Famous Dave's of America's (DAVE) CEO Edward Rensi on Q2 2014 Results - Earnings Call Transcript

Aug. 5.14 | About: Famous Dave's (DAVE)

Famous Dave's of America (NASDAQ:DAVE)

Q2 2014 Earnings Call

August 05, 2014 4:30 pm ET

Executives

Richard A. Pawlowski - Chief Financial Officer

Edward H. Rensi - Chief Executive Officer and Director

Analysts

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

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

Justin Ruiss - Sidoti & Company, LLC

Operator

Good day, ladies and gentlemen, and welcome to Famous Dave's Second Quarter 2014 Conference Call. [Operator Instructions]

At this time, it is my pleasure to turn the floor over to your host, Richard Pawlowski. Richard, the floor is yours.

Richard A. Pawlowski

Thank you. Good afternoon, and thank you for joining us for the Famous Dave's fiscal 2014 second quarter conference call. I'm Richard Pawlowski, Chief Financial Officer, and with me today is Ed Rensi, Famous Dave's CEO.

Before we begin, we'd like to remind those listening that certain matters discussed during this call 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 achieved. Factors that could cause actual results to differ materially from Famous Dave's expectations include the company's financial performance, restaurant industry conditions, the execution of our restaurant development and construction programs, franchisee performance and the ability of our franchisees to meet their development commitments, changes in local or national economic conditions, the 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, was issued this 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 we will turn the call over to Famous Dave's CEO, Ed Rensi. Ed?

Edward H. Rensi

Thank you, Richard. And good afternoon, everybody. While the quarter's comparable sales numbers were disappointing, they were partially the result of the elimination of our extensive e-mail discounting that occurred during the second fiscal quarter of 2013. Excluding the impact of these discounts from last year, we estimate our comparable sales decline would have been approximately half of the reported number.

Despite the decline in top line sales this quarter, we were pleased with the year-over-year improvements in operating income and earnings per share. During the quarter, we continued to make significant progress on the reimage of the Bolingbrook, Illinois, company restaurant. We are excited about these changes and their potential impact.

We remain completely committed to serving the very best barbecue in the country. That remains our mission and our focus. We've made changes to allow our guests to enjoy our food in new and more contemporary ways, whether on salads and flat breads, as part of the new bar menu or paired with our expanded selection of over 30 craft and local beers.

We've updated our dining room, expanded our patio, adding fire pits and connected this to an improved bar to allow for indoor-outdoor seating. We've added lots of entertainment, giant HD TVs, updated our music, added tablet-based games for both adults and kids and improved our Wi-Fi coverage and our bandwidth.

Our servers or waitstaff can now take customer's orders by tablet, and our kitchen has been updated using the latest cooking technology. These changes enable our guests to enjoy delicious food served much faster in a restaurant that is just a more enjoyable place to be and to dine.

Furthermore, over time, we expect these changes to enhance and improve our unit-level economics. Early feedback from our guests and our associates and employees has been very positive. Over the next several months, we will analyze the impact and once we are confident in our results, we will deploy them to the rest of the system to aid in top line sales growth and unit-level profitability at our new company-owned restaurants.

As we look out at the remainder of 2014, we know that we will continue to struggle with top line sales, particularly on a comparable basis as the level of e-mail discounting accelerated in the second half of 2013. Ending this strategy will continue to negatively impact our top line performance through at least the end of the first quarter of 2015.

We will continue to focus on driving top line sales by improving the overall guest experience, as well as improving our restaurant margins and prudently managing our other expenses.

Now I'd like to turn the call back to Richard, who will discuss the financial results in much greater detail.

Richard A. Pawlowski

Thanks, Ed. To those on the call, please refer to our press release issued earlier today as I summarize our results.

Famous Dave's reported revenue of $41.9 million and net income of $2.9 million or $0.39 per diluted share for the second quarter of fiscal 2014. This is compared to revenue of $43.6 million and net income of $2.1 million or $0.27 per diluted share for the comparable period of fiscal '13.

