Granite City Food & Brewery Ltd. (OTCPK:GCFB) Q3 2013 Earnings Conference Call November 12, 2013 11:00 AM ET
Robert J. Doran - Chief Executive Officer
James G. Gilbertson - Chief Financial Officer
Ladies and gentlemen, thank you for standing by and welcome to Granite City Food & Brewery Third Quarter 2013 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Tuesday, November 12, 2013.
I would like to turn the conference over to Jim Gilbertson. Please go ahead, sir.
James G. Gilbertson
Thank you, operator. Good morning and welcome to Granite City Food & Brewery’s third quarter 2013 conference call. This is Jim Gilbertson, the Chief Financial Officer, and with me is Rob Doran, CEO. Thank you for taking the time to listen to our call. For the agenda today, Rob will provide you some opening comments and highlights, I will then review our third quarter 2013 financial results in more detail, and Rob will provide final closing comments. We will then open the call for Q&A.
By now, everyone should have access to our third quarter press release, which we had released last night. Our release included a non-GAAP earnings and reconciliation schedule that we will refer to during the call, but first let us cover the required Safe Harbor statement.
Please note that throughout our call this morning, we will be presenting certain forward-looking statements of expected future performance including expectations regarding anticipated sales, operating margins, expenses and other matters. These forward-looking statements reflect our expectations and are based on currently available data. However actual results are subject to future risks and uncertainties, which could materially affect our performance.
We undertake no obligation to update any such forward-looking statements and we wish to advice you that risks and uncertainties that could affect our actual performance are set forth in the 'Risk Factors' contained within our quarterly report on Form 10-Q that was filed with the Securities and Exchange Commission on May 17, 2013.
We will reference certain non-GAAP financial measures in our call this morning such as restaurant-level and Company-wide EBITDA and restaurant-level income before occupancy or IBO. Reconciliations of these non-GAAP financial measures to GAAP financial measures are included in our press release, which is available on our website. The non-GAAP schedule breaks out the performance of our comparable restaurants, which includes 31 restaurants.
With that housekeeping out of the way, I’m going to turn the call over to Rob Doran, our Chief Executive Officer.
Robert J. Doran
Thanks Jim. As you can see from the results of the press release, the third quarter was one of our more challenging quarters this year. While our year-to-date figures are still strong with a gain of nearly $10 million in new revenue compared to 2012 and our adjusted EBITDA up 13%, the third quarter saw revenue increase slow. In particular, our guest counts were down during the quarter, which we attribute to a couple of items.
First, the overall casual dining industry was down during the quarter recording a decrease of 2.4% and 3.8% in same-store sales and guest counts respectively. Similar to the industry, we were down in both categories during the quarter. In addition to the industry challenges, we gave ourselves an additional challenge with the rollout of a new menu towards the end of the second quarter. All-in-all, these items caused us to comp a little worse than the industry with a decrease in same-store sales of 3.6% and decrease in guest counts of 5.2%.
I want to take a few moments to talk about our menu rollout. Typically, Granite City will implement a new menu once per year. The extent of the changes we made on the menu this year was a bit more of extensive than in past years since we sought to accomplish several goals with the new menu, including we wanted to upgrade some of our better selling menu items to make them more contemporary to appeal to a wider audience. We also wanted to create a better balanced menu and we wanted to change the menu mix to be more appealing to customers in various markets, a variety of small and large markets that we now serve. And lastly, we wanted to take a little price-over to offset overall cost increases in commodities and healthcare, while still ensuring that we maintain a solid value proposition.
For the most part, I believe we met our objectives and we had a lot of wins with the new menu. Some areas where we had issues to deal with were on a few of our more popular items. As you all know, Granite City has a strong customer loyalty, and even the smallest change on a particular item can cause a bit of an uproar. To that extent, we had about five items where many customers did not want to see upgrades or improvements in product, and they provided a lot of feedback to that extent. To satisfy our customers, we quickly added a Classics menu where we gave our customers the choice of the newer version or the classic menu items that they had come to love. All in all, we think this change satisfied our customer base and we are quickly moving to do a single menu that our customers told us were the favorites of those select changes.
