Famous Dave's of America, Inc. (NASDAQ:DAVE)
Q1 2016 Earnings Conference Call
May 16, 2016 4:30 PM ET
Dexter Newman - Chief Financial Officer
Adam Wright - Chief Executive Officer
Mark Rosenkranz - Craig-Hallum Capital Group
Mark Smith - Feltl and Company
Good day, ladies and gentlemen, thank you for standing by. Welcome to the Famous Dave’s First Quarter Fiscal 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this call is being recorded for playback and will be available for replay for seven days.
I would now like to turn the floor over to Dexter Newman, Chief Financial Officer for Famous Dave’s. Sir, the floor is yours.
Thank you and good afternoon, everyone. Joining me on the call today is Adam Wright, our CEO. By now you should have access to our first fiscal quarter 2016 earnings release. This afternoon’s conference call must be considered in conjunction with the earnings release we issued this afternoon. It can be found on our website at www.famousdaves.com in the Investor Relations section.
Today’s release and conference call both contain non-GAAP financial measures that exclude the impact of certain business events. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons, which should not be considered superior to, as a substitute for, and should be read in conjunction with the GAAP financial measures for the period. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful can be found in this afternoon’s earnings release.
Today’s earnings release and conference call also include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are not guarantees of future performance and therefore you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ from forward-looking statements. Some of these risks are mentioned in our earnings release, others are discussed in our SEC filings, which are available at www.sec.gov.
With that, I would now like to turn the call over to Adam Wright. Adam?
Good afternoon, everyone, and thank you for joining us. I’d like to begin today with an update on a few recent announcements. Next, I’ll provide an overview of our first quarter results and our key priorities for the remainder of fiscal 2016, then I’ll turn the call over to Dexter, our new CFO to provide further details.
But before we get started, I’d like to officially introduce Dexter to all of you. As many of you know, Dexter joined us after the end of the quarter. His expanded role includes leadership of our finance, information technology, and supply chain operations. He joined after most recently serving as a divisional Chief Financial Officer of Bloomin’ Brands.
Prior to Bloomin’ Brands, Dexter worked in leadership roles across Best Buy in finance, treasury, international and strategy, most recently serving as a CFO of its private brands in Global Sourcing division. Given the breadth of his experience, he has immediately contributed to our transformation and is an outstanding addition to the team. I look forward to you all having chance to meet him soon.
With Dexter’s addition, along with that of our new CMO, Alfredo Martel; and COO, Abe Ruiz, the company now has the right team in place to relentlessly focus on our near-term priorities and build the foundation for the businesses long-term sustainable success.
Now on to a few updates.
First, you’ll recall that on February 2, we successfully opened our first restaurant outside of North America in Abu Dhabi. Our Founder, Dave Anderson and I attended the opening and it is a beautiful restaurant that opened with strong sales and guest reviews. Our UAE partner TABLEZ, has signed a four restaurant development deal with us and we look forward to them opening additional restaurants in Dubai later this year.
Second, during the quarter, we signed a Three-Unit Area Development Agreement for Charlotte, North Carolina with the new franchisee and our first restaurant is expected to open in mid-2017.
Third, the company re-franchised seven restaurants in Addison, Algonquin, Bolingbrook, Evergreen Park, North Riverside, Orland Park, and Oswego, Illinois. The core tenet of our corporate strategy is to better serve our franchisees and re-franchising this market allow us to add few restaurants under our control.
Operating few restaurants allows us to improve our focus on certain franchisees in our existing restaurant base. Our franchise partner has agreed as part of the transaction to invest in existing restaurants and has also signed a development agreement to the entire market. We anticipate that sales will grow under his leadership, both from existing and new unit growth.
Now on to the quarter. Today, we are reporting our first quarter financial results in line with trends experienced over the past several quarters. Famous Dave’s financial performance during the quarter was unsatisfactory. With our new leadership team now in place, we’re laser focused on improving performance and share the Board’s sense of urgency. While we’re confident and focused on a refreshed direction of the company, that changes will take time in effect in order to win back guests, while at the same time acquire new guests.
Some of our unsatisfactory performance can be attributed to the prolonged effect of not honoring the roots of the brand, some to our close managerial control of our marketing spend during the quarter in anticipation of new leadership and some to lapping changes made in Q1 of last year to our restaurant that we’re not received well by our guests.
Let me be clear. We are determined to turnaround the performance of the company. As such, we have four near-term priorities that we’re focused on as part of the transformation, including number one, revitalizing sales and traffic by putting the guest at the center of what we do. This involves addressing their needs and providing superior value to them.
Number two, reducing costs, with a primary emphasis on lowering our food and labor costs. We plan on achieving these increased operating efficiencies by minimizing food, waste, menu simplification, labor scheduling, lean kitchen initiatives, and supply chain efficiencies.
Number three, elevating organizational effectiveness, which places importance on enabling a culture of accountability via data-driven decisions, stronger processes, clear roles and responsibilities, and effective communication.
And finally, number four, rebuilding culture, which will return us to better serving our guests and enhance the collaboration with and service to our franchisees, which importantly includes new franchisee unit growth with improved design and efficiencies that provide an excellent investment propositions to our franchisees. We’ve made significant progress on this front, but we are by no means declaring victory, we’re very excited about the future of Famous Dave’s.