Net income for the second quarter of fiscal '14 included the impact of $102,000 of charges or approximately $0.01 per diluted share related to a lease reserve, as a result of the previously announced decision to close the décor warehouse. Additionally, the company incurred approximately $427,000 or $0.04 per diluted share of severance costs. These costs were partially offset by the recapture of approximately $349,000 of stock-based compensation or $0.03 per diluted share. This is due to the recent departure of employees, predominantly at the executive level.

By way of comparison, fiscal 2013 second quarter results included approximately $271,000 or $0.02 per diluted share of severance costs as a result of the reduction in force.

Adjusted EBITDA for the second quarter of fiscal 2014 was $6.1 million compared to an adjusted EBITDA of $4.1 million -- $4.8 million for the second quarter of fiscal 2013, primarily reflecting lower G&A expenses and an improvement in food and beverage costs, partially offset by decline in net restaurant sales.

During the quarter, restaurant sales decreased approximately 4.3% year-over-year, reflecting a comparable sale decrease of 5.2%. As a reminder, the comparable sales decline was significantly impacted by the strategic decision to continue -- to discontinue the previously discussed e-mail discounting strategy.

As we further breakdown the comparable sales decline, we saw a 4.9% decline in dine-in sales and a 0.3% decline in to-go sales during the quarter. Our catering sales remained flat.

Off-premise sales were 37.2% of total sales for the second quarter of 2014, with catering at 10.4% and to-go at 26.8%. This compares to 35.8% for Q2 fiscal 2013. Our dine-in per person average for the second quarter of fiscal 2014 was $18.41 compared to $17.73 for the second quarter of fiscal 2013.

To break that down by day part was $15.70 for lunch and $20.04 for dinner. We do not anticipate increasing prices any further during the remainder of 2014.

Turning to our franchise business. Royalties were essentially flat year-over-year at $4.7 million, primarily reflecting the contribution from 7 net new franchise restaurants that opened since the end of the second quarter of 2013, offset by comparable sales decrease of 2.8% of existing franchise locations. During the second quarter, 1 franchise-operated restaurant opened in Bayamon, Puerto Rico.

At the end of the second quarter of fiscal 2014 and as of today, we have 53 company-owned restaurants and 141 franchise-operated restaurants for a systemwide total of 194 restaurants in 34 states, the Commonwealth of Puerto Rico and 1 Canadian province.

We are continuing to evaluate and assess the impact our move away from a predominantly discount-driven strategy and as such, we'll not provide any forward-looking guidance for fiscal 2014. We will, however, discuss our performance for the most recent quarter.

Overall, we saw 40 basis point decline in restaurant level cash flow margins on a year-over-year basis, primarily driven by sales deleverage from a decline in net restaurant sales. Food and beverage costs decreased to 28.9% of net restaurant sales compared to 30% for the second quarter of 2013. The improvement was largely driven by more favorable pricing on some of our food contracts.

Labor and benefits as a percentage of net restaurant sales was 30.9%, 30 basis points unfavorable to the comparable period in 2013, primarily this is due to the sales deleverage on fixed labor and management labor cost, partially offset by lower employee benefits cost.

Operating expenses for the second quarter of fiscal 2014 as a percent of net sales was 26.4% or 100 basis points unfavorable to the comparable period in fiscal 2013. This increase was primarily related to sales deleverage on fixed operating costs, as well as higher R&M and occupancy costs. These increases were partially offset by lower supply costs during the second quarter.

Advertising as a percent of net sales was 3.6%, which was essentially flat to the comparable period of 2013. In both years, there was a 0.75% marketing ad fund contribution.

G&A expenses for the second quarter of fiscal 2014 as a percent of total revenue was 9.7% or 320 basis points favorable to a comparable period for fiscal 2013. G&A reductions were a result of the impact from reductions in force that occurred during fiscal '13; the previously mentioned $349,000 recapture of stock-based compensation, partially offset by the impact of revenue deleverage; and approximately $427,000 of severance costs.

