Famous Dave's of America, Inc. (NASDAQ:DAVE)
Q4 2011 Earnings Call
February 16, 2012, 11:00 am EST
Diana Purcel - Chief Financial Officer
Christopher O’Donnell - Chief Executive Officer
Good morning everyone and thank you for joining us for the Famous Dave’s fiscal 2011 fourth 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.
Yesterday after market close, Famous Dave’s reported revenue of $37.5 million and earnings of $0.05 per share for the fourth quarter, including four cents of non-cash charges. For the full year, revenue totaled $154.8 million, and earnings were $0.68 per share including four cents of non-cash charges.
We had a solid fourth quarter of comparable sales growth, with company-owned restaurants up 3.6 percent, and franchise restaurants up 2.1 percent. For the full year, our company-owned restaurants were up 1.5 percent and our franchise-operated restaurants were flat, with over 50% of our franchise restaurants comp positive for the year-to-date timeframe.
The one thing that we learned from this past year is the necessity for us as an organization to remain nimble - and quick - to adapt to changing conditions. Whether impacted by hurricanes or earthquakes, volatile commodity costs or continued fluctuations in consumer confidence—we’ve shown that we can strategically run our business and address whatever obstacles we encounter.
During 2011, we grew as a system, and we evolved as a brand.
I mention growth first, because sometimes people forget that we are a growth concept and we have continued to grow during a timeframe of economic uncertainty. As a matter of fact, since the beginning of 2008, we have opened 48 new locations, including 8 franchise-operated restaurants and 2 company-owned restaurants that opened in 2011. We’ve achieved this growth through single unit agreements and area development agreements with new and existing partners, in addition to continued investments in company-owned locations.
As a matter of fact, one of the two company-owned locations that we opened this past year was a counter-service, fast-casual format—an evolution of some of our original restaurants.
This restaurant, located in Eden Prairie, MN, is a 65 seat “BBQ shack,” – taking us back to the roots of our early days. We’re encouraged by the early results of this location and the guest acceptance of the new format, which gives us the potential to open restaurants faster, with a broader range of real estate options.
During the fourth quarter of 2011 we also opened three new franchise-operated restaurants in Rapid City, SD, Times Square New York, representing a second location, and Springfield, MO.
In terms of brand building efforts, we continually review our menu, seeking to improve it with new, innovative and relevant offerings. We believe that our menu, combined with our limited time offerings, appeals to a diverse audience—whether, a guest is looking for smaller portions, more health-conscious selections or simply more variety. At the end of the day, however, we are committed to retain Famous Dave’s strong brand identity as America’s BBQ restaurant.
Turning to a recap of our fourth quarter and upcoming marketing efforts, we concluded our fall LTO, “Southside Rib Tips”. Our rib tips have always been a core menu item, but we reinvented them, changing the cut and seasoning them with a dry rub and a new Southside Sauce developed by Dave, and paired them with hell-fire pickle chips and pickled red onions. This LTO far surpassed any of our expectations, and received strong recommendations by our servers as well as exceptional acceptance by our guests. This is a product that is not only a great example of R&D innovation, but it offers great value to our guests and provides a positive impact on our margins.
Also during the fourth quarter, and as evidenced by our 3.6% comparable sales increase, we had a strong sales promotion, consisting of a direct mail piece to businesses and consumers, along with a bounce back initiative. While this promotion carried a heavier level of discounts, we were pleased with the increase in guest traffic as well as the increase in net sales.
During the last call, we told you that we would update you on our recent research project, which represents the most comprehensive consumer research we’ve ever done. We have now identified 4 unique segments of guests based on behavior and demographic data, and as a result of this research, we now have the ability to determine the most profitable segment to market to in the future and the best trade areas to build new, or relocate existing, restaurants. We also identified what is important to our guests and frankly, how we measure up in those areas. One of the key findings, however, was that there is a great deal of untapped potential - we have significant room to grow in our target markets to fully reach our defined customer segments. Suffice it to say, there’s a lot of data to sort through, but a key goal for us in 2012, will be to further mine the data and study the findings, and then be able to utilize the information to help guide the strategic direction and evolution of our brand.
Finally, during 2011 we completed the first phase of a very important, system-wide, guest experience initiative. During this phase, we defined how we want our guests to feel when they visit our restaurants - like good friends at a backyard barbeque - and we rolled out extensive training materials to all of our restaurants. In 2012, we will further extend this initiative, with a focus on the sharing of best practices across our system, and through enhancement of our guest feedback systems, which we are calling “Voice of the Guest.” We will be evaluating and investing in new technology that will give our guests a variety of options to provide feedback that we can then incorporate into our guest focus and operational practices.
