Famous Dave's of America, Inc. (NASDAQ:DAVE)
Q2 2011 Conference Call
July 28, 2011, 10:00 AM CT
Diana Purcel - CFO
Christopher O’Donnell - President and CEO
Good morning everyone and thank you for joining us for the Famous Dave’s fiscal 2011 second quarter conference call. I’m Diana Purcel, Chief Financial Officer. With me today 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?
Thank you, Diana.
Good morning everyone, and thank you for joining us for today’s call.
Yesterday after the close, Famous Dave’s reported revenue of $41.3 million and second quarter earnings of $0.29 per share.
During the second quarter, we experienced a 1.2 percent decline in comparable restaurant sales for our company-owned locations and a 1.4% decline for franchise comparable sales. We have positive comparable sales on a year-to-date basis for our company locations of 0.9% and negative comparable sales of 0.7% for our franchise locations.
Our comparable sales results primarily reflect a year over year shift in holidays that Diana will touch on and declines in our dine-in business.
To help offset this trend, and to drive incremental sales through new product introductions, we have created offerings aimed to attract new guests as well as maximize the value of our current guests. While we are carefully watching our dine-in traffic, we are pleased that our to-go and catering segments increased during the quarter, and we remain pleased with the overall improvement in off-premise sales on a year-to-date basis. These two segments at various times have served as somewhat of a positive leading indicator for our overall trends, so we remain encouraged.
To help continue to build our off-premise sales, and offer convenience for our guests, we recently completed the successful rollout of on-line ordering to all of our 52 company-owned restaurants. Additionally, several of our franchise partners have elected to implement the new system as well.
Since the rollout began, we have seen a higher check average for on-line orders and have received great feedback from our guests. Now our focus will be in maximizing the opportunities with greater guest trial.
On the marketing and brand-building front, Dave Anderson appeared as one of the nation’s six most prominent barbeque experts in a four-episode cook-off featured on the Food Network, called “Best in Smoke.” In our humble opinion, Dave was an audience favorite throughout the competition—and although he didn’t “officially win” he captured many people’s hearts and added great credibility to our brand.
We’re tremendously proud of our founder, and congratulate all the competitors in what turned out to be a fun—and grueling—competition. We also want to thank our director of culinary, Charlie Torgerson, for all his hard work on this project. We are lucky to have his innovative culinary skills in our test kitchen.
Famous Dave’s continues to garner national exposure this summer for our brand. Since Memorial Day, and through Labor Day, Famous Dave’s will be catering the backyard barbeque every Friday morning on Fox and Friends in New York City. Additionally, Dave will be a special guest on the show twice this summer, including an appearance this coming August 11th, featuring barbeque tips and recipes.
As for our limited time offerings and menu update, we just completed another successful “U.S. of Barbeque tour – but this time Hawaiian-style”! This promotion features our signature barbeque items from around the U.S., and to celebrate the opening of our first location in the Hawaiian islands on Maui, this year the promotion includes Hawaiian Huli-Buli chicken.
We’re again gearing up for Dave’s Day, which takes place on August 14th. This event celebrates the fact that we have an authentic bbq brand with a true, passionate, founder. This year marks the highest system-wide participation in this promotion, with more than 90 percent of our franchise partners taking part in the festivities. You’ll recall that anyone with the first name of Dave, David, or Davey, is eligible for a free entree up to $15.00 in value, and eligible for half that amount if their middle name is Dave or a close variation.
We are advertising the promotion via email blasts and social media, along with some targeted direct mail marketing.
This event remains popular with our loyal guests and has certainly attracted some new “Dave’s” to the restaurants - however, as with any promotion, we will continue to evaluate this promotional opportunity each year.
For those guests not named Dave, we have something too! Dave’s Day will kick off a promotion called the “Hog Days of Summer,” which will bring back our popular “Buck-A-Bone” and 50-cent wing specials, available with the purchase of any entree, in addition to several beer specials. This promotion will run from Dave’s Day until September 11th.