So while we have been working hard to make sure our customers have an upgraded menu with items they know and love, our restaurant staff has been working very hard to make sure that the customers have a rewarding experience. With the initial changes to the menu and the Classics rollout, there's a lot to take care of in the back of the house with the new menu items and the increase in menu items, and the front of the house staff was also busy making sure our customers were well taken care of and understood the new Classic menu items. We believe the combination of these events caused margin pressure on our food and labor cost during the quarter.
So, we sort of got hit with a double whammy, an industry in a bit of a downturn and margin pressure due to our internal changes, all leading to results that we felt were below even our own expectations in terms of revenue and profitability. The good news is that we can control our margins, and as I had mentioned earlier, we are moving back to the single menu with menu items that our customers told us were their favorites. After a six restaurant test with the single menu, we hope to have the single menu in place in all restaurants by the end of November. This will reduce the number of items that our kitchen staff will have to prepare, bring back some familiar recipes, as well as allow our servers to focus on taking care of the guests rather than explaining menu changes. These are all good steps and we feel confident we can bring our margins back to the level that meets our expectations.
On the guest count front, we are seeing a nice improvement in guest satisfaction in our food and service from our [voice] (ph) survey results. So that's a positive as well. We are also working very hard to develop consistency in our local store marketing, which we call our LSM program. As a result – or as a regional player, we don't have the funds to promote our brands through traditional media. As such, while some of the larger brands can get ahead of us by using television to promote specials and draw in guests, we have to rely on more traditional store level marketing through our LSM program. The one difficulty with this approach is that our marketing generally has a delayed effect because television can be instantaneous. Nevertheless, we are confident in this program and we are hopeful that the program will pay dividends as we move in towards the holiday season.
On a second front, we opened our new prototype in Lyndhurst, Ohio, a suburb of Cleveland, last week to terrific results. The store is a beautiful structure and our guests were more than complimentary about the food and the ambience during mock service and our VIP party prior to the opening. Despite difficult weather conditions, the store is generating revenues at levels that indicate that this will be one of our stronger stores. The staff did a great job prior to and during the opening. We also brought in a few LSM staff to make sure the restaurant opening was top-of-the-line within the local community. [indiscernible] has a dedicated and terrific staff that made this opening a success.
Finally, the Company has been engaged for some time in a study of the benefits and costs associated with being publicly traded as a reporting company. In light of the Company size, small market capitalization and the thinly traded market for its stock, the Board may find that the financial burden of reporting is disproportionate to any benefits of maintaining the registered status of Company's shares. At this point, however, the Company has not made a decision to voluntarily de-register and we remain a public company with no impact on our ability to trade stock. Our stock continues to be quoted on the over-the-counter CQB as it was before.
Now I will turn the call over to Jim.
James G. Gilbertson
Thanks Rob. As Rob noted, it has been a difficult quarter. The year has been a little down in terms of the sales in the industry and in particular the Midwest, as well the quarter was a bit more challenging due to our rollout of the new menu towards the end of the second quarter, there's a bit more [indiscernible] than in prior years, thus causing some margin erosion as it has taken more time for our staff to adjust to the changes.
On a year-to-date basis, net sales increased $10.2 million to $100.3 million or an 11.3% increase over 2012 year-to-date revenues of $90.1 million. Granite City restaurant same-store sales increased 0.6% compared to the industry results of a decrease of 1.2% during the period according to Knapp-Track. Through September 2013, our comparable Granite City store guest counts decreased 2.1% on a year-to-date basis compared to the industry result of a decrease of 2.5% as provided by Knapp-Track.
Total cost of sales before occupancy was $75.7 million or 75.5% of sales, compared to prior year cost of sales before occupancy of $67.4 million or 74.8% of sales. As noted previously, we saw an increase in food costs and labor costs in the recent quarter that also increased our year-to-date cost. On a year-to-date, the restaurant level income before occupancy or IBO as a percentage of revenue was 24.5% compared to 25.2% in 2012.
In addition to the cost related to our menu rollout, we also had a difficult comp base to compare with in 2012. We benefited greatly from the Super Bowl at our Cadillac Ranch, Indianapolis store which recorded higher than normal revenues and IBO margins of nearly 60% during the event.
[Net cash] (ph) general and administrative expenses, excluding stock option expenses and one-time costs, were $7 million or 7% of sales during the first nine months of 2013 compared to $7 million or 7.7% in the prior year. We feel that our G&A will continue to move down as a percentage of sales as we gain better leverage going forward from the revenues generated from new store openings.
