annualized number range that we've given with prior year, restated for conformity purposes.

Mark E. Smith - Feltl and Company, Inc., Research Division

Okay. If we look at that on an apples-to-apples basis from where the guidance was previously, with supervision still in that -- would that guidance have been, I guess, not quite as favorable through the year, or just about flat?

Diana Garvis Purcel

Say that again, I'm sorry?

Mark E. Smith - Feltl and Company, Inc., Research Division

I guess, if we still had supervision up in operating expenses, would that guidance on operating still be roughly that 115 to 120 bps favorable? Or maybe it would have moved down and be a little less favorable this year?

Diana Garvis Purcel

So it would have moved down. So if you look at -- if we were reporting on this as of first quarter, the guidance on an apples-to-apples basis, instead of the 115 to the 120 that you're referring to, would have been 100 to 105. So we have -- so you would have looked at the guidance at the first quarter at 100 to 105. Currently, it's 135 to 140 bps of a decrease in operating expense, predominantly due to we're seeing leverage on fixed costs on our second quarter results, but in addition to a reduced, more applicable advertising spend.

Mark E. Smith - Feltl and Company, Inc., Research Division

Okay. And it sounds like still even with moving some of that expense down to G&A, your guidance still got better for G&A, which is a positive. And is that really due to some of the cuts at the home office?

Diana Garvis Purcel

It is. So we're going to start to see -- obviously, there's a severance number in there of $271,000. But as John had indicated, we will see the positive results of the reduction in force through the balance of the year and as we annualize that through the second quarter of next year.

Mark E. Smith - Feltl and Company, Inc., Research Division

Okay. And then John, in your comments you mentioned kind of wanting that G&A, I think, under about 10% of revenue. Is that excluding management bonus or some pieces of that G&A? Or is that kind of a pure number that as a goal there, to be less than 10%?

John F. Gilbert

Yes. The latter, Mark. It's a pure number that would be inclusive of all G&A categories.

Mark E. Smith - Feltl and Company, Inc., Research Division

Okay. Okay. Excellent. Perfect. It's good to see that. Can you guys -- I'm really curious about breakdown of traffic versus ticket, especially with some of the digital coupons and things that we saw out there during the quarter, the P.I.G. Club members. Can you talk a little bit about that strategy and kind of success that you're seeing and kind of the impact on traffic and ticket for those?

John F. Gilbert

So Mark, I think the quarter had a number of different contributors to performance, both from a traffic and a ticket standpoint. Let's start with the basics. We did do a price increase at the very early part of the quarter. It appears most of that stuck, if not all of it. That also is part of a new -- newly designed menu that had a lot more science behind how we guided the consumer from a purchase process. So that shows up on the ticket side. Interestingly enough, then we got into new products with Burnt Ends, which showed up both from a traffic standpoint, we saw positive traffic for the first time in a long time and really probably one of the only players in the industry is our segment of the industry, that kind of had that performance as we look at Black Box. So we got a nice lift in traffic because of the new product. And then the new product was essentially an appetizer. So you saw an impact on ticket as well. In fact, it's probably the biggest single contributor to the quarter was the ticket increase associated with Burnt Ends that prevailed for the entire quarter. Then lastly, the elimination -- almost total elimination of the direct mail other than some direct mail tests that we continue to really identify and prove to ourselves that the shift away from direct mail was the right way to go. So we saw the P.I.G. Club email promotional strategy really supplant or replace the direct mail strategy across the quarter, and that manifests itself both in ticket and traffic increases. That is a daily direct mail -- excuse me, daily email circulation. So it really performs differently by day. But in the aggregate, the performance clearly lapped last year's direct mail program and frankly, the cost of distribution is nothing versus $0.65 a piece in the direct mail room.

Mark E. Smith - Feltl and Company, Inc., Research Division

Can you give us any numbers around P.I.G. Club growth perhaps here in the first half? And I know that's been an emphasis recently on pushing that in the restaurants. And then I don't know if you can give us any sort of attachment rate or redemption rates on kind of those email offers and what you're seeing used in the store.

John F. Gilbert

Mark, I'd prefer not to share a whole lot about P.I.G. Club. It's pretty proprietary to us. We're on to something that's clearly stimulating business for us, and it's really one of our secret sauce things. So I'm going to hold off on providing a whole lot of insight there. I'm sure you'll understand.

Operator

Our next question comes from Conrad Lyon with B. Riley & Co.

