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Executives

Diana Purcel – CFO

John Gilbert – CEO

Analysts

Greg McKinley – Dougherty & Co.

Shannon Richter – Feltl & Company

Conrad Lyon – B. Riley & Co.

Famous Dave’s of America, Inc. (DAVE) Q3 2013 Earnings Call October 24, 2013 11:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to your Third Quarter 2013 Conference Call. All lines have been placed in a listen-only mode. And the floor will be open for questions and comments following the presentation. [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 Purcel

Thank you so much. Good morning, everyone and thank you for joining us for the Famous Dave’s fiscal 2013 third 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 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 seven days.

Now, I will turn the call over to Famous Dave’s CEO, John Gilbert. John?

John Gilbert

Thanks, Diana and thanks to everybody on the line this morning and listening I appreciate your attention and interest. This will be a fun quarter to talk about. The narrative does have some twists and turns but the outcome was generally very satisfying. Our third quarter performance continues to confirm that our strategies are valid and our execution is delivering improving results. Let’s break the discussion down into the core areas that we have discussed in the past calls; same-store sales, store level profitability and G&A expenses. Our negative 0.8% same-store sales was disappointing. There is never a situation where we’re doing fewer sales in the prior year will be acceptable. However, it is useful to understand why the sales were down. A substantial portion of this shortfall occurred in the first week of the quarter was due simply to the day of the week on which July 4th falls.

As you know the famous days of the seasonal sometimes special occasion for many consumers and July 4th is a big one for us. In 2012, July 4th fell mid-week on a Wednesday. This year it fell on a Thursday this slight shift in time did hurt overall sales for the week and this shortfall really accounted for about half of the third quarter same-store sales decline. So despite the negative sales quarter, we continue to be very encouraged by our company’s store sales performance. We are nearly 0.5% positive year-to-date, in an industry that continues to face significant top-line challenges as indicated by the negative 1.4% for casual dining. Overall for the third quarter, according to Black Box Intelligence or BBI, which is a service we use to track our performance against the industry. And although our franchise sales were negative 2.3% for the quarter, their trends have improved since first quarter as well.

According to BBI, Famous Dave’s company results have gone from the bottom quartile back in Q4 of 2012 to the second quartile for the top in the third quarter. And in third quarter, we rolled over our best comps from last year. Our year-to-date sales growth for company restaurants continued improvements since first quarter for franchise restaurants are due to a number of important initiatives, many of which we’ve talked about on these calls. But I’m going to go through them again because it’s important to highlight that we invest something that’s working for you to stay on it. The introduction and continued success of our beef brisket product and the wonderful reaction we had for Burnt Ends which was introduced back in May, continues to be a big seller for us. Our ability to effectively preserve sales, even in this difficult environment by offering select promotions using our e-mail database, without having to resort to the much more expensive of direct mail discounting.

So last year we did a lot of direct mail activities. The distribution costs of those are very high. So this year we’ve been able to sort of in some cases match and in many cases, not have a less of a discount with e-mails which essentially saves us a high cost of production and distribution of direct mail. And then the continued use of our advertising campaign in the markets that do have TV, which if you’ve seen it, it really has a hard emphasis on authenticity in barbeque experience and it’s quite a shift away from some of the advertising we’ve done in the past. So perhaps the most exciting part of the quarter was our strong restaurant level profit improvement, even in spite the slightly negative comp sales. Our third quarter restaurant level cash flow margin improved by 630 basis points over third quarter last year, and really further confirmed that we’re on the right track toward achieving sustainable improvement in restaurant level profits.

During the quarter, in which sales were soft, we executed a number of initiatives that had a material impact on restaurant level profits. And they’re across P&L so it’s not just one thing that’s working for us. We redeployed our marketing spend in more effective ways as I mentioned with e-mail versus direct mails as an example of that. In some cases, where we were wasting money in the past, we pulled back on some spending altogether. We leveraged our custom e-mail database to offer promotions in more cost effective manner I mentioned that. And our restaurant teams did an exceptional job managing direct labor. And during the quarter, the teams began using a new scheduling software, that helps us project labor needs and more accurately predict what we need and in essence, helps us save money than the more traditional scheduling tools.

As we’ve indicated in the past, we concluded our roll out of new class To Go packaging that cost us less, but also maintains at a minimum the same level of quality the customers have come and expect from us and in fact in many cases it’s a better quality package than what we were using in the past. And we have seen the continued easing of food cost from a really long run of historic highs. So these initiatives combined provided over 600 basis points in restaurant level EBITDA margin improvement. This was truly exciting for us to see these achievements and actually we really feel good about this. We think this is the start of good things to come. Staying on the topic of cost for a bit, we continue to reduce our G&A this quarter and coupled with the reductions we talked about from the last quarter, we’ve got roughly 3 million bucks in G&A from where we started the year. These savings will manifest themselves over the balance of this year and into next year and put us well in our way to hitting our G&A expense goal of 10% of total revenue for 2015.