Pre-opening expenses in 2013 were $1 million compared to $900,000 in the prior year. Depreciation and amortization year-to-date expense was $6 million versus $5.5 million in 2012, an increase due to the purchase of the Cadillac Ranch stores throughout 2012 as well as new store openings.
Net interest expense for the year was $3.7 million compared to $3.7 million in 2012. As we previously announced, we refinanced our debt of Fifth Third in the spring locking in a large share of the debt at a fixed rate at 5.77% compared to a previous state of 6.75%.
Year-to-date 2013 net loss was $2.7 million or a loss per share of $0.40 compared to a loss of $3.1 million or a loss per share of $0.64 in 2012. For the first nine months of the year, our weighted average basic shares of 8.1 million shares were outstanding compared to 5.9 million shares in the prior year.
Adjusted EBITDA, which reflects all leases as operating leases so that the expense runs through the P&L, was $6.1 million at the end of the first nine months of 2013 compared to $5.4 million during the same period of 2012, an increase of 13.4%.
In the third quarter, net sales increased $300,000 to $31.4 million, or an increase of 1% in the third quarter 2013, compared to net sales of $31.1 million in the third quarter of 2012. Same-store sales for Granite City restaurants decreased 3.6% for the quarter. Average casual dining sales for the industry during the third quarter 2013 decreased 2.4%. Additionally, the guest counts for the comparable Granite City stores for the third quarter 2013 were down 5.2% compared to the casual dining industry which was down 3.8% according to Knapp-Track.
Total cost of sales before occupancy was $23.9 million in the third quarter or 76.1% of sales, compared to prior year third quarter cost of sales before occupancy of $23.5 million or 75.3% of sales. Overall, restaurant-level IBO was $7.5 million or 23.9% as a percentage of sales during the third quarter compared to prior year third quarter restaurant-level IBO of $7.7 million or 24.7% as a percent of sales. As noted in the year-to-date section, third quarter period is where we saw the effect of the menu rollout which affected our overall cost of operations during the period.
Cash G&A expenses, net of stock options and other one-time costs, were $2.1 million or 6.6% of sales during the quarter compared to $2.3 million or 7.3% in the prior year quarter. Pre-opening expenses in the third quarter of 2013 were $400,000 compared to $200,000 in the prior year quarter. Depreciation and amortization for the quarter was $2 million versus $1.9 million in the prior year quarter. Net interest expense for the quarter was $1.2 million which compared to $1.2 million in the comparable period of 2012.
Net loss for the third quarter 2013 was $1.7 million or a loss per share of $0.23 compared to a loss of $900,000 or a per-share loss of $0.14 in 2012. For the quarter on a weighted average basis, 8.2 million shares were outstanding compared to 8 million shares in the prior year quarter. Adjusted EBITDA was $1.6 million for the third quarter 2013 compared to $1.8 million in the same period of 2012. Our control of our G&A costs helped to offset a portion of the cost structure at the store level.
On the balance sheet, at the end of the third quarter 2013, the Company had $1 million of cash on its books compared to $2.6 million at the end of 2013. The Company utilizes its cash from operations and its line of credit to maintain enough cash on hand to accommodate its working capital and new restaurant construction need as is necessary. The Company just recently completed the construction of its new Cleveland, Ohio opening in Legacy Village and just opened its [indiscernible] to a strong turnout.
Total assets were $73.5 million at October 1, 2013 compared to $71.8 million at the end of fiscal year 2012. The increase is primarily due to the recording of costs related to our new Franklin and Indianapolis stores over and above any land or [TI] (ph) we received. Total liabilities increased from $70.3 million to $74.8 million, or approximately $4.5 million, primarily due to the debt related to the building of our new stores in Franklin, Indianapolis and Cleveland during 2013.
2013 has thus far been a tale of two time periods. In the first six months of the year, we grew our revenues rapidly with positive guest count comps and same-store sales comps, in addition to our successful new store openings in 2012. In the third quarter, we take negative industry comps and cost pressures related to the menu rollout. We believe that our 2013 new store openings as well as the menu rollout will begin paying dividends as we move through the fourth quarter and into the new year, although we are still facing a very unpredictable economy that is causing headwind for us and the casual dining industry.