Conrad Lyon - B. Riley Caris, Research Division

First of all, nice job growing sales here. Question on the comps. Clearly, doing a nice job on the to-go side. John, I think you mentioned part of it -- is it -- was it related to the call center? Is that what's really driving that, just more efficient, better use of the call center?

John F. Gilbert

Conrad, thanks first, for the high-5 on sales. We appreciate it. Secondly, on the call center, it's only in test. So it's only in a handful of stores in those test stores that has been contributing to performance increases in to-go. However, on a broader basis, we are clearly benefiting from the consumer sentiment around to-go food across the spectrum of restaurants. So we have this nice tailwind in to-go anyways. I think that by positioning ourselves as a relevant and important to-go choice for the, let's just pick one segment, the busy mom who's got a job and 3 kids at home and frankly, who wants more choices than pizza and fried chicken. So we're playing in that space pretty efficiently -- or pretty effectively, I should say -- based apparently on simply positioning a significant volume of our communication this year, particularly in the company restaurants both with promotional support and non-promotional support, just awareness, has been about Famous Dave's as a relevant to-go choice in the market today. So we're seeing a lot of support for that from a consumer standpoint. As it relates to the dine-in business, which we're very pleased with the dine-in performance, and even if we were to be compared as a standalone dine-in business versus our peers in the quarter, we had -- we turned in a pretty good number. And then catering is really more -- what we're feeling there is it's regionally based, and it seems to be tied to some of the government spending. If you look at the category, it's down the most in catering. It's those occasions that were government-driven -- and perhaps it's the sequester, I'm not sure what the real cause or factor here is, but we've seen a downtick in that part of our catering business. But in general, we're pretty pleased with where catering is as well.

Conrad Lyon - B. Riley Caris, Research Division

Got you. Okay. The gap between both the company and franchise same-store sales performance, is that -- is a large part of that attributed to the to-go? Meaning, are the franchisees not as strong on the to-go side?

John F. Gilbert

I think -- well, it's going to vary by franchisee, obviously. But in general, they're very similar to us in both to-go and catering. I think the bigger opportunity for us is as we saw the things that work for us and actually the things that help the franchisee modify their pretty significant declines, a big part of it was the presence or absence of traditional TV support. And so where we saw the biggest performance increase is in our company markets because we don't have TV everywhere either. We saw the correlation to the presence of TV being very strong. Now keep in mind, we had 2 televised initiatives over the quarter, both of them using a new campaign. But the first one, with the Burnt Ends new product news, really performed extremely well in all markets including franchisees. But a big part of that performance gap was those markets that had TV really, really performed well. So that will be one of our initiatives for the future is to bring more of the system under that umbrella of media support in order to provide essentially more awareness and get more leverage out of our news so that the whole country can understand who Famous Dave's is and what we do. And where we get that message out, we've been very effective this year.

Conrad Lyon - B. Riley Caris, Research Division

Got you. A little talk just about trends. Now I appreciate you moving up in the Black Box and discussing that. I think that's fantastic. And we've seen headlines, as you well know, that the industry seems to be on some sort of decline June, July. You guys seem to outperform the industry and moving up. So a question, and as much color as you can provide would be appreciated, are you kind of seeing this downturn? Or you think you're -- are you outperforming this downturn of sorts across the dining spectrum?

John F. Gilbert

We did in the quarter, obviously, from our Black Box performance. I don't -- I've seen some of the same quarterly reports you have. I haven't seen anything beyond that from other than Black Box for the new quarter. But certainly during the quarter, we saw a lot of traction us versus our peer group. I think the challenge with us versus our peer group is there really isn't a peer group for us. So we like to be seen as a peer to some of the quick casual concepts from a performance standpoint, both from a consumer perspective, obviously, but also from how we approach the business going forward from a franchisee perspective. And we believe we have earned the right and will earn the right to be seen in that light clearly as a higher standard there in terms of year-over-year growth. So as a strategy going forward, we'd like to be able to benefit from that continued interest in an off-premise consumption that consumers have. We aren't advocating on our responsibilities as a dine-in company, and we see a lot of potential there, obviously, particularly as it relates to some of the beverage initiatives that we've seen. And we have 2 new prototypes this year that will open, designed to showcase Famous Dave's full-serve going forward as a point of introduction and sales to new franchisees, and existing franchisees, as we shape this brand and contemporize it with more of a higher level of dine-in energy, so to speak.

Conrad Lyon - B. Riley Caris, Research Division

Let me say perhaps this way: would it be too aggressive to extrapolate the success you had, driving sales in the third -- in the second quarter on into the back of the year? I mean, certainly, the comparisons get a little bit easier in the back half, especially at fourth quarter.

