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Famous Dave's of America (NASDAQ:DAVE)

Q4 2013 Earnings Call

February 13, 2014 11:00 am ET

Executives

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

Dean A. Riesen - Non-Executive Chairman

Analysts

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

Justin Ruiss - Sidoti & Company, LLC

Shannon Richter

Operator

Good day, ladies and gentlemen, and welcome to your Famous Dave's Fourth 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. Good morning, everyone, and thank you for joining us for the Famous Dave's' fiscal 2013 fourth quarter conference call. I'm Diana Purcel, Chief Financial Officer. And with me today is Dean Riesen, Famous Dave's Chairman of the Board.

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 close 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 Dean Riesen, who would like to take a few minutes to address some of the questions you may have regarding recent events.

Dean A. Riesen

Diana, thank you. Good morning. I am standing in today for our new CEO Ed Rensi who had a previous commitment and he will be with you next quarter. Last week, John Gilbert informed me of his intention to resign, and he did resign on Monday from the board and as CEO of Famous Dave's. This was a complete surprise to me and to the board as I expected and the board did for him to lead the company for the next 5 years. We wish him well. The board met several times and in the end asked Edward Rensi, who had only just recently joined our board, if he'd be willing to lead the company as interim CEO. He generously agreed. I had recruited Ed to our board because of his long career in the restaurant industry and his significant operational experience, 35 years at McDonald's, 6 years as President and CEO, and his significant board experience at Snap-On Tools and Great Wolf Resorts and several others. In a very short time, he has made a significant impact to the future of our brand as a director. As CEO, we expect great things out of him. And in a very short period, I believe he is already on his way. For those of you that don't know or have not met Ed, he is one of the highest energy people I have ever met. The man barely sleeps. Given the transition, we will be -- we will not be giving any guidance on 2014 on this call, but that will have to wait until the first quarter when Ed will be presenting.

2013 was a transition year for Famous Dave's. For the fourth quarter, we fell behind our comparison to BBI in performance by 240 basis points, leaving us in the 25th percentile. For the full year, we did beat BBI by 20 basis points, putting us in the 52nd percentile. In 2013, we made major changes in our marketing approach. A new menu, RMS menu optimizations were both implemented. We changed our promotion strategy from one of traditional casual dining LTOs to one of new product introduction after significant testing. This led to our introduction successfully of Burnt Ends and several line extensions of Burnt Ends. We also began our process of rightsizing our G&A and are on target to hit our goal of 10% for full year 2015. We will continue to evolve our Fast Casual concept, and we believe that Ed will be critical in bringing that to fully to market and supercharging the growth of it. I want to thank our employees, our franchisees and our founder, "Famous Dave" Anderson, for all the work they do in a very dynamic and competitive environment. Now I will turn it over to Diana, who will brief you on the specific results for fourth quarter and full year 2013. Diana?

Diana Garvis Purcel

Thank you, Dean. To those on the call, please refer to our press release issued yesterday as I summarize our results. Famous Dave's reported revenue of $155.4 million and net income of $4.8 million or $0.62 per diluted share for fiscal 2013, compared to revenue of $155 million and net income of $4.4 million or $0.57 per diluted share for the prior year. Net income for fiscal 2013 included noncash charges of approximately $0.11 per diluted share related to the impairment charge for a restaurant in Maryland, lease restructuring fees associated with the restaurant in Virginia and residual closing costs associated with the relocation of a restaurant in Maryland. As a reminder, earnings per share for the prior year contained a benefit of approximately $0.07 per diluted share for a favorable tax rate adjustment.

Our adjusted EBITDA for fiscal 2013 was $15.1 million compared to an adjusted EBITDA of $12.6 million for fiscal 2012, reflecting improved restaurant level cash flows. We generated $15.6 million in cash flows provided by operating activities during fiscal 2013, and this compares to $9.6 million for fiscal 2012. The year-over-year cash generation reflects the improved results, as well as increased cash flows due to no corporate bonus payout in 2013 related to fiscal 2012 performance.

During the quarter, restaurant sales decreased approximately 1.2% year-over-year, reflecting the comparable sales decrease of 2.6%, partially offset by the addition of the Germantown, Maryland restaurant in the third quarter and the Timonium, Maryland restaurant in the fourth quarter.