We’ll also be rolling out a new menu in mid-August, which will feature a new appetizer—jalapeno and chili-roasted corn fritters, served with honey. We’ll also be featuring our new Southside Rib Tips – an authentic meaty and flavorful rib tip that is hickory-smoked then fire-grilled with a Memphis-style dry rub. We’ll be serving them with jalapeno pickled red onions, hell-fire pickles and our new Southside BBQ sauce. We’re really excited about this offering, and think it could become a signature item.
Our new menu will also reflect an approximate 2 percent price increase on selected items. While we’re extremely cautious when making the decision to raise prices, we also believe that the increase is necessary in order for us to keep up with rising food costs.
During the quarter our operations team made further progress in carrying out our guest experience initiative and gathered feedback from the restaurant team on the program. The survey results indicated that the program is resonating with our guests, and we believe that operational excellence contributes to our strong brand image and gives us a competitive edge.
One of the challenges facing everyone these days is increasing food costs. As mentioned previously, we have several initiatives in place to mitigate the cost pressures that impact our business. We continue to work on various tactics to help control the impact of these increases while maintaining our high food quality and ample portions. Diana will provide more detail shortly on these tactics and the expected impact of commodity pricing on our margins.
And, you’ll also hear in greater detail momentarily, that we’re paying close attention to our balance sheet and debt levels. Several weeks ago, we announced the extension of our credit facility for five more years. We’ve had a solid, long-term relationship with Wells Fargo, and we’re pleased that we’ve reaffirmed our partnership.
Speaking of partnerships, I wanted to provide an update on our system-wide development. Despite the fact that business conditions remain quite challenging, Famous Dave’s continues to grow at a prudent pace.
We are, however, updating our guidance on our development schedule, and now anticipate opening approximately 10 new restaurant locations, including 2 company-owned locations, in 2011. Subsequent to quarter end, in mid-July, we opened two franchise locations in Erie, PA and Portland, OR! Among the other new restaurants yet to open this year, is a company-owned location that will open in approximately 3 weeks from now in Falls Church, Virginia. We will also open a new proto-type, smaller footprint, quick casual-counter-service restaurant in Eden Prairie, MN, in the late fall. This new 3,000 square foot restaurant, will allow us to build on our legacy of quick-casual counter service restaurants in Minnesota, and feature a limited core menu of our Legendary BBQ offerings. This proto-type is designed to satisfy the BBQ cravings of our guests and meet the need for speed, convenience, and value in today’s environment
Additionally, it will provide a growth vehicle for our franchisees, requiring lower input costs than our full-serve 6,000 sq foot smokehouse, will fill in portions of a market that are currently underserved, and will contribute to our growth opportunities and our long-term strategic goal of growing to 4-5 hundred units in the United States.
As we’ve said before, we continue to manage our business for the long term. Yet, we’re just as impatient as everyone else to see this economy begin to gain some forward momentum. Be assured that we remain focused on executing at the very top of our game.
With that, let me turn the call over to Diana for a recap of our financial performance. Diana ?
Thank you, Christopher.
Yesterday, Famous Dave’s reported revenue of $41.3 million and net income of $2.4 million, or $0.29 cents per diluted share for the second quarter of 2011. This compares to revenue of $40.7 million and net income of $2.5 million, or $0.29 cents per diluted share for prior year’s second quarter.
Our restaurant sales reflect the addition of Bel Air, Maryland, which opened in August of 2010, partially offset by a comparable sales decrease of 1.2 percent. The decrease in comparable sales reflected a negative impact equal to approximately 90 basis points primarily from the year over year shift in the Easter holiday, from first quarter 2010 to second quarter 2011, and a one day shift of the 4th of July holiday from second quarter in 2010 to third quarter in 2011. Additionally, comparable sales included weighted average price of approximately 2.0 percent.
Of the 1.2 percent second quarter comparable sales decline, on a weighted basis, dine-in represented 1.7 percent. This decline was partially offset by increased off premise sales of 0.5 percent.
For the second quarter of fiscal 2011, off-premise sales were 32.5 percent of total sales, with catering representing 10.9 percent and To-Go representing 21.6 percent. This compares to off-premise sales of 32.0 percent for the prior year’s second quarter.
