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Famous Dave’s

Q3 2011 Conference Call

October 27, 2011, 11:00 AM ET

Executives

Diana Purcel - Chief Financial Officer

Christopher O’Donnell - Chief Executive Officer

Operator

[Operator Comments]

Diana Purcel

Good morning everyone and thank you for joining us for the Famous Dave’s fiscal 2011 third 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?

Christopher O’Donnell

Thank you, Diana.

Good morning everyone, and thank you for joining us for today’s call.

Yesterday after market close, Famous Dave’s reported third quarter revenue of $38.9 million and earnings per share of $0.19.

Our comparable restaurant sales for the third quarter were down 0.1 percent for company-owned restaurants, and were down 1.0 percent for franchise-operated restaurants. For the year to date timeframe, company-owned restaurant comparable sales remained in positive territory, at 0.8 percent, while franchise stores were down 0.7 percent.

Extraordinary weather related issues experienced on the east coast, combined with an economy that hasn’t fully recovered, presented challenges for our top-line this quarter.

Typically, we don’t comment on the weather, however, the combination of an earthquake, followed by Hurricane Irene, which plagued the east coast for the better part of a week, negatively affected our restaurants in that region. As a reminder, almost half of our restaurants are on the eastern seaboard, which also happen to be some of our highest volume locations. Our restaurants didn’t sustain significant physical damage as a result of the storms, however, the psychological effects that caused people to effectively ‘hunker down’, had a dramatic impact. The weather-related impact on sales was over 70 basis points for the quarter due to the closure of three of our high volume restaurants for a full day, and the early closing of multiple other locations.

The economy in general continues to present a challenging operating environment. With consumer confidence under pressure, continued high unemployment and news headlines warning of a double-dip recession, consumers in general are seeking value and our guest base remains cautious. Despite this, while dine-in numbers weren’t where we would have liked them to be, our to-go and catering segments continue to make strong contributions to sales, up 0.8 and 1.0 percent year-over-year, respectively.

Despite some challenges, we have had success in a variety of areas—the opening of our Falls Church, Virginia company-owned restaurant in late August, the signing of a multi-unit franchisee agreement in Canada, our first international locations, and the start of construction on our Eden Prairie company-owned counter-service restaurant set to open in early December. Additionally, we added to our awards, the most notable being another Chinet People’s Choice award at the BBQ Battle, in Washington DC.

Turning to marketing, we recently completed a significant restaurant and guest segmentation and modeling project to give us a clearer understanding as to which segment of guests hold the most value for the Famous Dave’s brand. This research will be instrumental in helping us create more cost effective and efficient targeted marking efforts, and frankly real estate choices going forward.

We plan to utilize this knowledge in the fourth quarter and beyond to reach out to our more significant individual guest segments as well as businesses in the areas closest to our restaurants.

For the fourth quarter, our outreach efforts will include targeted direct mail to businesses and consumers that feature promotions for dine-in, to-go, and catering, as well as a “bounce-back” program that will offer free entrees, appetizers and other items for guests who return during the promotional timeframe.

Admittedly, the direct mail and bounce-back programs can be viewed as a discounting tactic; however they also provide us with a unique opportunity to build on our “Guest Experience” focus and strengthen the level of engagement between our guests and our team members.

In this environment, and given the widespread promotional activities taking place, it’s vitally important that we be part of the consideration set for consumers when they chose to dine out, and what better way to stay top of mind, than a warm, engaging, personal “Thank You” and an enticing reward to return for another Famous experience.

Speaking of Famous, Famous Dave Anderson continues to help carry the message of authenticity and bold flavors. Going forward, there will be an increased emphasis on messaging around “quality and authentic legendary BBQ” with Dave sharing the story of his journey.

During the quarter, we completed our Dave’s Day promotion in August, as well as, our “Hog Days of Summer” LTO which brought back our popular “Buck-A-Bone” and 50-cent wing specials.

We currently have our fall LTO “in play”, featuring Southside Rib Tips. This item was inspired by Dave’s heritage in Chicago where he originally used a garbage can as a makeshift smoker to create authentic Chicago street corner BBQ. The response on these has exceeded our expectations. Rib tips have always been a core menu item, but these have been reinvented with a bold dry rub and a new tangy Southside Sauce. This is a tremendous product that not only showcases our heritage, but is value priced for the guest, and carries a lower food cost. We’re serving the offering as a full platter, a combo with our award-winning spareribs and as an appetizer. Also included in the LTO is a brand new item—chili-roasted corn fritters with diced jalapenos and served with clover honey. The promotion will last approximately 5 weeks.

We rolled out a new menu in mid-August that included new items as well as an approximate 2.0% average price increase. In addition to the items just mentioned, our new menu includes beer-battered cod and a new version of our Appetizer Sampler Platter.