For the full year, total restaurant sales increased approximately 1% reflecting a positive 0.2% comparable sales increase, the annualized impact of 2 restaurants that opened in fiscal 2012, the addition of 2 company-owned restaurants during fiscal 2013 and a weighted average price increase of approximately 2.5%. These were partially offset by the closure of a company-owned restaurant that was relocated within the same market. We remain pleased with the gains made in to-go, which increased almost 12% over the prior year. We continue to be challenged, however, by a 2.8% decline in dine-in sales and a 5.4% decline in catering sales.

Off-premise sales were 35.6% of total sales for 2013 with catering at 9.8% and to-go at 25.8%. This compared to 33.4% for fiscal 2012. Our dine-in per person average for fiscal 2013 was $17.18 compared to $16.20 for 2012. The breakdown by day part was $15.09 for lunch and $18.47 for dinner.

On the franchise side, royalties decreased year-over-year, primarily reflecting a comparable sales decrease of 2.9%, partially offset by 5 net new franchise restaurants that opened since the end of the fourth quarter of 2012. During the fourth quarter, we had 2 franchise-operated restaurants open in Williston, North Dakota and Oxnard, California. At the end of fiscal 2013, we had 54 company-owned restaurants and 140 franchise-operated restaurants for a system-wide total of 194 restaurants in 34 states, the Commonwealth of Puerto Rico and 1 Canadian province. During the first quarter of fiscal 2014, we opened 2 franchise-operated restaurants in Cottage Grove, Minnesota and El Paso, Texas. And as of today, we have 196 restaurants. At the beginning of the year, we provided guidance that for fiscal 2013, we would expect to see at least 250 basis points of improvement in our restaurant cash flow margins and we achieved that goal. Due to more favorable food cost -- food contracts, excuse me, we realized declines in food and beverage costs year-over-year, which were 30.3% of net restaurant sales for fiscal 2013 compared to 31.3% for fiscal 2012. For fiscal 2013, labor and benefits as a percentage of net restaurant sales were 20 basis points favorable to the comparable period of fiscal 2012, primarily due to lower direct labor. This was less than our guidance on our last call of 65 to 75 basis points due to less sales leveraged achieved on management labor than expected.

Operating expenses for fiscal 2013 as a percentage of net sales were 25.6% or 130 basis points favorable to the prior year. As previously mentioned, we redeployed our marketing spend during 2013 in more effective ways such as not investing in a direct mail program similar to the prior year. Additionally, 2013 operating expenses were positively impacted by lower supply and R&M costs. This was lower than our guidance of approximately 145 to 155 basis points, primarily due to less leverage achieved than expected on occupancy costs.

Advertising expense was 2.5% of net sales including a 0.75% contribution to the marketing fund. This compares to 2012 spend of 3.4% of net sales, which included a 1% contribution to the marketing fund. G&A expenses for fiscal 2013 as a percentage of total revenue was essentially flat compared to fiscal 2012. Neither fiscal year had a bonus accrual. The increase in dollars year-over-year reflects the impact from the addition of a COO position, the impact of $348,000 related to severance costs and additional stock-based compensations for grants of restricted shares to the CEO as well as to new board members. This increase was partially offset by reductions in overhead.

Preopening costs for 2013 were approximately $646,000 for the opening of 2 ground-up, full service company-owned restaurants. Interest expense for 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. Our effective tax rate for fiscal 2013 was 29.7% reflecting a higher level of pretax income. With regard to our balance sheet, our unrestricted cash and cash equivalent balance at the end of fiscal 2013 was approximately $1.3 million. We ended the year with a balance of $11.4 million on our revolving line of credit, reflecting a 16% decline from prior year and we were in compliance with all of our debt covenants. During the year, we paid off approximately 14% of total debt. As of today, we have a balance of $13.5 million on our line of credit.

We used approximately $6.6 million of cash for capital expenditures primarily reflecting expenditures for the 2 company-owned restaurants that opened during the year, as well as continued investments in our existing restaurants and investments in corporate infrastructure system. Lastly, during fiscal 2013, we used approximately $6.9 million to repurchase 379,000 shares at an average price of $18.22, excluding commissions, and we remain committed to our buyback program. At this point, we'd like to take your questions. Michael?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question today comes from Greg McKinley from Dougherty.

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

You started off the call giving some color around John Gilbert's departure and sort of indicating that, that caught the board off guard a bit. What, if anything, can you share with us about his reasons for departure? And maybe after addressing that, when I was reading the press release, Ed Rensi's named the interim CEO and there's a quote in there saying he looks forward to leading Famous Dave's for the foreseeable future. That doesn't sound as much interim, that comment. So I wondering if you can just clarify that a little bit, please?

