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Executives

Diana Purcel - CFO

Christopher O’Donnell - President and CEO

Famous Dave's of America, Inc. (DAVE) Q1 2011 Conference Call April 28, 2011 10:00 AM ET

Operator

[Operator Comments]

Diana Purcel

Good morning everyone and thank you for joining us for the Famous Dave’s fiscal 2011 first quarter conference call. I’m Diana Purcel, Chief Financial Officer, and joining me is Christopher O’Donnell, our Chief Executive Officer.

Before we begin, we’d like to remind those listening that certain matters discussed within are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Famous Dave’s believes that the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors that could cause actual results to differ materially from Famous Dave’s expectations include financial performance, restaurant industry conditions, execution of our restaurant development and construction programs, franchisee performance, ability of our franchisees to meet their development commitments, changes in local or national economic conditions, availability of financing, and other risks detailed from time to time in the company’s SEC reports.

Our earnings release, which contains the financial and other statistical information being discussed this morning, was issued yesterday afternoon after market 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 seven days.

Now, I will turn the call over to Christopher O’Donnell, Famous Dave’s President and CEO. Christopher?

Christopher O’Donnell

Thank you, Diana.

Good morning everyone, and thank you for joining us.

For the first quarter, we reported $0.14 per share, which included a $0.01 per share non-cash charge, on revenue of $37.1 million. These results compared to 2010’s first quarter earnings of $0.30, or $0.15 per share, adjusted for last year’s gain on the acquisition of restaurants in New York and New Jersey, on revenue of $32.6 million.

Revenue for the quarter reflects a comparable sales increase of 3.0% for our company-owned locations, sales from the new restaurant in Bel Air, MD, as well as the impact from two additional months of sales year over year for our New York and New Jersey restaurants. The New York and New Jersey restaurants will be included in our comparable sales results beginning with the second quarter. They won’t be in our full year comparable results, because they weren’t included in the company-owned restaurant comparable base until April 2011.

While we are encouraged by our comparable sales and revenue performance, we aren’t satisfied with delivering results that are essentially flat year over year, and we know we still have a lot of work to do.

The categories of dine-in, to-go, and catering all increased during the quarter, and we remain pleased with the improvement in off-premise sales over the past several quarters.

Additionally, our franchise restaurants continued to improve during the quarter, as franchise comparable sales were essentially flat.

As we prepare to enter the summer BBQ season, we remain optimistic, yet still somewhat cautious, in our outlook. In the broadest sense, the increase in gas prices, worldwide unrest, the horrific disaster in Japan, and mixed signs of economic growth, have created continued uncertainty in the current business and consumer climate.

While we can’t do anything about the macro-economic factors, what we can do, is keep our heads down, concentrate on running our business, and manage the uncertainty. This means, understanding what we can and cannot control, planning for a variety of scenarios and capitalizing on opportunities.

We continue to evaluate each and every line in our income statement to determine what can be done strategically to take advantage of opportunities, or to create our own, to drive profitable sales and manage costs in a rising price environment.

Diana will cover more details on our financial results for the quarter momentarily.

On the development front, we continue to open new units and close some older, under-performing restaurants, as well. During the first quarter, we opened new franchise locations in Lawrence, Kansas, Reno, Nevada and Henderson, Nevada. Under-performing locations in Omaha, Nebraska, Pensacola, Florida, and Kansas City, Missouri closed. We are currently in discussions with new and existing franchise partners to continue to build our pipeline and still expect to open approximately 12 total restaurants during 2011, including a new company-owned location in Falls Church, Virginia in the third quarter.

Last month, we had our largest, and arguably the most successful, Famous Dave’s Franchise Partner and Operations “Brand” Conference to date. As a reminder, this conference gives us the opportunity to spend quality time with our franchise partners, operators and suppliers over the course of three days.

This year’s conference featured informative sessions on franchise finance, social media marketing, the guest experience, and our operational scorecard, FD Powers. In our estimation, this year’s gathering was successful on all fronts - the content, interaction, sharing of information and communication of our vision. Our relationships with our franchise partners are strong, and we’re working hard to provide them with support and to identify solutions for their business needs. As just one example, we were pleased to introduce our franchise partners to “BoeFly”, an online marketplace that helps match franchisees seeking funding with suitable financing sources.

Last quarter we spoke to you briefly about our Guest Experience initiative, and we are now in the process of rolling out the components of that program.

While we have always been one of our industry’s leaders in terms of guest satisfaction scores, we continue to strive to be better. Our Guest Experience initiative is a comprehensive effort, with the goal to strengthen the link between our external and internal brand, in order to create a unique, Famous Dave’s experience.