Now as the new CEO, I felt it was important this year to get a good sense of which restaurants would be a drag on future performance. And I personally devoted a good deal of time to generate activities that might change the result in the handful of restaurants that were, call it underperforming the vast majority of the company of restaurants. We’ve employed a series of activities and tactics and positively impact all of our restaurants with the exception of Salisbury, Maryland. In accordance with accounting rules, this quarter we were required to take a full non-cash impairment charge on this restaurant of approximately 1 million bucks. This is an isolated Salisbury, it’s an isolated market in Maryland eastern shores that among a number of things, is fairly small and compact. It’s also highly price sensitive and the economy hasn’t bounced back as quickly there and there’s been a number of new competition in that market, a lot of new seats. This restaurant is still open and operating and we’re looking at a range of strategic opportunities and options as it relates to Salisbury going forward. We also took a one-time non-cash charge of approximately 200,000 related to lease cost associated with terminating and then enter into a favorable new lease, on a strong performing restaurant in Virginia.

Going back to our current quarter, and taking out the one time hit from these non-cash charges and adjusting for the last year’s one-time tax benefit, which was recorded in Q3 2012 of $0.07 a share, we saw 450% increase in adjusted EPS quarter-to-quarter and nearly double adjusted EBITDA versus last year. And this doesn’t even take into account that in this year’s third quarter, we include a bonus accrual of almost 500,000 compared to no bonus accrual last year. Store efforts have produced results, kind of looking they hear clearly our work is nowhere done. It’s really important to point out, that we are building a very stable base from which to achieve our aggressive growth objectives going forward, because this is about a growth brand and not really about saving our way to success. However, we have found ways to have a material impact on our P&L. We’ve not just improved the basics by which we are compared to our peers, which are same-store sales, unit level economics and G&A, but we’re also laying the foundation for profitable growth going forward. And imagine the leverage we get, when we start growing this thing going forward.

We’re moving with urgency into the first stages of our long range plan, creating relative advantage – which is creating relative advantages of franchise or, to attract more franchisees. And build more units using a highly flexible brand footprint, we talked about this in the past that ranges from full service restaurants to quick-casual models. Let me highlight some of the things that I believe will give us this relative advantage to other franchise options. We’re unique in providing a single brand portfolio effect with multiple lines of business. I mean we are really seeing that platform for us today as our To Go business is really driving our top-line performance. And we do have these multiple line of business that are discreet from each other To Go, dine-in and catering and lastly our license retail business.

We will continue to test an off-premise call center, with the aim of rolling that out that, that improves both sales and restaurant level cash flows and profits and look to launching that based upon assessments of the results. It also improves the customer experience dramatically and I think that’s a benefit of the call center that we have to keep up for center. We’ve hired a senior level marketing executive, with broad experience and he will meet our product and media strategies with an aim to having more of our restaurants fall under the umbrella that we really developed around the impact we’re getting from television, media. Our strong performance in many markets is driven directly by the presence of TV. We are testing really on a perpetual basis, because you’ve heard me say this before, new menus and new products and new menu designs with an aim toward continuing our same-store sales momentum versus our peers.

We are conducting time and motion studies in our restaurant that will ultimately lead to new labor operating standards, aimed at improving task efficiency and total workforce productivity within our restaurant system. We are testing new restaurant equipment and back of house operating systems to both leverage our multiple lines of business, as well as improve restaurant level economics and then in some cases, even improve the quality of the products. Lastly and most importantly, we will roll out new prototype restaurants, particularly and specifically, in the quick-casual space. We’ll take advantage of the nature of barbeque I talked about in the call earlier, which is offering simpler, lower cost and more contemporary brand expressions to our franchisees. Barbeques are highly fungible food stuff and it’s a kind of stuff that we’re testing that can be done with barbeque that makes this brand really pop from a consumer standpoint. Both of our 2013 new restaurants that were opened – new company restaurants that were opening will feature elements of this new prototype as we seek to prove out the business case for future franchisee development. These are both full service restaurants as we look to 2014 company development more focus almost entirely on quick-casual restaurants in terms of prototypes.

Our first new unit Germantown opened last month in Maryland. Our next unit opens in Timonium next week. In addition to the two company restaurants, we now expect to see a total of eight franchises that’s opening in 2013 as one franchise opening slipped into early 2014. And as a final acknowledgement to the importance of our quick-casual format to our future, we’ve organized all quick-casual activities from restaurant operations to new unit development, to the marketing expression to the brand and really the leadership for the brand itself under one experienced leader. So this is a change from our past as we’ve found success in this sort of myopic focus that we’re developing around. Our approach to line of business, To Go, dine-in and catering, we also felt like having a myopic focus on how to explosively grow the quick-casual part of our format, small box, counter serve style restaurant made a lot of sense. So we’ve undertaken that and have identified a leader for that and I think that gives us tremendous upside.

