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Diversified Restaurant Holdings, Inc. (NASDAQ:BAGR)

Q4 2013 Results Earnings Conference Call

March 14, 2014 10:00 AM ET

Executives

Alex Hamilton - Investor Relations

Michael Ansley - Chairman, President and CEO

David Burke - Chief Financial Officer

Analysts

Greg McKinley - Dougherty & Company

Mark Smith - Feltl & Company

Justin Ruiss - Sidoti & Company

Rick D'Auteuil - Columbia Management

Operator

Greetings. And welcome to the Diversified Restaurant Holdings Fourth Quarter and Full Year 2013 Financial Results Conference Call. At this time, all the participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alex Hamilton, Investor Relations for Diversified Restaurant Holdings. Thank you, sir. Please go ahead.

Alex Hamilton

Thank you, Brenda, and good morning, everyone. We appreciate your time and interest in Diversified Restaurant Holdings. On the call today is Michael Ansley, President, CEO and Chairman; and David Burke, Chief Financial Officer. David will review the fourth quarter and year end financial results, as well as the company’s outlook. This call will conclude with a question-and-answer session. If you do not have the release or the slides that will accompany our discussion, they can be found on our website at www.diversifiedrestaurantholdings.com.

Please refer to slide two. As you are aware, we may make some forward-looking statements during the formal discussion and Q&A portion of this teleconference. These statements apply to future events which are subject to risks and uncertainties, as well as other factors that could cause the actual results to differ materially from what we state here today.

These factors are outlined in our earnings release, as well as in the documents filed by the company with the Securities and Exchange Commission, and can be found on our website or at www.sec.gov.

So, with that, let me turn the call over to Michael.

Michael Ansley

Thank you, Alex, and good morning, everyone. We appreciate your time today and your interest in Diversified Restaurant Holdings. Brief overview of our results, we made excellent progress in 2013 as demonstrated by our growth in restaurants and sales. We added 10 new restaurants and relocated one, expanded into a new market, enhanced Bagger Dave's menu to delight our guests to further refined our real estate strategy.

We had record fourth quarter sales up 9% to $28.5 million. Comparable restaurant sales increased $1.1 on consolidated basis. This compares with an exceptionally strong 9.2% comparable restaurant sales growth in fourth quarter 2012. Traffic which slightly lighter than prior year period was affected by weather, sport schedules and the performance of the Detroit lines in the Detroit Bagger’s franchises.

We had record 2013 revenue of $108.9 million, up $40.6 for the year, sales growth was driven by addition of 10 restaurants in 2013 and the acquisition of eight restaurants in the fourth quarter of 2012.

Comparable sales for 2013 were up 3.7%, on both traffic and pricing compared to 7.6% in 2012. Two-year comparable sales were up 11.6%. As mentioned, full year revenue was a record, we would like to highlight the EBITDA was strong, evidence of our operational efficiencies and scale is developed in our business.

We expect profitability will continue. To attract strongly we are excited about the progress we are making with our Bagger Dave's brand. Our customers remain our top focus and key to our ongoing success as we continue to expand brand awareness and market penetration.

With that, I will turn it over to David Burke to review our financials. David?

David Burke

Thanks, Michael. Starting on slide five, fourth quarter food, beverage and packaging costs were $8.2 million, which improved at 29.4% of revenue, compared with 31.4% of revenue in the prior period. We are benefiting here from chicken wings prices which were down approximately 20% quarter-over-quarter.

Fourth quarter compensation costs increased by $600,000 to $7.2 million over the prior year period and reflect the addition of new locations. As a percentage of revenue, our year-over-year labor costs were flat.

Moving to slide six, fourth quarter general and admin expenses were $2.2 million or 7.7% of revenue, compared with $2.3 million or 8.8% of revenue in last year’s fourth quarter. We're clearly seeing the leverage from higher sales volume and have taken a disciplined approach to managing this cost.

Pre-opening costs of $1.2 million held flat in the fourth quarter with the same period last year. We are expecting pre-opening expense to average between $200,000 to $250,000 per store going forward.