As you can tell, we are firmly focused on the future. For 2012, four key areas will have our focus and attention:
The first: Growth in new restaurants – both company and franchise.
We believe that we now have all the tools and a variety of options to accelerate our growth.
In 2012 we expect to open up to 15 new restaurants—with 10-12 being franchise locations and 2 to 3 being company locations. Included in these openings will be our first international location, a restaurant in Winnipeg that is expected to open in June.
We have a clear vision for growth, incorporating both the counter service, as well as full-service formats. Our long-term goal is clear: We will grow to 400-500 restaurants domestically, with additional future growth internationally.
Second, concept evolution: in menu, restaurant format, and guest satisfaction.
We will continue to evolve our menu and our concept to meet the needs of our guests, and to remain relevant with our guests. Look for enhancements to existing products, new items, new plate presentations, ala cart items, and exciting limited time offers. For example, we have an LTO starting this week which runs through the first week of April, and features our beer-battered cod as both an entrée and an appetizer. Additionally, as a special for the Lenten season, we will be featuring All-You-Can-Eat beer-battered cod Fridays.
Third: Excellence in core systems and processes with a focus on continuous improvement.
Our founder Dave Anderson has a saying: “Good, better, best, never let it rest…” We live by these words every day as we continue to enhance systems and improve processes for our operators, our support team, and our franchise system.
Fourth: Delivering Shareholder Value.
We believe that if we do all of the items just mentioned, and most importantly, do them successfully, we will not only generate shareholder value, but we will create a long-term, sustainable, enduring brand that we can ALL be proud of.
We have a distinguished concept and a unique brand of high quality BBQ. It’s bold – it’s eclectic – it’s cravable – frankly, it’s better. And just as important, this company was not only built by raving fans, it is tirelessly supported by team members in the restaurants who execute with consistency and deliver great BBQ with a big smile and with gratitude. This frontline team is supported by again, a team of dedicated professionals in our support center, as well as passionate franchise owners and committed vendors. I’ll now turn the call over to Diana for a recap of our financial performance. Diana ?
Thank you, Christopher.
Yesterday, Famous Dave’s reported revenue of $37.5 million and net income of $414,000, or $0.05 cents per diluted share for the fourth quarter of 2011 compared to revenue of $36.2 million and net income of $517,000 or $0.06 cents per diluted share for the fourth quarter of 2010.
For the full fiscal year 2011, revenue was $154.8 million and net income was $5.6 million, or $0.68 cents per diluted share, which includes $0.04 non-cash charges for the impairment of specific restaurant assets. This compares to revenue of $148.3 million and net income of $7.2 million or $0.82 cents per diluted share for 2010, which included a $0.15 non-cash gain per diluted share related to the acquisition of seven restaurants in New York and New Jersey.
Fourth quarter company restaurant comparable sales increased 3.6 percent over 2010, reflecting the positive impact from the direct mail and bounce-back programs and a weighted average price increase of approximately 3.1%. On a weighted basis, dine-in represented 1.3 percent, To-Go accounted for 1.3 percent and catering comprised 1.0 percent.
For the fourth quarter of fiscal 2011, off-premise sales were 33.7 percent of total sales, with catering representing 10.3 percent and To-Go representing 23.4 percent. This compares to off-premise sales of 32.2 percent for the prior year’s fourth quarter.
For the full year, total restaurant sales growth reflected the full year impact of the seven New York and New Jersey restaurants, two new company-owned restaurants, and a comparable sales increase of 1.5 percent which included a weighted average pricing impact of 2.6 percent.
Breaking down the 1.5 percent comparable sales increase, on a weighted basis, while dine-in sales accounted for a decrease of 0.3 percent, this was completely offset by To-Go and catering which accounted for 1.1 percent and 0.7 percent, respectively.
For the full fiscal year, off-premise sales were 32.0 percent of total sales, with catering at 9.9 percent and To-Go at 22.1 percent. This compares to 2010’s off-premise sales of 31.0 percent.
For fiscal 2011, our per-person average was $15.38 compared with an average of $14.82 for 2010. The breakdown by day part for 2011 was $13.39 for lunch and $16.62 for dinner. The increase year over year primarily reflects the price increases just mentioned, and an annual decline in dine-in traffic.
On the franchise side, the increase in franchise royalties reflects a net increase of three franchise restaurants year over year and comparable sales results that were flat. Eight new franchise restaurants opened in fiscal 2011 and five restaurants closed. Three new franchise restaurants opened during the fourth quarter; Rapid City, South Dakota, New York City, New York, and Springfield, Missouri. One franchise-operated restaurant closed in Chestnut, Pennsylvania.