This part wraps up my discussion related to what has turned to be a very busy, yet productive quarter, all this the stuff that we’ve done in this past quarter. In addition to that we have done this quarter, we still have a roll out of activity of the tested in our recent past and that’s all ahead of us in Q4 and beyond. So during the fourth quarter, we’ll roll out on a system wide basis. Our [indiscernible] and turkey program that we tested last year we mentioned it in the first call this year, we had terrific results on those. And it just makes a ton of sense if you think of Famous Dave’s essentially taking care of your Thanksgiving and Christmas holiday needs, with smoked turkeys and smoked ham. They are just brilliant products, so really excited about that. We will roll out mobile ordering capabilities as part of our digital strategy. We are seeing huge shifts from telephone orders to the mobile or online ordering. Now, we really want to have a state of the art ordering process or protocol for consumers to use as they access To Go.

We have this part of that shift in our business focus to hire a season catering leader who will expand a roll out of the campaign management tool that we started testing in back in second quarter, that helps with our seated sales and leaders, to improve their catering sales. So there is two key points that takeaway and catering leader for us in the expansion of our campaign management tool. We’ve completed two tests this past quarter that have a bright future for us from a product standpoint. We tested a line extension of our hugely successful Burnt Ends products and crazy idea but cheesy burnt ends and guess what, consumers loved it. And we also tested a new steak product, a steak that would be done the way you’d expect Dave to do a steak. So it’s not a barbeque product per se, but it’s a steak done the way a barbeque expert would do it.

So as I kind of wrap up my part, I really believe that this third quarter confirms what this brand is capable of and what this team is capable of when we combine the right initiatives with the right degree of focus by the right people. I’ll turn the call over to Diana and she can provide some detail on the key items for the quarter. Diana?

Diana Purcel

Thank you, John. To those on the call, please refer to our press release issued yesterday as they summarize our results. Famous Dave’s recorded revenue at $39.2 million and net income of $737,000 or $0.10 per diluted share, for the third quarter of 2013 compared to revenue of $39.9 million and net income of $845,000 or $0.11 per diluted share for the prior year. As John had mentioned, net income for the third quarter of fiscal 2013 included non-cash charges of approximately $0.12 per diluted share, related to the impairment charge for a restaurant in Maryland, as well as lease restructuring fees associated with a restaurant in Virginia. In addition, the most recent quarter included expense related bon-a, of approximately 435,000 or $0.04 per diluted share for the results for the third of fiscal 2012 did not include any expense related to bon-a.

As a reminder, earnings per share for this prior year third quarter contained a benefit of approximately $0.07 per diluted share for our favorable tax rate adjustment. Our adjusted EBITDA for the first nine months of fiscal 2013 was 10.6 million compared to an adjusted EBITDA of 10.2 million, for the comparable timeframe at fiscal 2012, reflecting the positive momentum achieved in the last six months of 2013. We generated 11.8 million in cash flows provided by operating activities during the first nine months of fiscal 2013 and this compares to 6 million for the nine months of 2012. The year-over-year cash generation reflects the strong results from the last six months, as well as increased cash flows due to no corporate bonus payouts in 2013 as related to 2012.

During the quarter, restaurant sales decreased approximately 1.5% year-over-year, reflecting the comparable sales decrease of 0.8% and closure at the Lombard Illinois restaurant during the fourth quarter 2012 at the end of its lease term and the closure of the Gaithersburg Maryland restaurant, which was essentially a relocation of the Germantown Maryland restaurant that opened during the third quarter of 2013. A comparable sales result also includes the annualized impact of a new company owned restaurant that opened in the fourth quarter of 2012 in Evergreen Park Illinois, in addition to weighted average price of approximately 3%. We are pleased with the gains made To Go sales, which increased 11% over the prior year and on a weighted basis, by 2.4%. We were challenged however, by a 2.4% weighted decline in dine-in sales and 0.8% weighted decline in catering sales. Led by To Go, we continued to see an increase in our off-premise sales, which grew to 37.5% of which To Go represented 25% and catering represented 12%. This compares to off-premise sales of 35.2% for the prior year.

Our dine-in per person average for the third quarter of fiscal 2013 was $16.82 compared to $15.87 for the third quarter of 2012. The breakdown by day part was $14.68 for lunch and $18.09 for dinner. On the franchise side, royalties increased year-over-year, primarily reflecting four net new franchise restaurants that opened since the end of third quarter of 2012. The increase in royalty revenue was partially offset by comparable sales declines of 2.3%. During the quarter we had five franchise operated restaurants that opened in Holt, Michigan; Benson Park, Nebraska; Hayward at California; Union Gap, Washington and Independence, Missouri. The Independence, Missouri location was actually a relocation of the Overland Park Kansas restaurant that closed during the quarter.