On slide seven, we'll review EBITDA. As you can see, our growth and leverage are demonstrated with the adjusted EBITDA increasing to 25.8% to $3.4 million for the fourth quarter of 2013. Adjusted EBITDA margin expanded 160 basis points to 12.1%. For the year adjusted EBITDA grew 62.7% to $13 million.

Restaurant level EBITDA, which excludes non-restaurant-specific general and administrative expenses increased $700,000 to $5.7 million, a 13.6% increase. We believe that when used in conjunction with the GAAP measures, restaurant level EBITDA and adjusted EBITDA, which are non-GAAP measures, provide additional information related to our operating performance. We provide reconciliations for these in our earnings release and on the slides in the supplemental section.

Net income for the fourth quarter was a loss of $177,000 compared with a loss of $623,000 in the prior year. But keep in mind that the net income was significantly impacted by the pre-opening costs, which are one-time costs related to new restaurant development that is necessary to achieve our growth objectives.

Looking at our balance sheet on slide eight, cash and cash equivalents along with investments were $18.2 million at the end of the fourth quarter up substantially from $2.7 million at year end our 2012, as a result of our April follow-on offering. We continue to believe that cash on hand, cash generated from operations and available credit line is more than sufficient to meet our growth plans for the next 12 months.

Capital expenditures were about $25 million during 2013, with new restaurant construction accounting for most of the spending. Timing of investments brought capital spend for 2013 down somewhat from our original projection of $29 million. We expect capital expenditures to be in a range of $33 million to $36 million in 2014.

Slide nine has our annual expectations for 2014. We reiterate the revenue guidance provide when we release preliminary results. We expect 2014 revenues to be in the range of $125 million to $130 million. Adjusted EBITDA for 2014 is expected to be in the range of $13.5 million to $14.5 million, and restaurant level EBITDA is expected to be in the range of $22 million to $23.5 million.

As we look to our development pipeline for 2014, we don’t plan to provide a quarter-by-quarter schedules, but we would like to see roughly half of our revenue spend openings in the first half of the year. Michael?

Michael Ansley

Just to reiterate, we are very happy with our performance, we feel strong 2013, we opened 10 restaurants, it’s the 22% unit growth, the revenue grew 41%. We feel, I mean, we have very focus and discipline real estate strategy moving forward. We have made great strides in broadening and establishing our Bagger Dave's brand in 2013.

The outlook for 2014, we’re very excited about the expectations for 2013. We expect to develop eight new Bagger Dave's units and three Buffalo Wild Wings. This is 20% unit growth from where we ended 2013 and we also have two relocations and two potential remodels of our Buffalo Wild Wings brand.

On March 5th, we began a new marketing initiative with Bagger Dave's focusing on freshness and differentiators of our menu and our food. So far feedback is very, very positive and on the slideshow you will see, on 11, 12, 13, and 14, our billboard strategy.

We are going to be focusing on basically four things, our primary recipe, we think it’s a terrific differentiator, our turkey burger which is roughly about 20% of our burger sales currently. And our fresh-cut potatoes, we use a specialty sweet potato that I don’t believe than anybody else has. And it’s definitely unique french fries and we found on the fact that our french fries are glutten free, fresh cuts, trans-fat free and allergen free and has been significant.

So we see that as a differentiator moving forward. And we have added grilled chicken to the menu. And that just was added at the beginning of February and we’ve already seen in our sales mix, a doubling of our salads and we’ve seen an improvement in our Mac 'N' Cheese sales and the chicken is only that receives very well so far. So we’re very, very excited about that. Again that campaign just kicked off. It’s very, very robust. It’s a mixture of radio, billboards, digital and it will be an updated website by the end of March.

So Slide 10 again. Through ‘14 and into ‘15 goes into that. We also will be bottling our soda later this year on our black cherry cream soda or orange cream soda and our root beer have been very well received from our guest. We see that as an enhancement to Bagger Dave’s brand and also a differentiator. So we will be bottling that later this year and that will be sold in store.

So with that, I will open it up to the operator and we can take some questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Greg McKinley with Dougherty & Company. Please proceed with your question.