As a reminder, the second quarter of fiscal 2013 included $271,000 of severance costs.

Interest expense for the second quarter of fiscal 2014 was $237,000, and essentially flat in both dollars and as a percent of revenue compared to the comparable period of the prior year. Our effective tax rate for the second quarter of fiscal 2014 was 32.8%, reflecting the result for the first 6 months of 2014. This compares to 29.7% during the first 6 months of 2013.

With regard to our balance sheet, our unrestricted cash and cash equivalents balance at the end of the second quarter of fiscal 2014 was approximately $2.2 million. We ended the second quarter with a balance of $7 million on our revolving line of credit and we are in compliance with all our debt covenants. As of today, we have a balance of $7.5 million on our line of credit. We used approximately $1.1 million of cash for capital expenditures, primarily reflecting our continued investments in our existing restaurants, the reimage of our Bolingbrook, Illinois restaurant and investments in corporate infrastructure systems.

Lastly, during the first 6 months of fiscal 2014, we used approximately $869,000 to repurchase 45,000 shares at an average price of $19.29, excluding commission. There's approximately 0.25 million shares left on our current 1 million share repurchase authorization.

From a growth perspective, we now anticipate opening 4 franchise-operated locations during fiscal 2014, including the 3 opened in the first 6 months of the year. The remaining opening is anticipated in the third quarter.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we have a question from Mark Smith from Feltl and Company.

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

First, Richard, can you walk through the -- your commodities outlook and give us an update on your contracts, where you sit now and when they start to run out?

Richard A. Pawlowski

Yes. So 100% of our proteins are locked through the end of '14. Brisket is locked through the first quarter of '15. And we're taking a look at seeing how far we can extend that contract out. As we look broadly across our basket of COGS, we expect that our cost will revert back to 2013 levels for 2015. It's still very early in the cycle for us to have very good visibility into '15. But our best case or our best guess is that we'll revert back closer to 2013 levels for the full year.

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

And then, Ed, any -- can you give us any more insight into sales trends? I know it's early, but any sales trends at Bolingbrook?

Edward H. Rensi

Not really. We have some up and downs. It's kind of interesting. We had a grand opening that ran Monday through Sunday with a lot of activity, had very positive responses the first 7 days. And then, unfortunately, unbeknownst to us our next-door neighbor, the hypermarket decided they were going to repave their access road, which shut down the main road into our restaurant. So we were shut down Sunday night, Monday, Tuesday and opened back up at 8:00 on Wednesday evening, and that caused a lot of disruption in the store. We're 3 weeks into this at this point, and we've had some really positive days, a few days that were flat. But we're way too early to know. We're got some major activities going on for the next 3, 4 weeks. We're going to do a tie-in with the Chicago Bears opening season and we're optimistic. But one thing I can tell you, all the feedback from our customers is very positive. They really like the new bar menu a lot. They really like the new open spacious look. I think taking the write-off on our décor warehouse was actually the right thing to do. Taking down the décor in many of our stores was actually the right thing to do. So we're pretty optimistic about it and that we're doing a pre- and post-analysis because we want to sell our franchisees on the idea of upgrading their restaurants to this new kind of a facility. And we're trying to hang on to our legacy customers, obviously, because they're very important to us and at the same time, introduce younger sets of audiences to a bar food offering, where our great proteins, our brisket, et cetera, pork and chicken, our ingredients and items is going to be just the center plate. So right now, we don't have specific numbers, but we got a lot of positive comments.

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

And then last question. Can you give us any more break down on traffic versus ticket in the comp and as you've gotten away from some of the e-mail discounting, what you've seen happen to your ticket?