With regard to growth, we remain on track to open 10 new restaurant locations in 2011, which include two company-owned locations.

We will be opening our new “quick casual” restaurant in Eden Prairie, MN in early December. Many of you know that the company began with a “counter service” type restaurant format, so this is really just dusting off our ‘playbook’ and evolving it through some different elements. It will be important for us to get an understanding as to what does and doesn’t work as we prepare to offer this footprint to our entire system. We see this format as a potentially strong growth vehicle, that should achieve broad acceptance among guests, offer compelling economics in terms of construction costs, and provide speed to market and an additional growth vehicle for our franchisees.

Counter-service restaurants are already playing a role in our construction plans for 2012. Right now, we’re anticipating the construction of 3-4 company-owned restaurants in 2012, with a mix of full-service, and counter service, along with up to 10 franchise restaurants—two of which we anticipate will be counter service formats.

We’re very excited that one of the restaurants just mentioned will be outside of the United States. As you may have seen in our recent announcement, we recently signed a multi-unit franchise agreement with a new franchise partner, and the first location is anticipated to open June of 2012 in Winnipeg, Manitoba.

To summarize, while the economy continues to provide challenges, we remain nimble in the present, while making, what we believe to be, the best decisions for the long term. I am proud of our operations team, franchise partners, suppliers, and support team members for all that they do to make us stronger and well-positioned for the future.

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 $38.9 million and net income of $1.6 million, or $0.19 cents per diluted share for the third quarter of 2011. This compares to revenue of $38.7 million and net income of $1.5 million, or $0.17 cents per diluted share for the prior year’s third quarter.

Our restaurant sales reflect the addition of two new-company owned restaurants in Bel Air, Maryland and Falls Church, Virginia, which opened August of 2010 and 2011, respectively. These increases were offset by the comparable sales decrease of 0.1 percent. Comparable sales for the quarter reflected the negative impact from weather-related events on the East coast equal to approximately 70 basis points, and also included a weighted average price increase of approximately 3.4 percent.

As a breakdown of the third quarter comparable sales, on a weighted basis, dine-in represented a decline of 1.9 percent, almost completely offset by increased off premise sales of 1.8 percent.

For the third quarter of fiscal 2011, off-premise sales were 34.1 percent of total net sales, with catering representing 13.2 percent and To-Go representing 20.9 percent. This compares to off-premise sales of 32.1 percent for the prior year’s third quarter.

Our per-person average for the third quarter of fiscal 2011 was $15.39 compared to $14.74 for the same period in fiscal 2010 primarily reflecting the price increase and the decline in dine-in traffic. The breakdown by day part for the third quarter of 2011 was $13.29 for lunch and $16.64 for dinner.

On the franchise side, the increase in franchise royalties for the quarter reflects a net five additional franchise restaurants year over year, partially offset by a comparable sales decline of 1.0 percent. Ten new franchise-operated restaurants opened since the third 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 third quarter of 2011 and as of today, we have 53 company-owned restaurants and 131 franchise-operated restaurants for a system-wide total of 184 restaurants in 37 states. During the quarter, one company-owned restaurant opened in Falls Church, Virginia, and two franchise-operated restaurants opened in Erie, Pennsylvania and Portland, Oregon.

By comparison, at the end of the 2010 third quarter, we had 53 company-owned restaurants and 126 franchise-operated restaurants for a system-wide total of 179 restaurants in 36 states.

I will now take a few moments to review the expenses for the quarter.

Our food and beverage costs for the third quarter of fiscal 2011 were 30.0 percent of net restaurant sales compared to 29.7 percent for the same period in fiscal 2010. This increase primarily reflects the impact on food and liquor margins due to the special promotional pricing during the Hog Days of Summer LTO related to ribs, wings, and beer.

Approximately 90 percent of our food and non-alcoholic beverage purchases are on contract now, and pork, chicken, and brisket represent approximately 55 percent of total purchases.

To close out our forecast for the year, as a reminder, we are protected on our pork and chicken contracts throughout 2011, at a year over year price increase of approximately 2.3 percent and 4.9 percent, respectively.

Our brisket contract extends throughout 2011 at a net cost increase of 4.9 percent over fiscal 2010’s pricing.

Lastly, we anticipate an approximate 2.5 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 batter.

In order to mitigate the cost pressures, we took price twice during fiscal 2011 equating to weighted average price of approximately 2.6 percent for 2011. We continue to identify strategies to combat the rising cost environment, including optimizing our freight distribution network, taking advantage of negotiated early-pay discounts with our food distributor and leveraging our secondary supplier program for key items on our menu. These strategies have helped us partially offset market conditions in fiscal 2011, and will help reduce cost pressures for the future.