John F. Gilbert

Yes, I hesitate to answer that question. I'm not sure I can provide any. I wish I could. I don't have a crystal ball. I have some skills, but that's one that's beyond my abilities.

Conrad Lyon - B. Riley Caris, Research Division

All right. It's fair enough on that one. All right. Let me shift over to just the bonus accruals, or captures. I just want to make sure I understand that properly. Bonus accrual, that's under the new plan. The bonus recapture, that's really -- is that largely just a function of the readjustment of the compensation plan?

Diana Garvis Purcel

No, it's really not. I'll let John talk to this, because it really speaks to us as a performance-based organization and the fact that last year, in 2012, we didn't hit our internal targets and therefore, were not tracking for bonus. And therefore, in accordance with our plan we ended up reversing the bonus accrual in the second quarter of last year. This year certainly will be a second quarter performance. We have made up ground and are in the process of accruing a bonus accrual. But strategically, I'll let -- maybe John can add a few points on that.

John F. Gilbert

Well, I think the methodology year-over-year is the same. We simply did not earn a bonus for 2012's performance. For most of the executive team, almost 2/3 of the total compensation is at-risk compensation, and that didn't bode well for 2012. 2013 is a different year with a different performance. The only real thing I'd highlight in terms of how we're looking at this year is this year's target is EBITDA. We're looking at 2 real targets actually: EBITDA for most of our bonus; and then we are bonusing based upon market share gains as a part of our compensation package. That's a small piece of it. Clearly, based on our performance versus Black Box, which is the metric we use to measure that market share gain, coupled with where EBITDA is forecasted to end up, we're having a significantly better year than we did last year.

Conrad Lyon - B. Riley Caris, Research Division

Got you. Okay. And so just to be clear, the bonus recapture, that essentially was a 1x benefit. And then bonus contingency, hopefully as EBITDA grows bonus accruals going forward, right?

Diana Garvis Purcel

Correct.

Conrad Lyon - B. Riley Caris, Research Division

Yes. Got you. Okay. Question, I'm not sure if you mentioned this or not, and I apologize. But in regards to the rationalization of the home office, did you mention what the dollar amount will be saved on an annualized basis for this year?

Diana Garvis Purcel

We didn't mention on an annualized basis. On a steady-state less the severance, we're looking at probably $1 million. So obviously, that won't fall all into this year.

Conrad Lyon - B. Riley Caris, Research Division

Got you. Okay. Shifting over towards not necessarily unit development, but just a smattering of closures. Any sense of if that's going to kind of persist? Are there going to be some more kind of relocations going forward, that type of thing? Or do you feel pretty good about kind of the cash flowing of stores and that on the franchise side?

Diana Garvis Purcel

Yes. We're not aware of any closures. As we indicated, there was a closure subsequent to the quarter that was a relocation opportunity. That seem to be the best thing for the franchise partner, and we leave it up to them to understand their market. But we're really pleased with the health of this system right now. In any given year, I know that we've had closures in the past. We've had 3 this year, all for different reasons and all seem to be in the best interest of the brand as a whole. So at this point in time, I'm not aware of any closures on the horizon or any relocations of existing franchise restaurants.

Conrad Lyon - B. Riley Caris, Research Division

Got you. Okay. This will be my final one. Just on food COGS, or really the pork contract. Can you remind us where you stand on the pork contract duration? Inflation?

Diana Garvis Purcel

Yes. So we're contracted through the end of the year, and we always do it at the time of the year that we're watching the market closely to see if there's opportunities to blend and extend. So our pork contract year-over-year on comparable volumes is down 1.3% for all of our of pork contracts; and that includes ribs, pork butts, hotlinks. So that's total pork. But as I mentioned, we are watching the market. We're right now anticipating some further release later in the year. And so we want to make sure that we time our contracting appropriately to capture as much savings as possible. And if we can blend and extend into this year and still benefit this year in the fourth quarter, we will do so.

Operator

Our next question comes from Justin Ruiss.

Justin Ruiss - Sidoti & Company, LLC

I just had a quick question. I know that somewhere along the lines you said there would be possible remodels of restaurants. And I just kind of wanted to get a scope of how well the, I guess, the alcohol segment is with the craft beers. Is there a chance that you could be extending out bar space? Or if you are remodeling any stores, would that be something that you would look to do?