At the end of the quarter and as of today, we have 53 company-owned restaurant and 138 franchise operated restaurants for a system wide total of 191 restaurants in 34 states, the Commonwealth of Puerto Rico and one Canadian province. During the first quarter, we indicated that by year-end and on annualized basis, we expected to see 250 to 300 basis points of improvement in our restaurant cash flow margin. During the third quarter, we realized some positive momentum towards that imitative and saw a 630 basis points compared to the prior year’s third quarter. For the third quarter in the row, food and beverage cost declined year-over-year and with 30.6% of net restaurant sales compared to 31.5% for the third quarter of fiscal 2012. Food and beverage cost benefited from the favorable impact from some of the strategic initiatives that we have been working towards, as well as the anticipated decline in contracted food cost. We’re benefiting from a decrease for our pork and our brisket pricing, both of which are contracted through the remainder of fiscal 2013, as well as other items such as ham seafood and corn. Our chicken contract is locked in through the end of the year and a slight increase year-over-year.

We will continue our efforts to further improve margins to key core item promotions as John mentioned, through opportunistic commodity purchases and through strategic menu mix management. Additionally, we should benefit from our price increase of 1.6% that we took along with our new menu in September. This increase was based on the insights we obtained from our menu pricing consultant. Based on the results over the first nine months which included a significant mix shift to brisket as a result to the launch of our Burnt Ends products, we are moderating our previous guidance for food and beverage cost for fiscal 2013, to be approximately 75 to 85 basis points lower than fiscal 2012’s percentage. We are aggressively working on 2014 contracts as we speak. During the third quarter, we executed a contract for our pork, for all of fiscal 2014 at an approximate savings of 4% year-over-year. As mentioned, we are still negotiating the final pricing on the remainder of our key proteins for 2014 and we will give you more definitive update on the next call.

For the third quarter of fiscal 2013, labor and benefits, as a percentage of net restaurant sales, were 90 basis points favorable to the comparable period in fiscal 2012, primarily due to lower direct labor and employee benefit cost partially offset by sales deleverage. For the full year, based on the results of the first nine months, we are updating our previous guidance and now anticipate labor and benefit cost as a percentage of sales to be 65 to 75 basis points favorable to fiscal 2012’s percentage. Operating expenses for the third quarter as a percentage of net sales were 25.2% or 440 basis points favorable to the prior year. As John had previously mentioned, we have evaluated our marketing spend and redeployed it in more effective ways. By not continuing to invest in the direct mail program similar to the prior year, we were able to save approximately $1.2 million. Additionally, 2013’s third quarter operating expenses were positively impacted by lower supply and repairs and maintenance costs.

For 2013, we expect advertising expense now be approximately 2.4% of net sales for all of fiscal 2013 which includes 8.75% contribution to the marketing fund. This compares to a 2012 spend of 3.4% of net sales, which included a 1% contribution to the marketing fund. Based on the results of our nine months, 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 145 to 155 basis points lower than 2012’s percentage. G&A expenses as a percentage of total revenue for the third quarter of fiscal 2013, was 12.5% compared to 12.1% for the comparable quarter of fiscal 2012. This increase reflects the year-over-year impact of 2013’s bonus accrual, equal to 435,000 or 110 basis points, partially offset by the reduction in force and other cost savings initiatives. For the first nine months of fiscal 2013, the bonus accrual was approximately $1.4 million or $0.13 per diluted share.

As an update to our previous guidance, we now anticipate G&A expenses as a percentage of revenue to be approximately 110 to 120 basis points unfavorable to the prior year, primarily due to the full impact of the bonus accruals partially offset by the reduction in force and other cost savings initiatives. Supervision expense for fiscal 2012’s third quarter which is now included in G&A similar with the prior year, was equal to approximately $467,000 and it was approximately $1.9 million for all of fiscal 2012. And as a reminder, in all of our SEC reported documents, we have restated the prior year to reflect the current year presentations. Fiscal 2013’s third quarter had 293,000 of pre-opening expenses compared to 19,000 to the third quarter of 2012. We now anticipate pre-opening cost for 2013 to be approximately 569,000 for the opening of two ground-up full service company owned restaurants, one which we opened in the third quarter and one which will open in the fourth quarter. Interest expense for the third quarter of fiscal 2013 was lower both in dollars and as a percentage of revenue compared to the prior year, reflecting lower average balances on our revolving line of credit. We expect this trend to continue for the remainder of fiscal 2013 as pertaining to interest expense.

We’re updating our previous guidance with respect to our effective tax rate and now expect a 28.1% effective tax rate for 2013, reflecting the results of the first nine months of 2013. With regard to our balance sheet, our unrestricted cash and cash equivalents balance at the end of the third quarter 2013 was approximately 1.8 million. We ended the quarter with a balance of 6.9 million on our revolving line of credit, reflecting an almost 50% decline from year-end as well as the prior year’s third quarter. Since year-end, we’ve hit off approximately 32% of total debt and as of today, we have a balance of 8.2 million on our line. We were in compliance with all of our covenants during the quarter. We used approximately 3.6 million of cash for capital expenditures, primarily reflective of company-owned restaurant that opened in Germantown, Maryland and continued investments in our existing restaurants. We’re updating our guidance and now expect total 2013 capital expenditures to be approximately 6.8 million, reflecting two new ground-up full service restaurant opening, continued investments in our existing restaurants including – investments incorporating infrastructure system. Lastly, during the third quarter of fiscal 2013, we also used approximately 1.2 million to repurchase 75,000 shares at an average price of $16.13 excluding commission.