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, number of restaurants in the comparable sales base and our complete fourth quarter financial results.
At the end of the 2011 fourth quarter, we had 54 company-owned restaurants and 133 franchise-operated restaurants for a system-wide total of 187 restaurants in 37 states. By comparison, at the end of the 2010 fourth quarter, we had 52 company-owned restaurants and 130 franchise-operated restaurants for a system-wide total of 182 restaurants in 37 states. During 2012, we expect to add up to 15 new restaurants, including two to three company-owned restaurants.
Subsequent to year end, a franchise-operated restaurant closed in Manchester, New Hampshire and as of today, we have 54 company-owned restaurants and 132 franchise-operated restaurants for a system-wide total of 186 restaurants in 36 states.
I will now take a few moments to review the costs and expenses for the year and to provide additional guidance as to what we’re seeing for 2012:
As you’re comparing our actual results to our third quarter guidance, please note that the explanation of each line will be consistent. While the fourth quarter sales promotion was successful in terms of comparable sales growth and increased guest counts, the number of redemptions and average check were lower than originally anticipated, thus we did not see the full sales leverage that was expected.
Our food and beverage costs for fiscal 2011 were 29.8 percent of net restaurant sales compared to 29.5 percent for fiscal 2010. This increase is primarily due to expected commodity cost increases and higher levels of discounting during the fourth quarter of 2011 as compared to prior year.
Let me take a few moments to give you a glimpse into what we are seeing as it relates to 2012 food and beverage costs.
As a reminder, we made the decision to not blend and extend our pork contract in 2011. As such; we were able to keep pork costs lower than the pork market. During the latter half of 2011, we locked in our pork contract for 2012, and as a result, we will see an approximate 20.5 percent increase year over year in pork costs. While this increase is certainly significant, it’s important to mention that locking in at that time was a good decision, as our contract pricing continues to be favorable to the market at this time. We remain nimble and watch the markets very closely, however, and should we see pork prices soften, we will aggressively pursue a strategy of blending and extending our pork contracts later in fiscal 2012 into fiscal 2013.
Our major chicken contract is firm through June of 2012. To control and minimize poultry costs, we will optimize the way we source, ship, and purchase these products. With this strategic management of our chicken products we anticipate a price decrease of approximately 4.8 percent from fiscal 2011’s pricing. And while there’s a lot of discussion about chicken wing prices right now our pricing is down year over year, and for us chicken wings only represent 0.7 percent of our total food purchases.
Our brisket contract extends through April of 2012 at a net cost increase of 7.9 percent from fiscal 2011’s pricing. Due to current market pricing, which is at record highs, we will continue to execute short term contracts until we can lock in acceptable long-term pricing.
Lastly, we anticipate an approximate 7.2 percent year over year net decrease for the remainder of our contracts, including hamburger, seafood, and side items such as, corn, beans, apples and corn muffin mix, as well as other key items, such as, our sauces, seasonings, cooking oil, and produce.
With all indications continuing to point to rising commodity prices across the industry, we plan on mitigating these price increases with a number of strategies:
We recently revised our menu and took price on selected menu items equal to approximately 1.5 percent. As such, our first quarter results will reflect approximately 3.1 percent of weighted average price, and we will determine later in the year whether or not we will take additional price in 2012. We will also continue to focus on the optimization of our distribution network to reduce freight costs, and will continue to evaluate and manage portion sizes for certain side items. Finally, we will continue our efforts to strategically manage limited time offerings and their potential to positively impact menu mix and margin.
As a result of all of the initiatives just mentioned, and although not without its challenges, we are striving for an approximate 10 – 15 basis point decrease in our food and beverage costs as a percent of sales year over year. Additionally, to reduce pressure on our margins, we are currently anticipating a lower of level of discounting in fiscal 2012.
For fiscal 2011, labor and benefits as a percentage of net restaurant sales were flat to fiscal 2010’s percentage. This increase from our previous guidance was due to additional staffing required to support the fourth quarter programs, and was partially offset by savings from operating below our full manager matrix and a favorable healthcare claims experience.
For 2012, we expect labor and benefits costs as a percentage of sales, to be 20 to 25 basis points lower than fiscal 2011’s percentage. This decrease is primarily due to anticipated sales leverage due to a lower level of discounts year over year, partially offset by operating closer to our full manager matrix.
Operating expenses for fiscal 2011 were 28.0 percent compared to 27.5 percent for fiscal 2010. This year over year increase was primarily related to increased occupancy costs related to the full year impact of the New York and New Jersey restaurants, as well higher supply and advertising costs. These increases were partially offset by lower utility costs. For fiscal 2011, advertising, as a percentage of sales, was approximately 3.4 percent compared to 3.2 percent for the prior year, primarily due to the increase in the Marketing Ad Fund contribution from 0.5 for 2010 percent to 0.75 percent for 2011.