Our per-person average for the second quarter of fiscal 2011 was $15.35 compared to $14.83 for the same period in fiscal 2010. The breakdown by day part for the second quarter of 2011 was $13.36 for lunch and $16.54 for dinner. This year over year increase primarily reflects higher adult beverage sales during the Best in Smoke LTO, the price increase previously mentioned, and the decline in dine-in traffic previously discussed.
On the franchise side, we saw a 4.0 percent increase in franchise royalties, reflecting a net four additional franchise restaurants year over year, partially offset by a comparable sales decline of 1.4 percent Nine new franchise-operated restaurants opened since the second quarter of fiscal 2010 and five 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 second quarter of 2011, we had 52 company-owned restaurants and 129 franchise-operated restaurants for a system-wide total of 181 restaurants in 37 states. During the quarter, a franchise-operated restaurant closed in Tallahassee, Florida.
By comparison, at the end of the 2010 second quarter, we had 52 company-owned restaurants and 125 franchise-operated restaurants for a system-wide total of 177 restaurants in 36 states.
As mentioned earlier, subsequent to the end of the quarter, two franchise-operated restaurants opened in Erie, Pennsylvania and Portland, Oregon, both with impressive opening week volumes. As of today, we have 52 company-owned restaurants and 131 franchise-operated restaurants for a system-wide total of 183 restaurants in 37 states.
I will now take a few moments to review the costs and expenses for the quarter.
Our food and beverage costs for the second quarter of fiscal 2011 were 29.1 percent of net restaurant sales compared to 29.3 percent for the same period in fiscal 2010, reflecting the results of various cost saving initiatives, such as freight optimization and local produce contracting, essentially offset by increased food costs year over year.
As a reminder, approximately 85 percent of our food and non-alcoholic beverage purchases are on contract. Pork, chicken, and brisket represent approximately 53 percent of our total purchases.
I’ll provide a brief status of our key 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 previously discussed however, and similar to 2010’s strategy, we are currently evaluating an option to extend our contract and blend in a price increase this year in an effort to minimize expected cost increases in fiscal 2012. We will make a final determination on this extension during the 3rd quarter.
Our chicken contracts are firm through the remainder of 2011 at a price increase of approximately 4.9 percent over fiscal 2010.
Our brisket contract extends through September of 2011 at a net cost increase of 4.2 percent from fiscal 2010’s pricing. We continue to execute shorter term contracts until we can lock in an acceptable longer-term price.
Lastly, we anticipate an approximate 1.4 percent year over year increase for the remainder of our contracts, which includes hamburger, seafood, and other key items, such as, our sauces, seasonings, cooking oil, and corn muffin mix.
All combined for fiscal 2011, we are currently anticipating an approximate 2.5 percent increase in total food costs. As Christopher mentioned earlier, our new menu will also reflect an approximate 2.0 percent price increase on selected items. While we have passed part of our cost increase on to our guests, we believe it is prudent to not pass all of it on in this current economic environment.
To manage the remainder of these cost increases, we’ve continued to look for ways to optimize our freight distribution network. Additionally, we are taking advantage of early-pay discounts with our food distributor and have continued to aggressively manage our secondary supplier program for key items on our menu.
Due to the current and expected price increases in the commodity markets, partially offset by the cost savings initiatives mentioned above, we are updating our previous guidance and now anticipate an approximate 25 – 30 basis point decrease in our food and beverage costs, as a percent of net sales, year over year.
For the second quarter of fiscal 2011, labor and benefits, as a percentage of net restaurant sales, were 10 basis points unfavorable to the prior year. This increase is due to higher direct labor costs and increased manager labor due to operating at our full manager matrix. These increases were partially offset by lower employee benefit costs, year over year.
We affirm our previous guidance and still expect labor and benefits, as a percent of restaurant sales, to be approximately 15 - 20 basis points higher than fiscal 2010’s percentage.
Operating expenses for the second quarter of fiscal 2011 were 27.3 percent compared to 26.6 percent for fiscal 2010. This year over year increase was primarily related to higher supply and utility costs. Additionally, we have realized higher credit card processing costs due to increased interchange fees.