Greg McKinley - Dougherty & Company

Good morning. I wondered if you could provide us some color on how you feel about the performance of the second half store openings. So there were six Bagger Dave’s opened in the second half of ‘13. Any color you can provide us on how those opened versus your planned and how you’ve seen those mature here over recent months?

Michael Ansley

The real estate openings rely on especially if Bagger Dave’s performance are quite low. We are very happy with it. I’m very happy with our performance in the Indiana thus far.

Greg McKinley - Dougherty & Company

And what is it about those locations that you think is leading toward strong performance?

Michael Ansley

Well, the improvement in our development of line of credit early last year and the secondary offering enabled us to go into Indianapolis and basically (indiscernible) take down these A plus real estate. So we feel that we’ve learned a lot about brand and that flexibility allowed us to get more aggressive on the real estate. Going into a new market, people won’t know the brand and you can make sure you guys stop in really, really good real estate.

So we’re able to go down there and buy three outparcels in key markets with major traffic drivers on busy roads. And that’s going to be our strategy moving forward and that flexibility in our financing give us that ability to do that. So we’re very excited about the stuff that we opened in the latter part of ‘13 and we really have it in the pipeline for ‘14.

Greg McKinley - Dougherty & Company

With that as context, can you talk about how you are looking at your eight-store pipeline for Bagger in ‘14 from a, maybe, it’s local trade area, demographics or the type of real estate that you think you’ve secured for those stores?

Michael Ansley

Well, looking at populations, those are about 50,000 offices in 5-mile radius. We’re looking at much importance of urban areas. 50,000 to 100,000 income and we like to see the average age somewhere between 35 and 40. So Indianapolis for instance, Avon, Greenwood, Fishers, Carmel, those are the type of markets, we actually are at Fort Wayne, north side of Fort Wayne. That has that population.

We are looking for in the median income of 63,000 and our store is performing well. We seem to do well when we focus more on dinner traffic and what that would be evening destination where we’re around maybe theaters, regional malls, Targets, Loews, WalMarts, things of that nature. So that’s where we build on moving forward.

So we are also able to acquire some additional real estate for 2014 that boost our CapEx a bit. But we feel very good about that and the ops are potentially starting off those real estate assets down the road. We definitely are not real estate company but in order to have a sophisticated real estate program, we’re going to have to able to do some land leases and take down some outparcels. So that’s what we are doing moving forward.

We’re also very happy with the Buffalo Wild Wings that we have in our pipeline. So two of those are in Florida Metropolitan, Tampa. One is in Wesley Chapel, one is in Pinellas Park. Pinellas Park is already under construction that will open in May and they have one that’s we’d be opening with a combination sites with Bagger Dave’s Buffalo Wild Things in Birch Run, Michigan. That is a cross run of very, very popular outlet mall right [out of the 170 Drive] (ph) and we have 100-foot [highland] (ph) sign off the freeway with both brands. So we are very excited about that.

Greg McKinley - Dougherty & Company

Okay. So that’s helpful. Thank you. So as you look at the pipeline going forward, so you’ve described the demographics that you are going after. Do you feel like the quality of the real estate within those demographics that you are targeting for ‘14 is similar to some of the sites that have been successful for you late in ‘13 that give you the chance to replicate some of the strong Bagger openings?

Michael Ansley

Very much. All of them are in front of a major traffic driver or an end cap position and very excited about it. Again we’re continuing in Indiana and Michigan only. We’re going to stay very, very disciplined in that respect because some of those are without market penetration, brand awareness. So the combination of penetrating the market rate with real estate and then layering that in the advertising is key to our growth strategy.

Greg McKinley - Dougherty & Company

Okay. Now, CapEx higher than I would have expected and maybe you alluded to it, maybe you’re buying some land parcels that you will eventually do a sale leaseback transaction on. But, can you break out CapEx for us in 2014 between, whether it’s store development or corporate purposes? And then give us a sense for how much of that is actual real estate versus building. I just want -- I guess maybe some comfort that your store level investment costs are consistent with the pro forma model.