Due to some recently added fourth quarter marketing promotions, which carry an increased level of discounting, and higher commodity prices relating to our side items, we are updating our previous guidance and now anticipate an approximate 15 – 20 basis point increase in our food and beverage costs, as a percent of net sales, year over year.

Due to the volatility in the market, we cannot give firm guidance with regard to several of our commodities. We have, however, locked down pork which is approximately 35 percent of our total contracted purchases. As a reminder, for the past two years we’ve been able to mitigate the impact from rising pork prices, by effectively blending and extending our pork contracts. In late 2011, we made the decision not to blend and extend for 2012. As such, we recently locked in 2012 pricing and anticipate an approximate 20.5 percent price increase on an annualized basis, over fiscal 2011’s pricing. While this price increase is significant, it was the right decision, as our contract pricing continues to be favorable to the market at this time. We remain nimble, however, and should we see pork prices soften in 2012, we will aggressively pursue a strategy of blending and extending our pork contracts with fiscal 2013.

As mentioned, for other products such as chicken, brisket and several of our key side items, we are actively negotiating our contracts for fiscal 2012. We will give you a more definitive update on the next call, but with all that we know today, at this time we are projecting a 5 to 7 percent, year over year increase in contracted food and beverage costs.

Please know that we will be aggressively trying to offset these price increases, where possible, by continuing our 2011 cost savings initiatives, such as optimizing our distribution network and maximizing freight savings.

For the third quarter of fiscal 2011, labor and benefits, as a percentage of net restaurant sales, were 30 basis points favorable to the prior year primarily due to lower medical claims, year over year.

We are updating our previous guidance and now expect labor and benefits, as a percent of restaurant sales, to be approximately 25 – 30 basis points lower than fiscal 2010’s percentage. This decrease is due to a lower than anticipated medical claims experience and operating below our full manager matrix.

Operating expenses for the third quarter of fiscal 2011 were 27.8 percent compared to 27.6 percent for fiscal 2010. This year over year increase was primarily related to higher supply, advertising and R&M costs partially offset by lower utility costs.

During the fourth quarter we’ve reallocated our marking dollars, and as such, for fiscal 2011, advertising expense will now be approximately 3.3 percent of net sales, including a 0.75 percent contribution to the National Ad Fund. We are confident that we will be able to accomplish our marketing objectives while still achieving these cost savings.

We affirm our previous guidance and still anticipate operating expenses, as a percentage of net sales, to be approximately 45 – 50 basis points higher than 2010’s percentage.

Our G&A expenses, as a percentage of total revenue, for the third quarter of fiscal 2011 were 10.3 percent compared to 10.4 percent for the prior year’s third quarter.

Excluding stock-based compensation and board of director cash compensation, our G&A expenses as a percentage of total revenue would have been 9.2 percent for the third quarter of fiscal 2011 compared with 9.6 percent for the comparable period of fiscal 2010.

For the third quarter, stock-based compensation and board of director cash compensation expense was approximately $427,000 compared with $325,000 for the third quarter of 2010, due to a higher stock price at the time of grant 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 flat to 2010’s percentage due to several cost savings initiatives.

During the third quarter we had approximately $237,000 of pre-opening expenses compared to $219,000 during the third quarter of 2010. As previously mentioned, we opened a company-owned restaurant in Falls Church, VA during the third quarter. During the fourth quarter we will open another company-owned restaurant in Eden Prairie, MN. We now anticipate pre-opening expenses for 2011 to be approximately $436,000, including pre-opening rent, for the two restaurants just mentioned.

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 third quarter of 2011 was approximately $1.7 million.

We ended the quarter with a balance of $10.0 million on our revolving line of credit, compared to $13.6 million for the comparable quarter of fiscal 2010, and compared with $13.0 million at yearend. Additionally, we were in compliance with all covenants. As of today, we currently have a balance of $[10.7] million on our line of credit.

During the 2011 year to date period, we generated $8.5 million in cash from operations compared to $9.0 million for the prior year’s third quarter.

We spent approximately $3.4 million on capital expenditures primarily for the construction of one new company-owned 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 nine months of fiscal 2011, we used approximately $3.1 million to repurchase approximately 306,100 shares at an average price of $10.15, excluding commissions. To date, we have repurchased approximately 480,230 shares of our current million share authorization for approximately $4.9 million at an average price of $10.21, excluding commissions.

During the quarter, we used our cash to invest in new and existing restaurants, to pay down debt, and to continue our share repurchase program. As we finish out fiscal 2011, and look to 2012, as always, we will continue to evaluate the best uses for our cash.

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 (Closing Comments)

In summary, we are working on the right things. We continue to manage our business for the long-term, and we continue to invest prudently and strategically for the future. Thank you for your time today, and as always, please DO let us know when you’re in one of our restaurants. This concludes our call.

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