Edward H. Rensi

Well, the unfortunate thing is when we get all this very deep discounting, we were running somewhere around 30% discounts, $10 off on a $30 purchase. And we educated our best customers to wait for this discount. And once we get through this cycle, I think we'll see a true picture of what's going on. Richard may have very specific numbers. I don't have them at my fingertips. So Richard, if you want to add in.

Richard A. Pawlowski

Yes. I mean, the biggest decline we saw, Mark, was really in the dinner day part. Traffic, on a guest count basis, was down about 10%. To-go was down 1.9%, lunch was down 9.2%, catering was up 3.1%.

Following the challenge of that Ed articulated, we don't really know whether that was discount traffic that has gone away or if that was any sort of decay in our core underlying customer base just because the level of discounting was so high.

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

Can you dig a bit deeper into it, are you seeing any trends in items that are ordered as you look at build your own barbecue and other items? Are people sticking at kind of core menu? Are you seeing a good opt-in for some of these newer items?

Edward H. Rensi

Well, one of the most important things you think you can do to build sales in restaurants is have new news around the menu. In our Burnt Ends since it's introduction some time ago has been very, very popular. The Cheesy Burnt Ends promotion has been very successful, as all core items does. And the build your own barbecue is very popular. People like the flexibility of designing their own kind of lunch menu and dinner menu. So we think we've got some real key ingredients to start growing sales once we get over this very painful hump we're in with discounting.

Operator

And our next question comes from Greg McKinley from Dougherty & Company.

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

I wonder if you can talk a little bit about your communications to date with franchisees. Ed, what have you learned in your time as the CEO so far about your franchise base? How have you communicated with them about some of the things you're testing and envision the concept to evolve into over time?

Edward H. Rensi

Well, we have some senior leaders in the franchise group. [indiscernible] in California is one of our senior leaders. I gave him a personal invitation a number of weeks ago to come in to Bolingbrook, take a look at all the new concepts we're working on, give him an opportunity to comment and to opine on the menu items and what he thought we might want to do. We have a very strong belief that the greatest asset we have in our company is our franchisees. And we want to engage them every way we can. And on -- and the franchise advisory board, we were in here 2 weeks ago, and we spent 2 days of them going through a great detail the things we did at Bolingbrook, what the preliminary results were. They got to see the menu themselves. They got to taste the food. They got to see the changes in the core. They experienced our flights of beer, our bites of food in the bar. They saw some of the -- they saw all the new kitchen cooking equipment. They saw the kind of quality that could come out of that computer-driven equipment. We've since put in Buzztime, Buzz Table, kitchen management systems and we're starting another round of communications. Tomorrow, [indiscernible] is coming back with his entire senior operations staff to start to educate themselves on what they're going to do and how they're gonna proceed with their stores out on the West Coast. I'm hosting Mike Wright on Thursday. And Anon [ph] on Thursday. And Mike Wright is from up in Dakota's. We're going to talk about what we're doing and let him have a good peak at what's going on. So far, the franchisees really understand what we're trying to do with these changing menus and developments in the kitchen equipment, the décor, the seating, the expanded patios, et cetera. And they're starting to buy into it pretty aggressively. I just issued, after our board meeting today, I gave direction to our senior operating staff for company stores to put the bar menu in at all the company stores; to put a television program in, Buzztime; to put in a table management system, et cetera, et cetera, et cetera. So in the next 4 or 5 months, we're going to be rolling out all these concepts into all of our company stores going pre- and post-analysis, so that we can continue to communicate with our franchisees their success. Also during this process, we have a multifaceted design project going on where we have invited major designers from across United States to start to give us a look of what modern Famous Dave's modern barbecue could look like and we'll go through that process very shortly. So we're communicating via phone, in person. We've got a news letter, we call Barbecue Buzz, we're sending out on a regular basis. We have a regular mail and we sent to the franchisees, which is a newsletter to them directly. We're inviting their staff. We've had people come in from Michigan and from Central Illinois and from Wisconsin. So we are being as transparent as we possibly can. We're inviting every bit of insight, intelligence and criticism they can muster because we want them to be part of the new Famous Dave's.