At this point, we would like to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. [Operator Instructions]. And we – our first question is from Greg McKinley from Dougherty & Co. Please state your question.

Greg McKinley – Dougherty & Co.

Good morning. Could you talk a little bit about – so you mentioned obviously a difficult macro operating environment in terms of casual dining trends. How did you see your consumer behave during the course of the quarter? And then I wonder if you could talk a little bit about now your anniversary your direct mail campaign from your prior year period, how will your promotional strategy sort of help you fight those headwinds except they are still there or you have eased it off?

John Gilbert

Hey Greg, how are you?

Greg McKinley – Dougherty & Co.

Good morning.

John Gilbert

So couple of things, the course of the quarter it’s a great question. The quarter was very solid throughout the three month period with the hiccup around July 4th. A substantial portion of the balance of the shortfall was really tied up in the way a large catering order fell at the end of the quarter. So, we feel very good about it based upon looking at the industry. We’re deeply concerned about the macro environment as probably all my peers are, but in general, I would say that in the quarter, we had a lot of smiles for the entire quarter but the large portion of it trying to call back from the July 4th. As it relates to the use of direct mail, there is a couple of things that this e-mail campaign gives us the ability to do; it’s extremely flexible in terms of both breadth of impact and how many restaurants do we want to reach out to or on behalf of with our e-mail campaign. And then it’s also extremely rapid, if we make a decision today we can do an e-mail tomorrow.

Direct mail offers you essentially those two things but with direct mail, you need to decide which restaurants you want to do it for probably six to nine weeks before you actually can get it out in the marketplace. So there is a huge advantage as you can appreciate I’m sure in terms of the situational use of these things. And same-store sales business is a daily scratch and claw approach for all of us in this industry. And so the more timely and flexible the tool is, e-mail in this case, the more you can eliminate sort of that wasteful scratch and claw we don’t really need it and apply it directly where you do need it. So we’re really encouraged by the use of this tool.

At the same time, I think it’s also extremely – it’s an extremely useful tool again back to e-mail to help lean from discounting in general when it’s appropriate to do so. And so our approach will be to continue to use the healthier tools for growth, which in my opinion will be both restaurant level execution from an operating standpoint and then food news or product news to drive healthy growth and be very selective in terms of the use of discounts. And use discounts in a way that there is a positive ROI and one of the big barriers with direct mails, it costs you $0.65 a piece really minimum to get a direct mail in somebody’s home, most of that’s posted. So you can eliminate that and have the same effectiveness with another tool, you’re in really good spot.

Greg McKinley – Dougherty & Co.

Thank you. And then in your press release you commented on the development of distinct lunch and dinner menus?

John Gilbert

Yes.

Greg McKinley – Dougherty & Co.

Wondering is that happened yet or when will that be happening and are there – and what do you expect to get out of that? How much will that cost to roll out a separate menu program, any operational complexity that goes along with it in the stores?

John Gilbert

Yeah we’ve already rolled it out. So we are in our stores right now. We have separated the lunch and dinner menu there are lot of re-ins for that but primarily we wanted to make sure that let’s say a weekend dinner which is a sweet spot for us, that we are offering our guests a healthy go in the right direction in our minds for the best experience which tends to be our center of the plate, barbeque items and not offering lunch items which also have an ancillary negative to us, which is trade down. The cost of executing that is minimal. The lunch menu is pretty small and not necessarily very costly. And so we are now in the business of having menus dinner already day part specifically often based upon when the customer arrives. Our restaurant has the flexibility, if a customer asks I’ve been here a lot I love that lunch item, we will obviously, happily satisfy that customer.

Greg McKinley – Dougherty & Co.

Okay. Thank you. And then may be just comment a little bit around fast or quick serve barbeque landscape that you talked about bringing in I think a new leader to that business wondering if you could talk a little bit about that? And what if anything you are seeing competitively in that, because I hear and see ads for other what I would describe, as quick-casual barbeque?

John Gilbert

Yeah we think it’s – well we can just look at our own data and talk specifically about that. We probably have just in the company side nine counter service restaurants today, two of them are probably in the new shack and the other ones are legacy shacks or legacy counter serve and only two franchisee units. We also look at our To Go business and see just how not only sales are growing, but also traffic is growing pretty substantially. And so we’re convinced that part of the future of barbeque lies in aggressive expansion of our quick-casual, both prototype and then even casual or To Go with an existing prototype. So we’ve hired – we designated a leader for that who has an operating background. So we wanted to make sure that one of the opportunities that we see in our mix. We have terrific top line volume in our quick-casual units today. We need to engineer that so in addition to all initiatives we’ve talked about today which are certainly driving bottom-line improvements that is there more that we can do in those quick-casual units to drive better performance at the bottom-line. And we’re obviously aware of and paying close attention to the competitive expansion within this space. And we’re probably of the mind, let’s get this thing absolutely right because our go forward proposition will be franchisee driven. So we want to have the mouse trap if you will, for current and new franchisees so that there is an expansion of that footprint quickly, but also from an organized and discipline perspective.