Michael Ansley

Yes. There is a combination of things. There is about $5 million in real estate. That’s just direct cost. So that kind of might break that down for you a little further. It’s about $30 million actual restaurant construction and that would be both the leasehold improvement or building construction in the FF&E, which includes the building on real estate. The preopening is about $3 million, $3.1 million in preopening cost, and so that kind of breaks it down somewhat. There has been -- the stay design of Buffalo Wild Wings that we’re all getting into in 2014, I mean some of those buildings are coming little more expensive than we originally anticipated.

We are working in collaboration with Buffalo Wild Wings that is being refined, adjusted, and value engineered. Some of it just because we’re franchises, just going out, there is new design, just getting feedback, it is what it is, but there are some -- a couple of stores are bigger than normal. So the [Technical Difficulty] 6,500 to 7,500 square feet, the vast degree of store for us already and we’ve got less rent than we paid on the 6,500. So we had some additional expenditures there on the CapEx there. Florida is just an expensive state to begin with, so we saw some increased cost on the (indiscernible) part and some of that was site work.

Greg McKinley - Dougherty & Company

Okay.

Michael Ansley

So that’s what we are getting into a little more than we expected, but we are comfortable with it, the banks are comfortable with it and we do have -- it’s hard to tell you right now but right now we have about $18 million to $25 million in real estate to eventually sell.

Greg McKinley - Dougherty & Company

There you own two day or that you will own extra?

Michael Ansley

That would be what we own today, plus what we have in the pipeline this year. So as you probably know once you have a lease executed and you’re underdevelopment, you can actually foot that real estate. We are obviously much more comfortable with Buffalo Wild Wings, significant idea of the type of lease rate that we will be comfortable with which should be right around that 6% occupancy cost, but cap rates are very attractive at the moment. So, something that we should be very prudent with.

Greg McKinley - Dougherty & Company

Okay. All right. Thank you. And then maybe last two questions for now anyway, the G&A looked like that ramps maybe little higher than I was expecting. What should be we looking for in 2014 in terms of your G&A expenditures? And then it’s been well noted that Midwest has been slammed by some terrible weather to start 2014. I wonder if you can give us some color for how you guys have sort of experienced sales during that period.

David Burke

Sure. This is David. From a G&A perspective, there will be a slight increase, that’s not significant versus what you’re seeing in Q4. So from a run rate perspective, there is not going to be a significant change into 2014. From a sales perspective, we can’t get every specific year that it’s -- there is no question that there is an impact due to the weather like everyone else, we are not anomaly from that perspective. So anything more specific you’re looking for?

Greg McKinley - Dougherty & Company

I don’t know if you could provide us quarter to-date comp update or anything of that effect?

David Burke

No, I am sorry, we won’t provide that at this time.

Greg McKinley - Dougherty & Company

Okay. All right. Thank you.

David Burke

Next.

Operator

Thank you. And our next question comes from the line of Mark Smith with Feltl & Company. Please go ahead with your question.

Mark Smith - Feltl & Company

Good morning, guys. First, maybe following up on that last question. I don’t know David if you can give us maybe days that were closed due to weather so far in Q1 that we know yet from snow emergencies in Indiana?

Michael Ansley

Yes. We had some closures in January. Those are behind us. In terms of significance of that, I mean there is an impact, but it’s not the course of the quarter or year, it’s not going to be highly impactful from that perspective. To get some power outages, there is some emergency closures in Indiana, Indianapolis area where the city shutdown, so they forced the closure, but we’re talking a few days here and there for a handful of stores.

David Burke

What we can say is given the circumstances and what we have heard from other operators in the market, we are happy with where we are at this quarter that makes the results and we are definitely seeing improvement in the latter part of February and we are doing well in March up until this week when this rate got hit with another (indiscernible) but we had seen some improvements

Mark Smith - Feltl & Company

Okay. That helps. Just looking at the preopening, it looks like you guys are saying that it’s going to around what was it 200 to 250 per opening. It looks like it was a bit above that here in Q4, was that really the Detroit opening and any other things that drove that higher in Q4?