Based on these uncertainties, we are adjusting our 2013 revenue guidance to a range of $125 million to $135 million, and adjusted EBITDA, which reflects all leases as operating leases so that the expenses run through the P&L, to $7.5 million to $8.5 million.
With that, let me turn the conference call back to Rob.
Robert J. Doran
That concludes our report for this quarter, and thank you, Jim. If any of the participants on the call have any questions, please ask them now. Thank you.
(Operator Instructions) Your first question comes from the line of Richard [indiscernible], a shareholder.
On October 22, you issued a press release that said that you were considering going dark. When do you anticipate deciding whether or not you are going to go dark?
Robert J. Doran
I guess we don't actually have a timeframe. It's really a Board decision and I think the Board is still analyzing the cost associated with it versus the benefit of staying a registered company. So we don't really have a timeframe at this point, Rick.
Mr. Doran, what would be the deciding criteria as to whether or not you decide to go dark?
Robert J. Doran
I believe it's [indiscernible] to say that the Board just wants to analyze, as they have for the past quarter, any associated savings versus any benefits of savings as a registered company.
What is the amount of anticipated savings that you intend to realize as a result of going dark?
Robert J. Doran
I think as we talked about in our press release, several hundred thousand dollars, but it will be significant and we are still looking at that. I mean as you now there is filing cost, et cetera, but then there is other cost that comes up as you move to different transactions. So we are still trying to analyze that and Board to get a good feel for it, but clearly from a value standpoint, if we cut out costs and increase our [indiscernible] from a valuation standpoint, we'll increase the value of the stock.
Right, so we are talking about a couple of hundred thousand, can you just ballpark it for us?
Robert J. Doran
It will be significant, I mean that is just kind of stuff that you look off off-hand, printing costs, advertising, and those types of things, but clearly we're trying to get a good feel for every cost that comes along with being a public, a lot of it is [indiscernible] time as different transaction comes up and it requires different filings, et cetera.
In the event that you decide to re-register your shares if you go dark, what would be the anticipated cost of doing that, in other words reversing this decision?
Robert J. Doran
I don't have a figure for that. I mean re-registering it depends on what you do, what type of transaction that is. I don't have a cost figure on top of my head on that one.
Did you consider that when you – I mean was that one of the considerations that you are taking in when you are deciding whether or not to go dark, there is a cost associated with going public again so to speak?
Robert J. Doran
Yes, the Board is looking into all those different issues.
Do you believe that going dark is consistent with the goal of maximizing shareholder value?
Robert J. Doran
Rick, at this point I mean the Board hasn't made a decision. It's looking at all the different options. We felt that it was just important to let the shareholders know that it was something we are considering, and once we finalize that conclusion, the Board will make its decision on that and the shareholders will know.
Almost immediately after you announced that you were considering going dark, there was over $8 million of shareholder value that was lost. How do you intend to restore that lost value to the shareholders?
Robert J. Doran
I don't think the value of the Company, in other words an issue to shareholders [indiscernible] the share price, but from a value standpoint, it is still the same company, still throwing out the same EBITDA levels, and the consideration was just, can we increase shareholders by cutting our costs. So it's a little hard to talk about stock price. We just thought that it was important to let the shareholders know there was something that we are considering doing to lower the cost of the Company.
What other measures have you considered to save money outside of going dark?
James G. Gilbertson
Richard, we spent, as I mentioned in our comments, we have been slowly and steadily reducing the amount of G&A to a point where we're probably at or a little below what would be best-in-class in the industry, and we'll continue to do that through 2014.
Have you considered reducing the compensation level of the executive management team?
James G. Gilbertson
We have actually talked about reducing numbers of the executive management team.
What about the compensation, I mean looking at the 10-K from last year, your combined salary with Dean Oakey was in excess of $1.1 million. Has there been any consideration into reducing compensation? Is any of your compensation tied to performance?
Robert J. Doran
Yes. Like any other company, the Board has a compensation committee and they go through and look at [everyone's] (ph) experience, what they bring to the Company, and try to compare that to data that's available out in the public sector.
Thank you. I have no more questions.
(Operator Instructions) Your next question comes from the line of Michael [indiscernible], private investor.
My questions were just answered actually.
There are no further questions at this time. I will now turn the call back over. Please continue with your presentation or closing remarks.
Robert J. Doran
Operator, with no further questions, I'd like again to thank the participants who called in, and that ends our call.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!