Greg McKinley – Dougherty & Co.

Thanks for that. Then may be just quick follow up on that so quick-casual, with the concept that you are envisioning, would it be primarily a takeout and catering store or would it still be centered around people sitting down and eating in the store?

John Gilbert

I wouldn’t use the word centered around people sitting and eating. We obviously have dine-in capabilities we want to make that dine-in experience pretty posed as well. So we would still envision having beer and wine for, which is clearly a dine-in component and we think that’s a very nice blend of what I would call the quality and experience of barbeque. But if you want to have it as a dine-in customer which probably 40% plus will, we’re going to have a great experience. We’ll have a terrific hospitality program people serve, but we’ll still offer that kind of hospitality that our customers have come to expect and at the same time, be in the line if you want to relax they will be screens and TV screens. And so it will be a very receptive ambience, it just won’t be very big. And then, clearly organize this thing around efficient and convenient To Go experience for probably what will be the majority of the business out of these units and then yes, we’ll have a catering component as well there. So our vision is all three lines of business in a substantially smaller box with an intent and purposeful – intent driven and purposeful orientation to off-premise.

Greg McKinley – Dougherty & Co.

Thank you.

John Gilbert

Thank you.

Operator

Our next question is from Mark Smith from Feltl & Co. Please state your question.

Shannon Richter – Feltl & Company

Hi this is Shannon Richter for Mark Smith, just a couple of questions here. Can you talk about the franchise health and happiness?

John Gilbert

We will be with our franchisees in our marketing summit in two weeks. We spent obviously a lot of time on the phone and conversations with them. They are clearly not pleased with the macro environment and their in some cases performance as it relates to both sales and traffic. I think their health is good and I think their relationship with their franchise or us in this case, is very good. We have a series of what I would call, major initiatives, backed by pretty compelling business cases that will roll out to the system in two weeks, with an aim toward impacting 2014’s performance. The initial response to those initiatives has been very positive. So I feel like we as a franchise or all our franchisees, leadership and programs activities that will help turn this trend. I believe there is no reason in the world these are restaurants that have 79 net promoter scores for example. So they are huge or high service and high food quality scores. There is no reason to believe they can’t match the company restaurant performance. The biggest difference in their performance is due to the presence of TV and some of the pumping restaurants in the absence in franchise restaurants and that’s only due to the fact that it’s very difficult to buy TV on a local level.

So our plans contemplate that reality and we have a solution that I think does deliver against the gap between us company and us franchisee. And then ultimately, it’s not how we beat the industry and gain share, I think some of the stuff that we’ve talked about are more aggressive off-premise activities. All the systems that we’re testing right now are designed to be expanded to include franchisees from our menu optimization program to our call center test to our mobile ordering test. And I think all of them and some will express the same kind of results on a national level that we’re seeing on the test level. So we have a number of initiatives queued up to help them to close that gap.

Shannon Richter – Feltl & Company

Okay, perfect. And then can you give the club membership numbers?

John Gilbert

Yeah, I mean we’re getting close to 2 million members. Last time, we met we were around 1.7 million.

Shannon Richter – Feltl & Company

And then my final question, can you just give me the guidance on the labor and benefits one more time sorry about that I missed it?

Diana Purcel

Yes, no problem. We said labor and benefit is going to be a decrease of 65 to 75 basis points.

Shannon Richter – Feltl & Company

Thank you so much.

John Gilbert

Thank you, Shannon.

Operator

Our next question is from Conrad Lyon from B. Riley and Co. Please state your question.

Conrad Lyon – B. Riley & Co.

All right. Thanks. Hey hope you guys are doing well? Big picture question kind of following on what you said earlier about development both from the quick-casual format and just full service. And my question is going to essentially relate to G&A, but how do you see the company evolving over the next several years? Do you see it you said you guys are more of a franchise or being more franchise centric, where we might see further G&A reduction opportunities or how do you see the company franchise it makes it really playing out in the long run and how does it relate to G&A?

John Gilbert

It’s a terrific question Conrad. We see the bulk of our growth coming through franchisee development. We think that our responsibility from a capital allocation standpoint is to demonstrate the wonderful breadth of utility that this brand has across a number of different footprints from full service restaurants with big bars that are frankly kicking butt right now in some new markets, to this obviously this quick-casual prototype and pretty much everything in between. We really think that’s unique to us and unique to Bar-B-Que. In terms of G&A, we set a 10% target out there. We think that, that obviously contemplates both some additional cuts, but even leveraging growth. The good thing about the franchise growth model is, there is a tremendous amount that’s really why it’s appealing to us, there is a tremendous amount of leverage from system leverage including G&A as you expand it out. We also love the idea of having competent operators in their local communities with the barbeque presence we think that’s a wonderful way to develop barbeque, as opposed to may be some of the very menu brand which are more in a bag approach that doesn’t really leverage off of our local community as well in my opinion. So, we’re really excited about getting the tweaks right to both prototypes if you will and then having that box of economics makes sense and then on the franchise our side just leveraging the heck out of G&A.