Advertising expense is still expected to be approximately 3.5 percent of net sales for 2011, 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, to be approximately 45 – 50 basis points higher than 2010’s percentage. This increase is due to continued pressure from utility costs and credit card fees, in addition to a loss of leverage from second quarter restaurant sales.
Our G&A expenses, as a percentage of total revenue, for the second quarter of fiscal 2011 were 10.2 percent compared to 9.6 percent for the prior year’s second quarter. As discussed previously, this increase was anticipated, and was due to additional head count deemed necessary to support our guest experience initiatives and our franchise system.
Excluding stock-based compensation and board of director cash compensation, our G&A expenses as a percentage of total revenue would have been 9.1 percent for the second quarter of fiscal 2011 compared with 8.8 percent for the comparable period of fiscal 2010.
For the second quarter, stock-based compensation and board of director cash compensation expense was approximately $423,000 compared with $340,000 for the second quarter of 2010. The increase in this expense category is primarily due to a higher stock price year over year. For fiscal 2011, we still anticipate stock-based compensation and board of director cash compensation to be approximately $1.7 million compared with $1.3 million for fiscal 2010.
We are updating our previous guidance and now expect G&A expenses as a percentage of revenue, to be approximately 15 - 20 basis points unfavorable to 2010’s percentage.
During the second quarter we had approximately $45,000 of pre-opening expenses compared to $54,000 in the second quarter of 2010. As previously mentioned, we will be opening two company-owned restaurants in fiscal 2011, Falls Church, VA and Eden Prairie, MN in the third and fourth quarters, respectively. We now anticipate pre-opening expenses for 2011 to be approximately $567,000, including pre-opening rent, for the two restaurants just mentioned and an-as-yet to be determined company-owned restaurant opening in early 2012.
For the second quarter of fiscal 2011, interest expense decreased year over year due to lower debt levels partially offset by slightly higher interest rates.
We are updating our previous guidance and now expect interest expense, as a percent of total revenue, to be favorable, by 5 - 10 basis points to fiscal 2010’s percentage, due to lower debt levels partially offset by slightly higher interest rates.
Lastly, we still 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 second quarter of 2011 was approximately $2.3 million.
As a reminder, we recently amended our credit facility and extended its term until July of 2016. This amendment provided us with an additional $30 million of share repurchases from the date of the amendment. Other changes include a modest increase in our margin rate along with an acceleration of the amortization and maturity date of our term loan to July of 2016.
We ended the quarter with a balance of $10.4 million on our revolving line of credit, compared to $12.5 million for the comparable quarter of fiscal 2010, and compared with $13.0 million at yearend. Additionally, we were in compliance with all of the covenants on our recently amended credit facility. As of today, we currently have a balance of $[9.7] million on our line of credit.
During the 2011 year to date period, we generated $6.5 million in cash from operations compared to $6.3 million for the prior year’s second quarter.
We spent approximately $1.6 million on capital expenditures primarily for the construction of the Falls Church restaurant, as well as 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 two new company-owned restaurants, and continued investments in corporate infrastructure systems.
During the first six months of fiscal 2011, we used approximately $2.7 million to repurchase approximately 260,000 shares at an average price of $10.26, excluding commissions. To date, we have repurchased approximately 434,000 shares of our current million share authorization for approximately $4.7 million at an average price of $10.28, excluding commissions.
During the quarter we used our cash to pay down debt and invest in new and existing restaurants. As always, as we move throughout the remainder of the year, we will continue to evaluate the best use of our cash.
Christopher will have a few closing comments, but at this point we would like to take your questions.
Christopher O’Donnell (Conclusion)
Although we delivered flat earnings results in the second quarter compared to prior year, we continue to manage our business for the long-term and continue to invest strategically for the future. We believe that we’re doing the right things for our business and that these efforts will positively translate for our brand, for our guests and for our shareholders.
Thank you for listening, and as always, we appreciate your visits to our restaurants. This concludes our call.
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