Michael Ansley

Yeah. But we found downtimes locations in general have a very higher projecting costs for a variety of reasons. We open our Bagger Dave's in latter part of this year on the Chicago, Lincoln Park location, which is a very large store as well, driving up some of those costs. There is no question about it.

Mark Smith - Feltl & Company

And then on new openings, will we see any here in Q1?

Michael Ansley

No.

David Burke

No.

Mark Smith - Feltl & Company

Okay. And then you made some commentary on kind of first half, I think versus second half, I think I missed some of that in your commentary.

Michael Ansley

Okay. We are not providing quarterly store bookings just because there is a lot that goes into stores, there is a lot of unknowns and something we can pushed a couple of weeks here and there. So what we are announcing is that we -- our plan and intent is to open roughly half of those in the first half and other half in the second half of the year.

Mark Smith - Feltl & Company

Okay. And then, beef costs, you once said that your contract is coming due, can you give us insight into that as well as kind of total commodities and what you are seeing and expectations for 2014?

Michael Ansley

Yeah. We don’t have necessarily a beef contract. We don’t need to offer that right now but we do have, like a monthly, actually it’s a six months agreement with our provider. But so far they’ve been stable and we have a really good relationship with them and they -- it’s obviously a much bigger entity and they work with our Director of Purchasing on a six months agreement. We are not seeing much movement there on that front.

So we are pretty happy with that. We did see some Turkey spike. Our Turkey products, which is a much better profit margin for us in the latter part of ’14 but that seems to come down. It usually happens during our Thanksgiving, obviously in Turkey. But everything else has been fairly stable. Obviously, chicken wing prices have been favorable.

Mark Smith - Feltl & Company

Okay. I think that’s it for me. Thanks.

Operator

Thank you. And our next question comes from the line of Justin Ruiss with Sidoti & Company. Please proceed with your question.

Justin Ruiss - Sidoti & Company

Good morning. I know that you have everything mapped out with the locations for 2014. Is there any, I guess maybe, I don’t know if we can call like this, but is there any expansion geographically outside of the Michigan, Indiana area for 2015, maybe later out after that as well?

Michael Ansley

Potentially, I was in Dayton on Monday, Tuesday, looking at sites and date in Ohio because we think Dayton is a nice movement into Ohio from our operations in Indianapolis. It’s about a two, two and a half hour drive on from spring to Ohio, both Dave and I went to the University of Dayton, we know a lot of people in Dayton. So we know the market really, really well. We did see some good stuff as far as real estate in Dayton. Also looking at Toledo, because we are 45 minutes from Toledo to Detroit, so I can’t confirm anything at this point but we are starting to look at Ohio.

Justin Ruiss - Sidoti & Company

Got you. And then, with the average check I know for Bagger’s specifically, is there any room for that to maybe increase little bit? Are you trying to still keep everything kind of competitive?

Michael Ansley

Yeah. I mean, Bagger Dave’s definitely went through a transformation in the last six months on -- via full-service concepts and although, we have a lot of respect for all of them, they definitely were more of a competitor of theirs then you would say a, Five Guys and a Smashburger. We are definitely more dinner driven, 42% of our sales are down.

So the prototype was more evolved or enhanced. So you will see that in all of the projects in ‘14. If we change the logo, the prior logo in a practical sense was very hard to implement on buildings and in print. And we really think we truly have an icon and we basically took our craft soda and our craft beer logo and just made it a primary logo solution of conflict there.

So the new prototype you will see in enhancement in the bar, we think it’s pretty cool. It’s definitely more emphasis on liquor. We’ve been working with finest (indiscernible) on the neighborhood adult beverage program that is only on March. So we have some signatures drinks that will be rolled out in mason jars, so excited about that. We think the addition of chicken, there were lot for us, so the focus that may not be in a ground, beef or ground, Turkey product.

Now we have another protein. We’ve already seen a lot of positives feedback around that product. It’s a cage free chicken breast. It’s a special marinated, it obviously enhanced our salads immediately. So since we rolled out -- beginning February, our salad sales have doubled. And eight ounce beef patty clipped order, just made sense because we are in full-service ramp.