John F. Gilbert

Justin, it's John. I think the intent of the remodel has a number of different elements, both in terms of simplifying the box so that it's less expensive, adding some capacity kind of per square foot. And then to your point, I wouldn't say that we would make the bar areas bigger. Now they would be bigger than some of our early restaurants that don't have much bar space. But we will have the bar area be more central to the overall experience. In many cases, our bars are kind of tucked away and not really integrated into the main dining space. In both remodels, Timonium and Germantown, they will have bars that are central to the overall experience. And we believe that's very contemporary for casual dining, it's not out there. And we think that there will be some more opportunity for some density improvements in dining, and we're testing some community table-type setups in a couple of these prototypes, which actually adds seats. And so as you know, as a restaurant with peak periods it would be wonderful to be able to increase the ability to sit customers when they come in. So that's part of the dynamic. And then frankly, the other part is to elevate the barbecue, let's say, expertise and kind of make that more central to the experience and maybe downplay, a little bit, the Northwoods aspect of the current Famous Dave's portfolio. It will be pretty substantially noticeable change, but with an eye towards making the overall box economics work better our franchisees going forward.

Justin Ruiss - Sidoti & Company, LLC

Got you. And then just quickly on, I guess, looking at possible new menu items or anything like that, would you -- if you are going to roll out new menu items, would it be on like a quarter-to-quarter basis? Or is it just going to be a whole revamp on the menu going forward?

John F. Gilbert

So we're -- our menu is very sound right now, and we're very pleased with how the consumer interacts with our product offerings. We -- to be specific though, we will eliminate items that are -- that add complexity and don't sell well. And then on a periodic basis, and it maybe 2x a year, maybe 3x a year, we don't have to have the frequency of some of our peers because of the nature of our barbecue frequency, inherently. We will add new products that we believe, like the Burnt Ends, for example, capture the imagination of the consumer, particularly when they're advertised and drive traffic and sales profitably without having to resort to discounts. So our product strategy is probably less LTO and more permanent additions like Burnt Ends, which is permanently on our menu at this point in time. It's still selling extremely well. So our approach is probably a little more straightforward, and let's just say simplifying the menu experience for our customers.

Operator

Our next question comes from Greg McKinley of Dougherty.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Diana, you had provided some updates on margin expectations by-line item, but I know there are some re-classes there as well. How does that all boil down in terms of your net operating margin for you then versus what your previous guidance was?

Diana Garvis Purcel

Well, I'd refer back -- I can certainly reiterate the guidance that we have given in -- as of second quarter, and that will be an apples-to-apples, I'd be happy to do that. But I'd refer you back to the comment we made at the beginning of the year that we expect to achieve 250 to 300 basis points improvement in our restaurant-level operating margin and believe that our second quarter performance showed significant progress towards that initiative on an annualized basis.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Okay. Maybe I'll just maybe talk with you offline and make sure I understand that on a line item level. In terms of...

Diana Garvis Purcel

Would you like me to -- Greg, would you like me to go over the guidance again by line item?

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Sure. Maybe just in terms of how your view changed on G&A and operating expenses, because I know there's the re-class. So I just want to make sure I understand where those -- are we reiterating that on a net basis or changing that in some way?

Diana Garvis Purcel

These are reiterated on a fully reclassified apples-to-apples year-over-year basis. So in other words, there was improvement from our prior guidance in the first quarter, which is probably what you're asking about?

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Yes.

Diana Garvis Purcel

And so from an operating expense, the quick and easy answer for both of them, and then I'll go a little bit in depth, certainly, our second quarter performance certainly reflected an improving trend in both of those categories. And second quarter is our largest volume quarter. So we have the opportunity to really, when we get top line sales, to really leverage our fixed costs, particularly in our operating expense line, occupancy, et cetera. So the other thing that, as we mentioned, that is meaningful, particularly for the back half of the year, our advertising spend. And our guidance in the reduction in that spend for the balance of the year, as we make more purposeful use out of promotions and the digital strategy that we feel is working better for us and driving sales than some of the vehicles that we've used in the past. So being more mindful of that is going to help in an op expense. A couple other things in the second quarter that helped us on our operating expense, one of them, we've talked about our initiative on to-go supplies. We're starting to see some of the results of that initiative. And as John had mentioned, that's going to roll out to the organization. We saw some leverage on utilities, and we also -- some of the success in the pilot that we're seeing are in R&M expenses that we're testing in the Minneapolis market, that has been meaningful. That presented itself in the quarter as well. So we're expecting that those trends will continue. On the G&A side, again, second quarter leverage certainly helps from a revenue perspective, but also the reduction in force. The severance obviously falls into our numbers, but that is a 1x event, won't replicate itself in the back half of the year. And so on a steady-state basis, we should start seeing the savings as a result of that reduction in force. Does that help?