The enthusiasm of our team members and the experience that they create for our guests is every bit as important as the authentic, high-quality barbeque we serve. These combined— are what should make every visit to a Famous Dave’s restaurant feel like a backyard barbeque with good friends. And, clearly, our investor base understands that building a strong brand, has great value.

While we’ve had it in the Twin Cities market for awhile, next month we will complete our role out of on-line ordering to the rest of our company-owned restaurant locations. Soon you will have the convenience of getting Famous Dave’s BBQ To-Go in all of our 52 company-owned restaurants - on-line. With the click of a mouse and a credit card, you’ll be able to place your order to your liking, and then just stop by and pick it up.

Our founder Dave Anderson, continues to be a terrific resource on the R&D and marketing front, and gives us legitimacy in the BBQ space. I’m very excited to announce a special event coming up in May involving Dave, that will help us build brand awareness on a national scale! On May 8th, Dave will be appearing as one of the nation’s six most prominent barbeque experts in a four-episode, single elimination, cook-off entitled “Best in Smoke” on Food Network. Dave is held to a very strict confidentiality agreement, so even we don’t know how far he progressed in the competition. No matter what the outcome, we’re incredibly proud that Dave was chosen for this honor, and it speaks volumes to the quality and authenticity of our barbeque.

Additionally, during the first quarter, Dave Anderson had the honor of being the keynote speaker at the National BBQ Association annual conference. Famous Dave’s also took place in a contest at the conference and took home 3 awards: 2nd place for our Chicken Marinade, 3rd place for our Apricot Bourbon Sauce and 3rd place for our Teriyaki Marinade. We’re very proud of these awards, as participation in this contest represents the best of the best in the BBQ field! Additionally, our franchise partners continue to win awards in their markets. We recently won awards in: Franklin, TN, Christiana, Delaware, and Yuma, AZ. We also won Best BBQ in Westbury, NY, our new corporate market!

Turning to our menu, our new Citrus Grill offerings performed well during the quarter, exceeding our expectations in terms of product mix, and have been a great addition to our core menu offerings.

We are encouraged with the response from our guests who have expressed an interest in more healthful offerings. And, while we won’t know exactly what the final FDA regulations regarding calorie counts will be until the end of this year, we continue to work on a variety of more healthful choices for our guests that make sense in our niche.

In other menu developments, we are in the process of rolling out a new drink menu this month, and we have just rolled out our “Best in Smoke” limited time offering, inspired by Famous Dave Anderson’s appearance on the Food Network’s “Best in Smoke” competition. This promotion features a pork lettuce wrap with an exciting new Blackberry barbeque sauce, award winning St. Louis style or baby back Ribs with this new sauce, as well as our Brisket with a Dr Pepper glaze. Capping off the LTO is a pairing with Sam Adams Blackberry Witbier. These items are available now for a limited time or until we run out! While this promotion will be supported with some TV advertising, it will be predominantly promoted through our social media channels and communities.

Lastly, as a sneak preview of our summer offering, we’re bringing back our U.S. of BBQ, but this time, with a Hawaiian twist, because, we are celebrating Famous Dave’s new restaurant on the island of Maui. This promotion features our US of BBQ platter - our award-winning BBQ offerings which can now be combined with our charcoal smoked chicken thighs in a Hawaian Huli Buli sauce. We are also featuring a new drink, the “Tiki Twist”, as well as a contest for a chance for 2 to win a trip to Hawaii!

Despite the challenging economic times, we ARE growing our brand. We continue to innovate and extend the definition of “barbeque” with new products and initiatives. And, we strive to provide guests with an excellent value and guest experience that will keep them coming back for more. With that, let me turn the call over to Diana for a recap of our financial performance.

Diana ?

Diana Purcel

Thank you, Christopher.

Yesterday, Famous Dave’s reported revenue of $37.1 million and net income of $1.2 million, or $0.14 cents per diluted share for the first quarter of 2011. This compares to revenue of $32.6 million and net income of $2.7 million, or $0.30 cents per diluted share for the first quarter of 2010. The first quarter results for 2011 included a non-cash impairment loss of approximately $148,000 or $0.01 per diluted share for non-recoverable assets, related to a company restaurant that will be relocated within its existing market in early 2013.

The first quarter 2010 results included one-time non-cash gains of approximately $2.0 million or $0.15 per diluted share primarily related to the acquisition of the New York and New Jersey restaurants.

First quarter restaurant sales increased 15.3 percent year over year, reflecting the addition of the seven New York and New Jersey restaurants as well as a new company-owned restaurant, which opened in August of 2010; and a comparable sales increase of 3.0 percent. The comparable sales increase included a weighted average price increase of approximately 2.0 percent and the favorable impact of approximately 0.7 percent from the Easter holiday shift between quarters one and two, year over year. Of the 3.0 percent first quarter comparable sales increase, dine-in represented 0.7 percent, To-Go accounted for 1.9 percent and catering comprised 0.4 percent.