So that’s added to, I guess you’d say Bagger Dave's as a concept, I think it was just the right move. And we’ve seen positive feedback there for approximately 48% to 49% of all Burgers, starting February with eight ounce patty. 29 were the four ounce and then Turkey dropped a little bit, to about 16.9%, because chicken came in at about 5% already. So we feel good about that. We do see some enhancements in average ticket because of those notes.

Justin Ruiss - Sidoti & Company

Got you. And Turkey is still the best margin you’d make on a burger?

Michael Ansley

Yes. Chicken is probably second in any of these.

Justin Ruiss - Sidoti & Company

Got you. All right. Perfect. Thanks.

Operator

Thank you. And our next question comes from the line of Rick D'Auteuil with Columbia Management. Please go ahead with your question.

Rick D'Auteuil - Columbia Management

Yeah. Just a couple of things I sit on, some of the things that were brought up in the last call. In the last call, you called out a couple of underperformings stores and I know a lot of it was location related. Has there been any progress in the things that you called out last quarter or again, I think there were issues around than being more lunch centric in some cases but maybe you could bring us update on that?

Michael Ansley

There hasn’t been a huge improvement. But we have seen some, again, the new menu, the new advertising campaigns, all of that just got rolled out. We have seen some positive feedback around that, it’s very early. The weather hasn’t helped that program but it actually turns out, we took a pause on the advertising to get the new menu roll out. We wanted to make sure that the stores were operating a 100% on the new menu, so we gave them about four weeks to get their arms around the new menu as far as operations.

It is a very disciplined approach. We didn’t want to go out and start advertising immediately and overrun the restaurants and we can’t quite operate 100% on the new menu. So that’s why we paused on the advertising and we just drilled that out. So, a lot of that revolves around some of those markets. So, I will be here to give you more feedback in the future but it’s too early to tell.

Rick D'Auteuil - Columbia Management

Okay. And then you also talked on the last call about a design change that you were -- it sound like you were going to adopt this, are you locking on that or what’s the status of that on the Baggers Dave’s?

Michael Ansley

Yeah. It more than enhances, so the current standalone prototype that we have been building. There is nothing wrong with it necessarily, but it was 4,800 square feet with an outside patio. The new building which will be in Grand Pointe, Michigan in Birch Run in the latter part of the year, probably doesn’t link the quarter, fourth quarter is 4,200 with a 250 square foot all season patio. So, we took the box down, approximately 800 square feet if you look at how the patio is incorporated.

And it’s somewhat peaking the no buy Saturdays, which historically had been our best performing location where some of the near ones were performing quite well. And we said again, what was special about that site? That site was 3,900 square feet but did not have a variable patio.

So, we took that building and we enhanced it and we have all of our buildings moving forward will have a extreme Heathrow hit growth look on the front of it. As a brand identifier, it’s actually pretty cool. I think you’ll see it in the presentation that we had out there, maybe not at this one but it was out there earlier, so we’re excited about it. We see potential. It will definitely not be any more expensive. There maybe actually some cost savings.

Rick D'Auteuil - Columbia Management

Well, it’s a smaller box, you would think so, right?

Michael Ansley

Right.

Rick D'Auteuil - Columbia Management

Okay.

Michael Ansley

There is some repatriating out there on the construction cost because the economy has heated up a little bit it and that’s some of the issues of stadia from both the (indiscernible) side. Some of it is just inflation in general and some of it is the stadia design. But we feel good about this prototype of Bagger Dave’s.

Rick D'Auteuil - Columbia Management

Okay. It feels like just in the answering and some of answers to today’s questions and some of the things we’ve seen in the release, that we are seeing some increase including the comments you just said that real estate more expensive, construction more expensive. Are you able to offset that with some price or better sales? I think you talked about higher average check, I guess that helps to offset some of it.

And I guess, if the mix -- if the margins you talked about on specific products on the Bagger Dave side favor the chicken and turkey. So as the mix of that increases, that should help some too right. I guess I’m just wondering if the operating model is changing and maybe the returns on a store basis are not as compelling or are there offsets that what I’m hearing as much about?