Dean A. Riesen

Well, to your first question, I can't really elaborate on John's reasons. I know he has them. He informed me of his intention and the board took the appropriate action. As we indicated in our press release, Ed is the interim CEO. We will begin a search, but we are under no pressure since we have such a talented leader with Ed.

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

Okay, okay. And then, Diana, maybe just digging into a couple financial metrics. You had a 2.5% menu price increase, I think, effective in Q4. How should we think about that anniversary-ing or trailing off as '14 progresses?

Diana Garvis Purcel

Yes. As Dean had mentioned, we're going to be talking about some forward-looking guidance in first quarter. We have a menu evolution that will happen in April, and we still need to have some internal conversations as to what pricing looks like for the year. I will tell you that in this environment, we're going to be very sensitive about taking price, so I'll have more information for you on that at the first quarter call.

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

Okay. Regarding -- I don't know what, if anything you can or will answer around 2014, but at this point, I would imagine you have a pretty good view around how you've contacted for food costs. Can you comment on that?

Diana Garvis Purcel

Yes, I can touch on that a little bit without going too deep into it. Obviously, we're coming off of a pretty substantial high level of food cost, and we do see some relief coming. I can -- just as a reminder, 85% to 90% of our purchases are on contract. And pork, chicken, brisket and seafood account for about 60% of those purchases. So we do have some visibility at this time. What I can tell you is that when we look at our predictive cost for 2014, unlike contracts, we're looking in the neighborhood of about 5.5% deflation at this time.

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

Okay, so 5.5% deflation on that 85% to 90%?

Diana Garvis Purcel

Correct.

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

Okay. And then the other thing that I thought was sort of stood out just on the P&L substantial, sequential reduction in G&A costs. I think on the prepared remarks, you commented that bonuses were neither accrued in 2012 or '13, so that doesn't seem to be the cause of the big change. I wonder if you can elaborate a little bit more on where that $2 million sequential decline came from and how that -- I don't know if there's timing issues there, but if that sort of reflects -- to what degree that reflects the run rate of the corporate cost infrastructure today?

Diana Garvis Purcel

Yes, I appreciate the question. There is a bit of a timing difference there. As we moved through 2012, we had a little bit greater clarity earlier in the year as to how we were progressing against bonus. The bonus this year was reversed in the fourth quarter. So you are correct, there was a little bit of timing differences. And I wouldn't indicate that fourth quarter is a run rate. Obviously, it would be the company's intention to achieve and accrue a bonus going forward.

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

So can you just give us a sense if there wasn't a bonus reversal, maybe what the core G&A would've looked like in Q4?

Diana Garvis Purcel

Yes, I really can't. We don't disclose the actual dollars of our bonus, so I apologize for that. That's probably going a little deeper than I feel comfortable for. Unfortunately, and again, we'll have a little bit more clarity on 2014 in first quarter. Some of the noise in the quarter does mask some of the work that we've done to reduce overhead, as Dean had indicated. And hopefully, that will work itself out as we progress through 2014.

Operator

Our next question comes from Justin Ruiss from Sidoti.

Justin Ruiss - Sidoti & Company, LLC

I just had a quick question regarding Ed's approach to this. I know a lot of things were mapped out before hand, before Ed got there, and as -- I'm sorry, to see John go. But are a lot of the same kind of corporate culture or what's going on at Famous Dave's, is it still in the same mindset as was previous? I mean does Ed see things the way -- he's going to see them or does he see things the way that was previously stated?

Dean A. Riesen

Well, I'll answer that. On one level, John did -- started a lot of initiatives that are starting to bear fruit. And I believe Ed will build on all of those. Ed's personality and John's are different and every CEO change at any company leads to an adjustment in the culture. The leader has a big impact on that. So I think it's a little hard to tell how that will change as Ed's been in the job 2 or 3 days now. So I think that's the best way to answer your question.

Justin Ruiss - Sidoti & Company, LLC

Sure. And then just I don't know if maybe I missed it or not, but was there anything on store openings at all or are there any plans for any kind of expansion?