Conrad Lyon – B. Riley & Co.

I got you. So, can I say this or is it to think of it this way that G&A perhaps from a dollar basis may see some very modest increases over time for the next three, four, five years as you build out the franchise base whereby you are able to essentially line unlike you were alluding to? Is that fair way to look at it?

John Gilbert

Yeah, I think that’s fair. I mean we have said already we believe that there are some additional cuts that will do before we get to that moderate increase if it’s necessary. Yeah, we’re going to be very tuned in and dialed in to G&A. We’re a small company and I think there is further leverage ahead for us. We’re getting a lot done with significantly smaller team as opposed to even six months ago. We’re finding new ways to work and we’re using technology a lot more, just sat into my first reverse auction from a procurement standpoint. That process while labor intense, ends up saving us labor in the long run. We’re using outside consultants to help with menu optimization that saves us internally. So we are all for cloud based and technology oriented solutions to G&A challenges going forward and we feel like we found a few that really work for us.

Conrad Lyon – B. Riley & Co.

Got you. Okay. Let me get a little bit more gritty within G&A, let me just talk about the benefit this quarter versus last year. So first my recollection, I think last year there was a shift from the end of fiscal ‘11 into the third quarter with a bunch of marketing expense falling into that quarter. And it looked like more third quarter last year was the aberration and this quarter is more of a normalization, but it also sounds like now direct mail is getting reduced. And I just want to – it’s more of a clarification question, is that fair to look at not an aberration on top of that are we saying that a new strategy with marketing with direct mail standpoint?

John Gilbert

Yeah, I think that’s fair. I think you saw some timing things happen last year just in terms of when we were in media versus the prior year and when we brought direct mail versus the prior year, only paid for the direct mail versus the prior year actually. This year we don’t have those timing implications. So the benefits that we’re seeing right now may be they cut to the chase are timing related, they are strategy related. So they are not going to be a comeback at you at Q4 and hey that was a timing

Conrad Lyon – B. Riley & Co.

Exactly. Okay. Perfect. Let me dive in towards the top-line. I think it’s fantastic what’s happened with the To Go. Dine-in obviously some challenges there. Is it fair do you think do you think to compare the total comp to Black Box and I don’t know the details of Black Box, but just because your To Go sales are so high. But the dine-in business, I guess one of the things I wanted to ask is the direct mail was that more geared towards the dine-in business or To Go business or is that part of perhaps may be why there is still some challenges in dine-in than To Go? I’m obviously not on the direct mail list but probably have a better idea?

John Gilbert

We can push you on the list but you won’t get it but you’re asking a terrific question and first of all let me answer the first one. No, it’s not fair. So we’re looking at our lines of businesses independently and I can kind of give you a run down, at least in the two that matter in this conversation. Catering is a separate animal we don’t have to spend a lot of time on that, because there is no fair comparison there. But from a dine-in standpoint, sales wise, we’re kind of tracking along with the casual dining industry in terms of underperformance versus last year. When you look at To Go, we don’t compare ourselves to casual dine-in, we’re actually comparing ourselves to Black Box Index for quick-casual, which is a higher hurdle. And as we look at it right now year-to-date, we’re actually outperforming our growth in To Go which Diana referenced is pretty substantial. We’re actually outperforming what they call fast casual category, which is not fast food by the way. So this just includes the [indiscernible] and chipotles of the world, I don’t know the whole breakdown of who’s in there. But I think it’s a fairly high standard to compare ourselves to. I think we should. To get to your point, which is we really – what’s inherent in this brand that’s absolutely beautiful for us, is this natural portfolio effect that we’re seeing. I’m not sure many brands can – a lot of people buy brands to create a portfolio effect, we have it with one which is obviously a wonderful advantage. But we’re comparing internally, we’re comparing our To Go performance versus the fast casual number and we’re actually exceeding that number. That number is slightly negative year-to-date. This last quarter a couple of big guys did better in the second quarter, but we’re clearly up substantially. The second part of that question was really about the nature of direct mail and dine-in, I think your observation’s correct. Direct mail would have had a stronger impact on dine-in in some cases I think we’re excluding To Go from the offer. That’s one of the wonderful things about e-mail as we can be flexible not only in terms of timing and lead time, we can also be very specific to give you an example that’s really exciting. We’ve been doing some e-mail offers only related to the presence of an NFL football game or not. And so how does that work in practice? So we’ll send an e-mail on Sunday morning for To Go only offer and related to the Bears or related to the Red Skins and the response has been absolutely fantastic. So, we’re not only able to offer discounting and there is a discount associate with that e-mail, make no mistake.