Michael Ansley

No, I wouldn’t say that. I think our real estates program is where most of the creep is coming from because they are concentrating on much better location. So that puts us in a position where we have to acquire real estate. We need to do obviously site work and things of that nature. But I think you’ll see an enhancement in sales overall, which is much better real estate. And that is, David and I and the way we run the company historically is, we always take price every single solitary menu because there is always going to be inflationary issues there, be it labor, be it cost of sales, be it rents, real estate whatever and it’s just prudent to do that.

We don’t want to gauge the guest, so we’re very -- we recognized that, but we also recognized we have to operate the business. So we’ll continue on that strategy. So we don’t have to go back and say, oh, well, we should have taken price increase 18 months ago and now we have to take a big price increase. We got to do it in small increments. But I think most of the creep in the cost is just a better focus on real estate and making sure that we go into a market and don’t settle for anything less than the B-plus, really A-plus to B-plus is our focus.

Rick D'Auteuil - Columbia Management

Presumably, that translates the better sales too, right?

Michael Ansley

Right.

Rick D'Auteuil - Columbia Management

So the unit economics are still just as attractive, even though some of the costs are going up?

Michael Ansley

Yes, and we’re still holding, Bagger Dave's will be like and this is historic and we’ve seen the whole is around 28% launch, 24% between two and six, which is strong and we’re about 42% down. So if you compare it to, let’s just say both allowance because we know those numbers. Our launch is stronger than their launch. But they have better late night crowd than we do, but we still have three strong dayparts.

So we like that positioning and we’re obviously moved in our focus. So our location is mainly driven around dinner. We get launch, that’s great, but we like dinner because it’s a higher average ticket. There’s obviously additional alcohol sales and it’s seven nights a week and you have a much stronger weekend sales rather than being lunch-centric which is Monday to Friday which is basically one and two.

Rick D'Auteuil - Columbia Management

Okay. And I think with the new design, there was a focus more on the bar too. And the late night, you were talking about maybe extending hours I think if I recall or…?

Michael Ansley

Yeah. We did have some locations buying hour and has been small improvement there. The new prototype when you walk in, you’ll see the bar and there is a liquor tower in the middle of the bar and it’s lit up and we have the new adult leverages. We never focused on actual liquor. We were focusing on the craft beer and wine, both turns out a lot of these new cocktails that are out there, a very popular, Gen Y. Gen y seem to be drinking more liquor and wine, and the craft beer be more older crowds, so we wanted to get more into that business and it's call came in and they really stuck up to help us and they've actually given us some financial contribution to help with that drink program.

And so we have these new drinks we are rolling out large in the mason jars and some of the new menus are sodas. So we're pretty excited about that and we're excited about the prototype when you walk in. The bar was always been in the back, but it was kind of hidden, now when you walked in, it’s still in the back but you can see it. So we think it’s going to and it's got a much hipper, cool, edgier feel to it.

Rick D'Auteuil - Columbia Management

Okay. All right. I appreciate the answers. Thanks.

Operator

Thank you. (Operator instructions) Our next question comes from the line of Greg McKinley with Dougherty & Company. Please proceed with your question.

Greg McKinley - Dougherty & Company

Yeah. Thank you. Excuse me, just a few follow ups. You had mentioned wing costs were down 20% year-over-year. Can you give us a number what those came per pound for you in the quarter?

Michael Ansley

Yeah. For the quarter, we came in around $1.64 pound that’s our delivered costs for 2013 versus about $2.06 for the fourth quarter of 2012 if I recall it’s correct.

Greg McKinley - Dougherty & Company

Okay. And then just getting back to CapEx for a moment. Mike, I think you had mentioned you thought you would be around $3 million or $3.1 million of pre-opening in 2014, just back of the envelop that’s about $300,000 per store, but I think you guys said you're expecting $200 to $250…

Michael Ansley

Yeah.

Greg McKinley - Dougherty & Company

… and I wonder if where that difference lies?

Michael Ansley

Part of that is the bad debt, we have two relocations that we're doing this year, but that’s a significant piece of it still around you.

David Burke

That would be Buffalo Wild Wings North Port Florida and Sterling Heights Michigan. And those both are under-construction and they both Sterling Heights opens the new location, April 16th…

Greg McKinley - Dougherty & Company

Okay.