For 2012, the Company has increased the Marketing Ad Fund contribution system-wide, to 1.0 percent from 0.75 percent for fiscal 2011, and we expect that, advertising expense will be approximately 3.0 percent of net sales, including the contribution to the Marketing Ad Fund. We intend to achieve our objectives with a lower marketing spend, by enhancing the use of social media and viral marketing tools, and utilizing more targeted marketing initiatives based on the results of the research conducted in 2011. Collectively, these strategies should allow us to optimize the dollars spent while still achieving our advertising objectives.
We are projecting operating expenses as a percentage of net sales for fiscal 2012 to be approximately 30 – 35 basis points lower than 2011’s percentage. The majority of this decline relates to the decrease in advertising expense.
Our G&A expenses, as a percentage of total revenue, for fiscal 2011 was 10.6 percent compared to 10.9 percent in fiscal 2010. This decrease was primarily due to revenue leverage and lower bonus attainment partially offset by higher stock-based and board of director cash compensation.
Excluding stock-based compensation and board of director cash compensation, our G&A expenses as a percentage of total revenue would have been 9.6 percent for fiscal 2011 compared with 10.0 percent for 2010.
For the full year, stock-based compensation and board of director cash compensation expense was approximately $1.7 million compared with $1.3 million in fiscal 2010. The increase in this expense category is primarily due to a higher stock price year over year. We anticipate stock-based compensation and board of director cash compensation to be approximately $1.9 million for fiscal 2012. This increase was primarily due to a higher average share price for the performance share programs vesting in fiscal 2012 compared to the programs that vested in fiscal 2011.
For 2012, we expect G&A expenses as a percentage of revenue, to be approximately 50 - 55 basis points unfavorable to 2011’s percentage, reflecting the increased stock-based and board of director cash compensation and full accrual for bonus achievement,
In 2011, we had $412,000 of pre-opening expenses compared to $300,000 in 2010. Pre-opening costs for 2012 are estimated to be approximately $797,000 for the opening of two to three company-owned restaurants as well as some pre-opening expenses for an undetermined company-owned restaurant to open in early 2013.
For fiscal 2011, interest expense decreased year over year due to lower average debt balances and for 2012, we expect interest expense to be essentially flat as a percentage of revenue.
Lastly, our effective tax rate was 33.2 percent for fiscal 2011. This rate ended up being lower than our last guidance due to the increased impact that employee related tax credits combined with the higher level of discounting had on the effective rate.
In 2012, we expect a 34.0 percent effective tax rate due to a reduction in the employee related tax credits due to the decrease in discounting year over year and the statutory expiration of certain tax credits.
Now to our balance sheet:
Our unrestricted cash and cash equivalents balance at the end of the fourth quarter of 2011 was approximately $1.1 million.
We ended the year with a balance of $11.0 million on our revolving line of credit and were in compliance with all of the covenants on our credit facility. As of today, we currently have a balance of $13.1 million on our line of credit.
We generated $11.9 million in cash from operations in fiscal 2011 compared to $13.9 million for the prior year. This decrease is primarily related to optimizing our vendor payments for quicker payment terms to realize discounts.
Of the cash generation, we used approximately $5.5 million for capital expenditures for the construction of two new company-owned restaurants, continued investment in, and remodeling projects for, our existing restaurants, and various corporate infrastructure projects.
We expect total 2012 capital expenditures to be approximately $6.9 million, primarily reflecting three new restaurants opening, continued investments in our existing restaurants, including several significant remodeling projects, and continued investments in corporate infrastructure systems.
During fiscal 2011, we also used approximately $5.8 million to repurchase approximately 610,000 shares at an average price of $9.42, excluding commissions.
We continue to have three main uses for our capital. First and foremost, grow our system. Secondarily, we will continue to repurchase our common stock and reduce our debt levels.
Christopher will have a few closing comments, but at this point we would like to take your questions.
Christopher O’Donnell (Closing comments)
In summary, we enter 2012 with both passion and purpose. Passion speaks to what we do and how we do it – our food quality, adherence to standards of excellence, respect for all of our stakeholders and a focus on results. Purpose speaks to who we are and what we stand for – our commitment to the communities in which we serve, loyalty to the brand, reverence for our legacy, and an unwavering belief in transparency of disclosure and sound corporate governance.
Famous Dave’s is positioned well to grow and prosper. We have the systems, the formats and the financial strength to meet the challenges and seize the opportunities before us.
Thank you for visiting our restaurants, and as always, we appreciate any feedback on your experience. This concludes our call.
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