For the first quarter of fiscal 2011, off-premise sales were 27.6 percent of total sales, with catering representing 5.0 percent and To-Go representing 22.6 percent. This compares to off-premise sales of 27.0 percent for the prior year’s first quarter.

Our per-person average for the first quarter of fiscal 2011, was $15.29 compared to $14.77 for the same period in fiscal 2010. The breakdown by day part for the first quarter of 2011 was $13.32 for lunch and $16.55 for dinner. This increase, year over year, primarily reflects increased check average due to the Citrus Grill LTO, the holiday bounce back offers redeemed in January and February, and the price increase previously mentioned.

On the franchise side, we saw a 1.2 percent increase in franchise royalties reflecting a net increase of seven franchise restaurants, year over year, partially offset by a comparable sales decrease of 0.1 percent and the impact from the loss of two months of franchise royalties for the seven New York and New Jersey restaurants. Eleven new franchise restaurants opened since the first quarter of fiscal 2010 and four restaurants closed.

Please refer to our press release, issued yesterday, for a breakdown of other metrics such as average weekly sales for our company-owned and franchise-operated restaurants, post and pre-2005, in addition to operating weeks, and number of restaurants in the comparable sales base.

At the end of the 2011 first quarter and as of today, we have 52 company-owned restaurants and 130 franchise-operated restaurants for a system-wide total of 182 restaurants in 37 states. By comparison, at the end of the 2010 first quarter, we had 52 company-owned restaurants and 123 franchise-operated restaurants for a system-wide total of 175 restaurants in 36 states. We affirm our previous guidance and expect to open approximately 12 new restaurants in fiscal 2011, including one company-owned restaurant in Falls Church, VA.

Now onto a review of our costs and expenses for the quarter.

Our food and beverage costs for the first quarter of fiscal 2011 were 29.5 percent of net restaurant sales compared to 29.3 percent for the same period in fiscal 2010. In the face of rising food costs, we were essentially able to hold food costs flat year over year for the first quarter. The loss of leverage of approximately 20 basis points is primarily due to holiday bounce back discount offers that were redeemed in January and February.

We’d like to provide a current update on our protein contracts. As a reminder, we are protected on our pork contract throughout 2011, which will equate to an approximate 2.3 percent increase over 2010’s pricing. As we look beyond 2011, however, the forecasted pork markets are looking ominous. As such, similar to prior year, we are evaluating whether there are opportunities to blend and extend pricing later in the year and provide some protection for 2012. We will provide an update on this on the next call. Because pork prices are traditionally at their highest this time of year, it is difficult to have full and accurate visibility to this until later in the second quarter.

A majority of our chicken contracts are firm through September of 2011 at a price increase of approximately 6.3 percent over fiscal 2010. We anticipate giving updated guidance on our chicken pricing for the remainder of 2011 on our next call.

As mentioned on our previous call, our brisket contract extends through July of 2011 at a net cost increase of 4.2 percent from fiscal 2010’s pricing. We continue to watch the market closely and could potentially execute shorter-term contracts until we can lock in an acceptable longer-term price.

Hamburger is on contract through June 2011, and we continue to anticipate an average price increase of 9.0% compared to 2010. We continue to evaluate the market to determine the best time to lock in pricing for the rest of 2011, and are willing to ride the spot market until we can lock in at, what we believe, is our best price.

Our salmon and shrimp contracts are locked through June of 2011, and our catfish is locked through August of 2011, all at a blended price increase of approximately 3.9 percent from fiscal 2010’s pricing.

As we navigate through fiscal 2011 in the face of rising commodity prices, we remain flexible and adaptable in order to mitigate these price increases with several initiatives:

During the first quarter, we executed regional contracts for several of our key produce items.

We continue to review the way we source, ship, and purchase certain products such as chicken.

We are strategically managing our limited time offerings to positively impact our food cost margins while continuing to deliver a value to our guests.

We continue to find ways to reduce freight costs as we optimize our distribution network.

And lastly, while we took price earlier in the year, we will evaluate and determine whether we will take additional price later in 2011.

Prior to 2011, we embarked on a strategy to contract various items at a modest cost increase in order to protect ourselves from volatile inflation in 2011. Although this strategy, combined with the initiatives above, has been effective, we still have realized commodity cost increases on certain items. Accordingly, we now anticipate an approximate 20 – 25 basis point decrease in our food and beverage costs as a percent of sales, year over year.

For first quarter of fiscal 2011, labor and benefits as a percentage of net restaurant sales were 70 basis points favorable to the first quarter of fiscal 2010’s percentage. This decrease is primarily due to lower than anticipated medical claims and sales leverage year over year.