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

Okay. Thank you. Maybe on more of a tactical note, help us understand how you've looked at your cost structure a little bit and understand some of the decisions you've made so far? And I don't know, any perspective you can offer going forward on that.

Richard A. Pawlowski

Yes. So we've actually started a very detailed process to run a fine-tooth comb through every line item on the P&L, starting with the discount line at the top, moving through cost of goods sold, our labor matrix, our deployment. Everything we buy at the restaurant at the corporate level is up for evaluation in terms of, are we optimizing what we receive for the money we pay? So that process is underway. We haven't gotten anything to give guidance on in terms of the results of that, but we are taking a very, very hard look at everything that we do with a view to improving the guest experience and cutting costs.

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

Okay. And then I wonder if there's any color you can provide around -- so it's easy to understand that we're having to reeducate guests and sort of wean them off of this notion that they're going to get food on sale every time they go to your stores. Is there anything you can comment on, generally speaking, about how you think casual dining trends are impacting your business and how your business, excluding that discounting issue is holding up competitively from a share perspective?

Edward H. Rensi

As the CEO of this company, I want our executive management team and all of our associates to focus on our business, pay attention to our customers and drive sales by exceeding expectations [indiscernible]. We're not going to spend a lot of time worrying about an industry that we can't control or manage.

Operator

And our next question comes from Justin Ruiss from Sidoti & Company.

Justin Ruiss - Sidoti & Company, LLC

I just have a quick question just regarding alcohol as a percentage of sales. Can you break that out?

Richard A. Pawlowski

Break out in what respect?

Edward H. Rensi

I can tell you it's not good enough.

Justin Ruiss - Sidoti & Company, LLC

Okay....

Edward H. Rensi

We'd be speculating if we -- Richard just found...

Richard A. Pawlowski

We have the numbers. The question is how do you want us to break it out. It's running right now as a percent of dine-in net sales about 10%, which is low for the casual dining industry.

Justin Ruiss - Sidoti & Company, LLC

Okay. That's all I needed to know. When it comes to just the franchisees when you're looking at expanding out to new franchisees versus having the existing ones open up stores, can you break that out as a percentage as well? who you're really having franchise out that are new versus who are existing franchisees?

Edward H. Rensi

I guess the newest franchisees we have would be the ones in Puerto Rico that have opened up 2 or 3 stores now -- 2 stores. They're working on the third one. Really outstanding restaurateurs, really excited about that. But we really aren't recruiting new franchisees at the moment. We've got a lot of horsepower in the existing franchisees. We've got to very carefully define what all these changes are going to be like in new stores, got to get the design right. And the minute we feel confident that we've made the right decisions and that the business model is correct, then we will start actively recruiting new franchisees, as well as giving opportunity to our existing franchisees. The greatest strength we have is our franchisees and we want to take advantage of their brainpower.

Justin Ruiss - Sidoti & Company, LLC

Got you. And then, lastly, just looking at the cap spending, can you comment anything on how -- where cap spending is gonna be for 2014?

Richard A. Pawlowski

Where it's going to or where we have deployed capital year-to-date?

Justin Ruiss - Sidoti & Company, LLC

Both, actually, would be great.

Richard A. Pawlowski

Okay. I mean, year-to-date, we spent $1.1 million. The breakout of that is it's a combination of R&M, R&M spend for the existing restaurants. We've invested in some systems in the corporate office. We just changed our accounting platform. And so that's taken up the bulk of it. Obviously, the remodel at Bolingbrook has used some cash too. For the year, we have -- we anticipate spending approximately $4.1 million total CapEx, and we have that budgeted out and it falls into the same bucket.

Operator

[Operator Instructions] It appears we have no further questions on the phone at this time.

Edward H. Rensi

Thank you all very much.

Richard A. Pawlowski

Thank you.

Edward H. Rensi

Have a great day.

Operator

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

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