Diana Garvis Purcel

Yes, that was in the press release. So I would be happy to go over that with you. So our intention for 2014 from a store opening perspective would be to have 6 franchise openings. And as indicated, we've opened 2 thus far in the first quarter. The remaining 4 predominantly are going to follow in late in the third quarter. And then the intention for 1 company-owned location late in the third quarter.

Operator

Our next question comes from Mark Smith from Feltl and Company.

Shannon Richter

This is Shannon Richter on for Mark Smith. Can you please just discuss your use of cash and how aggressive you want to be with share repurchases?

Dean A. Riesen

Yes, I'll speak to that. We've had a long tradition here, certainly, since I've been on the board of buying back our stock, and we have every intention to continue doing that. We will be taking a fresh look at our capital allocations strategy, but I fully intend that we will continue with our buyback.

Shannon Richter

Okay. And then can you quantify any impacts from weather that was on the Q4 results? And then just going from that, is the Q1 impact more significant than that seen in Q4?

Diana Garvis Purcel

Yes. Obviously, we don't speak to numbers on -- at the beginning of the month. That being said, I'll just speak to 2014. We felt important to address it in the release coming out. Every other casual dining concept is being impacted by weather at this point and we're not unusual. We have a high concentration of restaurants in the severe weather patterns. And that's actually one of the reasons as well that benefiting from giving any guidance to first -- until first quarter. It will give us a sense of how this extreme weather will impact our fiscal 2014 results. So while I can't quantify it for you, I can tell you that, certainly, we have been hit in our core markets. I don't have the quantification in fourth quarter. From a weather perspective, certainly, we had restaurants where there were partial closures and some that we had some full closures. A large part of the decline in fourth quarter, to be honest with you, really had to do with the rollover of a significant direct mail campaign in 2012 that we purposely made the decision to work ourselves out of. So weather was an impact, but I would -- as you look at the comps, I would clearly say that our rollover against direct mail was probably a larger piece of that.

Shannon Richter

Okay, perfect. And then just one final question, is there a 53rd week this year?

Diana Garvis Purcel

No, there is not. That will not happen until 2015.

Operator

We have a follow-up question from Greg McKinley from Dougherty.

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

Could you just revisit the direct mail comment a little bit? How was -- how did you spend your advertising dollars in Q4 this year versus where you had been in Q4 last year or maybe even sequentially changed? I'm not sure.

Diana Garvis Purcel

Yes. So just to give you a perspective, just from the advertising spend, so if you look at quarter 4, our advertising was 1.6% this fourth quarter versus 2.4% in the prior year, so significantly different investment from an advertising perspective. So as we've talked about throughout the year, we spent a great deal of time and effort in 2012 with the direct mail campaign and that hit us and positively impacted us in the fourth quarter of 2012. Unfortunately, as we had spoken about, it wasn't profitable sales. And so we made a purposeful decision to roll off of that this year to pull away. Now we're still testing direct mail and still feel that it has a role, just not to the extent it did. As we spoke about in the year, one of the ways that we redirected our marketing spend was utilizing our P.I.G. Club database. So we have almost 2 million names across the system and really leverage that database to drive traffic into the stores. Obviously, the year-over-year comparison is fairly different. So while we had negative sales on the top line, I really believe that we had enhanced profitability, redeploying our marketing in that fashion. Does that help?

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

Yes. And then so if you were at 1.6% advertising for Q4, you were at 2.4% in the prior year. What were you running at for the first 9 months of this year? Or what was advertising for the full year of '13? Just curious if it's stepped down a lot.

Diana Garvis Purcel

Well, for the full year, it was 2.5%, and that compared to 3.4% in the prior year.

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

Okay, so there was a substantial step down in ad spend from the first 9 months of the year through Q4 of the year?

Diana Garvis Purcel

Yes. And we started out the year, frankly, with that objective. Really trying to be smart about where we were spending our advertising money. For example, last year, we spent some money on radio in the first quarter of 2012 that we didn't necessarily see the results coming from that spend that we would've liked to see. So we revisited that type of spend in the year. We did see a nice lift off of television when it's attached to product news. Dean had mentioned a terrific promotion with regard to our Burnt Ends and felt that the success of that, as well as the line extensions, were really enhanced by partnering that with media. So we're revisiting all those strategies as we go into 2014.

Operator

[Operator Instructions] And I'm seeing no further questions in this queue at this time.

Diana Garvis Purcel

Thank you, Michael, and thank you, all, for listening in this morning. This concludes our call.

Operator

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your phone lines at this time, and have a great day.

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