Conrad Lyon – B. Riley & Co.

Sure.

John Gilbert

They’re not only able to offer discounts on a timely basis queued up to go out in the morning, but we’re also able to have that message be very specific to the occasion. We did some government shut down e-mails in the DC market and they were tremendously effective. And so we’re using this tool in all kinds of ways that I think are really exciting for us. We have a long way to go still. But it clearly has given us the ability to focus on To Go, specifically which I guess is really what you’re asking.

Conrad Lyon – B. Riley & Co.

Yeah, yeah. Those were excellent clarifications. Okay. Let me shift towards the quick-casual format. It sounds like you’re certainly geared up or intent to accelerate it but am I correct, it sounds like you still want to guess the format right I don’t know if there is going to be a couple of different formats for different markets. But can you give more color or are you happy with what you have or still little more work? How much more time do you think you need before you really start with all formats?

John Gilbert

We’re happy with what we have and yes we think we still need to do some more work. I think timing really depends on some of the consumer reaction. We see something we put in test in the next three to six months. We do have existing small box 3,000 square foot 2,800 square foot boxes out there that we can go test things in. So we don’t have to wait to build a new one I guess is the point, which obviously takes longer. But probably the best way to look at is, we’ve got some decent top-line numbers and we’ve got some respectable bottom-line numbers, but we want to improve that to be. Keep in mind, we’re selling so we’re selling franchise units we want to make that – we want to make the top line and bottom line work together in a way to create this magnetic attraction to existing new franchisees I mean I got to have that because that’s the next big thing.

Conrad Lyon – B. Riley & Co.

I’m proud to hear but do you consider excellent or good top-line numbers are we talking 20 25k week or more or?

John Gilbert

That’s a good starting place.

Conrad Lyon – B. Riley & Co.

All right. I’ll keep it there then. All right. Probably just wrapping it here with the quick-casual format, I know a lot of competitors seem to have a more simple menu sounds like is that might be the way you would go with the quick-casual format as you refine it to be have a more simple menu that facilitates transactions and any cost deficiencies?

John Gilbert

Yes.

Conrad Lyon – B. Riley & Co.

Okay. All right. Helpful. All right well thanks for the questions – answers. Thanks.

John Gilbert

All right.

Operator

Have a question from Greg McKinley with Dougherty & Co. Please state your question.

Greg McKinley – Dougherty & Co.

Yes thank you. Just to follow up on food cost. Diana I think you mentioned you’ve contracted your pork needs for ‘14 and also be down 4%. Can you remind us what portion are your COGS is for pork and just how we should think about that impacting the full year COGS for the next year?

Diana Purcel

Yes absolutely. So pork right now is approximately call it 32% of our purchases.

Greg McKinley – Dougherty & Co.

Okay.

Diana Purcel

So we still have obviously quite a few contracts To Go and we’ll update as soon as possible. But sufficed to say, that as we look for the balance of 2013, I mean as we’re looking forward to 2014, as John has indicated we’re starting to see the benefit of coming down from really some historical high costs. And with corn looking good, we can peddle both with our contract that we’re continuing to do, but we’ll certainly update you on our full contract in February.

Greg McKinley – Dougherty & Co.

Okay, great. And then just remind us the sales mix between To Go, dine-in and catering?

Diana Purcel

Yes so for the quarter, 62% was dine-in, 25% was To Go and 12.5% was catering. So dining was 62.5% off-premise was 37.5%.

Greg McKinley – Dougherty & Co.

Yeah, okay. And then at this quarter, you said you’re running at about $3 million annualized G&A expense reduction, last quarter it was $1 million. So were these headcount additions or were there reductions rather or were they process efficiencies, both or how would you describe that?

Diana Purcel

It’s all in. So as we talk about the annualized impact obviously as John had mentioned, these are not going to fully present themselves really till 2015 because there is a portion that presented themselves this year, a portion that will present themselves next year. But it’s all included, so it includes – and actually that’s a net impact because as John had indicated, we’re going to continue to invest in areas of growth in the business. So there are certain positions that have been elevated to help us to achieve the next level of performance. So that does include looking at programs that includes looking at efficiencies technology opportunities that includes people. That’s all encompassed in.

Greg McKinley – Dougherty & Co.

And then finally, CapEx for the quarter and your current number of future franchise development commitments?

Diana Purcel

We had 63 units as a future forecast is our pipeline number at this point in time. And with regard to bear with me for one second, I can get you, for the quarter we had total CapEx at 2.1%. So year-to-date 3.6%, expecting 6.%8 for the year, 2.1% of that fell in the third quarter.

Greg McKinley – Dougherty & Co.

Thank you.

Diana Purcel

Yes.

John Gilbert

Thank you.

Operator

There appear to be no further questions.

John Gilbert

Thanks, everybody for joining us. We really look forward to talking next quarter. I think we’re going to have some great stuff to cover off on and we do really appreciate the time and attention on today’s call.

Operator

Please disconnect your lines at this time and have a great day.

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