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Yes. Yes. Maybe bigger picture from a G&A standpoint. You talked about the eventual goal of achieving a 10% level of expenses. Is that something that occurs within the next -- you think we can achieve that in the next 12 to 24 months? Or is that a multi-year kind of goal? And what are some of the -- I wonder how much of that is dependent on revenue growth versus just further opportunities for expense dollar reductions?

John F. Gilbert

Greg, it's John. I think the answer is, yes. We can achieve that within the 12- to 24-month period. That's our plan. And yes, it includes both direct and substantial cuts, but it also includes some expectation of, I would say aggressive, but not overly aggressive growth. We are committed to and have to get our G&A in line.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Yes. Okay. The sales impact in the quarter of lower discounting, so obviously we have a margin benefit, but we're also not shaving that discount off the top line. Can you help us understand the degree to which you felt that impacted both revenues and food costs?

Diana Garvis Purcel

Yes, give me a second. I'm just going to look up our discounts. So for instance, in the quarter, just to give you an idea -- I'll let John speak strategically. But -- so in the quarter, comps and discounts call it, last year was 4.7%. This year at 4.1%. Year-to-date, 5.5% last year, 4.6% this year. So certainly, those dollars are very meaningful, and the flow-through can be very impactful.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Okay. And would you describe the second quarter as the beginning of an initiative? Or did we see that really you hit the button, and you're full go during the quarter? Or is that 4.1% change even lower on a go-forward basis?

John F. Gilbert

Well, I think it's a fair question. I don't think it's transient. I think it is part of our go-forward vision of how we manage this brand. So as we look at the balance of the year plan, our plan has significantly lower discount windows in it. I mean, those discount windows are driven by some sort of tool to get that discount in front of consumers. So we know we're not going to do direct mail to the level that we did last year. I'll say a couple of things about discounts or promotional strategy, and that discounts are a tool. And I saw one of our competitors last night on TV with an open discount. Essentially, that was 2 entrées and an appetizer for $10. So I'm not going to comment on the validity of that strategy as it relates to their results or not. But I think discounting or improving the consumer price value dynamic is part of the tool chest we have as brand builders, and it's part of our tool chest as well. So we're not antagonistic to the idea of helping our customers find a higher frequency with us based upon offering them a better price value equation. Our formula simply for that gift that we are giving the customer to get is hopefully incremental behavior of some sort. So an extra visit a year, or an extra item when they come in, and that has been happening. So we feel like we're not alone, but we certainly feel like we found a way to leverage the promise of this brand by using promotion and discounting effectively, albeit a lot more cautiously than we have in the past.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Okay. On the menu side, I wonder if you can just make sure I have my facts correct. In April, you rolled a new menu. You have about 1.5% pricing on a blended basis. That worked for you then. And then did I hear you correctly that there would be an additional 1.5% taken with the new September menu?

John F. Gilbert

Yes, that's correct.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

So you'll have 3% working for you, really, September, December and Q1 of '14?

Diana Garvis Purcel

Yes, on a weighted basis, the way it works, we're looking at about 2.5% for the year.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Okay. Okay. And then finally, you'd commented about still seeing your stock as an attractive way to provide cash back to shareholders through repurchases. Can you remind us how you think about your real estate portfolio. Do you have a lot of owned real estate? Would you ever look at refinancing through like a sale-leaseback and using that to retire shares? Or how do you view that?

Diana Garvis Purcel

We own less than 20% of our portfolio and as we saw last year with one of our locations that, frankly, we had held up for a number of years as a seed restaurant in Tulsa, Oklahoma, we're able to sell the real estate, which frankly at the time had a greater degree of value than the business. So I guess the answer to that is we're open to any and all ideas as to what makes sense for the strategy of the company. To be clear, the reason that we -- we paid off a substantial portion amount of debt in the second quarter. So the reason we didn't buy back shares didn't have to do with the fact that we didn't have the cash to do so. We were restricted under some covenants under our current line of credit.

Operator

There are no further questions at this time.

John F. Gilbert

Well, I want to thank everybody for listening this morning. We're clearly pleased with our progress in the second quarter. But I want to highlight, this is a -- even though we talk to you in a quarterly basis, this turnaround and brand building opportunity is more than a single quarter. And so we see this as a long-term project, a long-term commitment. We will continue to work on the initiatives laid out this morning. And really, we do look forward to talking to you guys again on the next quarterly update.

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Source: Famous Dave's of America, Inc. (DAVE) Management Discusses Q2 2013 Results - Earnings Call Transcript

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