We now expect labor and benefits costs as a percentage of sales, to be 15 to 20 basis points higher than fiscal 2010’s percentage, primarily due to higher than anticipated health insurance premiums and payroll taxes for fiscal 2011 and operating at our full manager matrix.

Operating expenses for the first quarter of fiscal 2011 were 27.7 percent compared to 26.9 percent for fiscal 2010. This year over year increase was primarily related to higher occupancy costs, including real estate taxes, due to the full first quarter impact of our New York and New Jersey restaurants. As a reminder, these restaurants have higher occupancy costs and while we are pleased with their sales performance during the quarter, we need to continue to leverage their sales. Additionally, we had higher supply and repair and maintenance costs, which were partially offset by lower utility costs.

As a reminder for 2011, advertising expense is expected to be approximately 3.5 percent of net sales, including a 0.75 percent contribution to the National Ad Fund.

We are updating our previous guidance and now anticipate operating expenses as a percentage of net sales for fiscal 2011 to be approximately 20 – 25 basis points higher than 2010’s percentage primarily due to projected utility cost savings and better leverage on occupancy costs for the New York and New Jersey restaurants for the balance of the year.

Our G&A expenses, as a percentage of total revenue, for the first quarter of fiscal 2011 was 11.7 percent, flat to prior year’s first quarter.

Excluding stock-based compensation and board of director cash compensation, our G&A expenses as a percentage of total revenue would have been 10.5 percent for the first quarter of fiscal 2011 compared with 10.6 percent for the comparable period of fiscal 2010.

For the first quarter, stock-based compensation and board of director cash compensation expense was approximately $422,000 compared with $355,000 for the first quarter of 2010. The increase in this expense category is primarily due to a higher stock price year over year. For fiscal 2011, we anticipate stock-based compensation and board of director cash compensation to be approximately $1.7 million compared with $1.3 million in fiscal 2010.

We affirm our previous guidance and expect G&A expenses as a percentage of revenue, to be approximately 20 - 25 basis points unfavorable to 2010’s percentage.

We did not have any pre-opening expenses for the first quarter of fiscal 2011, and had $27,000 in the first quarter of 2010. As previously mentioned, we will be opening one company-owned restaurant in the third quarter of 2011 and therefore anticipate pre-opening expenses in the second and third quarters. Additionally, in the fourth quarter, we anticipate some pre-opening expenses for an-as-yet undetermined company-owned restaurant opening in early 2012. Total pre-opening costs for 2011 are therefore estimated at approximately $325,000, including pre-opening rent.

For the first quarter of fiscal 2011, interest expense decreased year over year due to lower debt levels partially offset by slightly higher interest rates.

We affirm our previous guidance and expect interest expense to be essentially flat as a percentage of revenue, year over year.

Lastly, our previous guidance estimated a tax rate of 34.4 percent, however due to the increased realization of certain tax credits, we now expect a 34.0 percent effective tax rate for 2011.

Now to our balance sheet:

Our unrestricted cash and cash equivalents balance at the end of the first quarter of 2011 was approximately $2.7 million.

We ended the quarter with a balance of $15.4 million on our revolving line of credit compared to $15.5 million for the comparable quarter of fiscal 2010. Additionally, we were in compliance with all of the covenants on our credit facility. As of today, we currently have a balance of $[15.2] million on our line of credit.

We generated $525,000 in cash from operations for the first quarter of fiscal 2011 compared to $364,000 for the prior year’s first quarter.

During the quarter, we spent approximately $580,000 on capital expenditures primarily for continued investment in, and remodeling projects for, our existing restaurants, and various corporate infrastructure projects.

We still expect total 2011 capital expenditures to be approximately $5.5 million, reflecting continued investments in our existing restaurants, including several significant remodeling projects, as well as, the conversion costs for a new company-owned restaurant, and continued investments in corporate infrastructure systems.

During the first quarter of fiscal 2011, we used approximately $2.5 million to repurchase approximately 246,000 shares at an average price of $10.28, excluding commissions. To date, we have repurchased approximately 420,000 shares of our current million share authorization

We are always evaluating options for the best use of our cash, including, new unit development, investing in our existing restaurants, potential acquisitions, continued stock repurchases, and debt reduction, and will continue to invest our capital based on the circumstances at the time and where we believe we can get the best return.

Christopher will have a few closing comments, but at this point we would like to take your questions.

Question-and-Answer Session

[Q&A]

Christopher O’Donnell (Conclusion)

2011 is far from over. We will continue to focus on sales, prudently manage our expenses and strategically align our business for continued growth and profitability. Thank you for participating in this call. We look forward to seeing you in one of our restaurants soon and please tune into the Food Network on May 8th at 10:00pm Eastern and Pacific Time to watch Dave compete. This concludes our call.

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