David Burke

… and the North Port’s two week after that, so we actually have like five restaurants under-construction right now. And by the way, we have a plan for anything in the first quarter, we had such a robust ’13, it's actually kind of nice to have a three to four-month pause, kind of regroup and that was the way we plan.

Greg McKinley - Dougherty & Company

Yeah.

David Burke

So there is a number of restaurants under-construction but they’ll start to open in the second quarter.

Greg McKinley - Dougherty & Company

Okay. And then just getting back to CapEx, you'd indicated $30 million in restaurant construction and I know you have those higher stadium design costs for Buffalo Wild Wings? But I'm just trying to triangulate, are we truly still incurring, call it $1 million cash investment at the Bagger concept, because a lot of stores on $30 million, we're not near that?

Michael Ansley

Right. Well, a lot of these are standalone this year. That's the difference. So like most feel which is (indiscernible) Indiana. We’ve also build there and we have to build the base building a design work. Woodhaven, Michigan which is a great site, we did a land lease there. So, we have a site work in (indiscernible). Grand Blanc same thing, Birch Run same thing, Kenton same thing, so you are getting in standalones.

Greg McKinley - Dougherty & Company

Okay.

Michael Ansley

Which is much better real estate and in two of those instances, actually three of those we owned it over there. So you have the eventually flipping it -- and getting that capital expenditure back.

Greg McKinley - Dougherty & Company

Yes. But -- but the land is not included in the 30 million correct, that's…

Michael Ansley

No, you have the shale building in the site work.

Greg McKinley - Dougherty & Company

Okay. Understood.

Michael Ansley

So but if you're going to an end cap position which would be Fishers, Crown Point and [Shadeville] (ph).

Greg McKinley - Dougherty & Company

Yeah.

Michael Ansley

You're still roughly 950,000 to 1 million to, like people always said depending on liquor license costs and TI, kind of improving the money.

Greg McKinley - Dougherty & Company

Yes

Michael Ansley

They were still in that range. The additional cost comes from building more free standing buildings.

Greg McKinley - Dougherty & Company

I got you, okay, makes sense. And then how do you feel about balance sheet leverage where you're heading later in 2014. One of you could just refresh our memory, what is your borrowing capacity. It looks to me like that leverage will creep up and maybe that four times trailing EBIT the range by the end of '14. What's your bank order, what's your banks availability and any covenants around that?

David Burke

Well, right now we're actually getting ready this next week to sign the paperwork and everything for $20 million lowered line reload through RBS. That said, we are having our discussion for the last couple of months. So it's a segue for tapping out of our current new offer which is $60 million and we’re going to be in $20 million. So we have an additional drive out of product outage for our developments. And then as Michael mentioned before, our ability to put all of this current and upcoming real estate that's regardless of additional cash versus both.

Greg McKinley - Dougherty & Company

I got you, okay.

David Burke

We’ll keep both of those.

Greg McKinley - Dougherty & Company

You feel uncomfortable to the ability to realized reasonable values of the real estate in the sale/leaseback?

David Burke

Yes, yes.

Greg McKinley - Dougherty & Company

Okay. Okay, great. And then I guess just the last two things on your balance sheet accounts receivable and accounts payable what difference then I would have expected both meaningfully larger than what I would have been modeling, anything unusual happening there?

David Burke

Receivables we have TI money coming in. It’s about million dollars.

Greg McKinley - Dougherty & Company

Yes.

David Burke

They're collecting ramping it.

Michael Ansley

Yeah. And actually some of that came in this week. We had about five properties when the results team in TI, can I include that morning.

David Burke

Yes

Greg McKinley - Dougherty & Company

Okay. All right, guys. Thank you.

David Burke

Thank you.

Operator

And it seems, we have no further questions at this time. I'd like to turn the floor back over to management for closing remarks.

Michael Ansley

Thank you. We appreciate your continued interest and your time today. And we look forward to talking to you in the future and updating you on our progress. Have a great day, have a great weekend. Good bye.

Operator

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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