As a reminder, our Founder, Famous Dave Anderson continues his active engagement on the further enhancement of our food and culture and is also back competing in barbecue competitions will be featured on National TV later this year. We are confident that with Dave Anderson’s guidance on food, innovation and vision, we will have some winning recipes for success.
We do not believe that the rate of decline that Famous Dave’s experience in the first quarter can be extrapolated in anyway. We have not been at a standstill, there were many positive developments in the quarter that are critical enablers to reposition the company for the long-term sustainable success, such as a relentless focus on driving guest satisfaction. I previously discussed return on Famous Dave’s through its roots and have taken actions, including the reversal of reductions in portion sizes, the return of iconic menu items, and the reversion to guests and employee favor uniforms to name a few.
While the significant actions have yet – have not yet translated into increased comparable store sales, over the past quarters, we have continued to see guest satisfaction scores meaningfully improved. Our guest satisfaction scores were up a 11.3% for the period ending March 2016 versus the period immediately before the menu and guest experience changes. This significant improvement in brand health suggests that we are on track to restore this brand to growth. Our focus is to now reengage with lapsed users and we’ll re-launch our marketed communication efforts to drive awareness, engage our guests, and increase traffic.
Having added Alfredo during the quarter and Dexter after the quarter, I’m also pleased with the progress we have made with the team in setting a clear direction and are now onto mobilizing our organization to execute around our priorities. We believe the results of our combined effort will lead to growth in comparable store sales and profits, it will just take sometime.
As I always do, I’d like to thank and acknowledge our hardworking team and franchisees, we care deeply about our company and future success and work diligently to move the business forward. I’m confident that with our efforts to rebuild our culture and our unfaltering passion for serving our award-winning barbecue, we are moving the company forward.
Our sole focus on maximizing long-term shareholder value, we remain confident in our company’s long-term growth prospects. And I’d encourage interested investors to review our brief presentation on our website with some additional qualitative information of changes we have made and that we’ve been working on behind the scenes here at the company.
With that, I’ll now like Dexter to provide more detail on the first quarter. Dexter?
Thank you, Adam. I’ll start with a discussion around our sales and profit performance for the quarter versus last year. As a reminder, when I speak to results, I’ll be referring to certain adjusted numbers that exclude certain costs and benefits. Please see the earnings release for reconciliations between non-GAAP metrics on our most comparable U.S. GAAP measures.
We also provide a discussion of the nature of each adjustment. With that in mind, as Adam stated, results in the first quarter were unsatisfactory, highlighted by the comparable sales decline and operating income. Revenue from continuing operations declined 16.7% to $23.5 million from $28.3 million, primarily due to the closure of a company restaurant under refranchising of five additional company-owned restaurants since the end of the first quarter of fiscal 2015, as well as a 7.7% comparable sales decline.
As we further breakdown the comparable sales decline, we saw a 6.4% decline in Dine-in sales and a 1.4% decline in To Go sales during the quarter, partially offset by a 0.1% increase in catering sales.
GAAP diluted earnings per share was $0.02 flat to the prior year and included the impact of approximately $204,000 of net gains related to the sale of the real estate underlying a previously closed restaurant in Richmond, Virginia.
Adjusted earnings per share, which excluded the impact of these nonrecurring gains or charges declined $0.04 to a loss of $0.01 from income of $0.03 in the same quarter in fiscal 2015. This decline was primarily driven by the erosion of restaurant level operating margins and partially offset by savings in G&A expense.
In March, the company re-franchised seven company-owned restaurants in Chicago, Illinois. As a result, the company is reflecting these restaurants as discontinued operations and removing them from its 2016 and 2015 operating results. The net income from discontinued operations net of the taxes was $681,000, or $0.10 per diluted share, and included an approximately $1.2 million recapture of deferred rent credits. This compares to net income of approximately $89,000, or $0.01 per diluted share for the comparable quarter in fiscal 2015.
Now turning to our Franchise business. Royalties defined 3.8% year-over-year to approximately $4.2 million compared to $4.3 million in the first quarter of fiscal 2015, primarily as a result of a comparable sales decline of 6.1%.
During the quarter, one franchise-operated restaurant opened in Abu Dhabi, United Arab Emirates. Seven of the Chicago company-owned restaurants were re-franchised to an existing franchisee and two franchise-operated restaurants closed; one in Simi Valley, California, and the other in Independence, Missouri.
At the end of the first quarter of fiscal 2016 and as of today, we have 37 company-owned restaurants and 141 franchise-operated restaurants for system-wide total of 178 restaurants in 33 states; the Commonwealth of Puerto Rico, Canada, and United Arab Emirates. Overall, we saw 590 basis point decline in restaurant level operating margin on a year-over-year basis, as a result of increased food costs, increased management labor as a result of less open positions and sales deleverage.
Food and beverage costs increased to 31.7% of net restaurant sales, compared to 30.2% for the first quarter of fiscal 2015. This year-over-year cost increase was a result of a shift in product mix and product yield on key proteins and was partially offset by contract deflation. As a reminder, the company has not taken a formal price increase since October 2013.
Labor and benefits as a percentage of net restaurant sales were 36.1%, 250 basis points unfavorable to the comparable period in the first quarter of fiscal 2015, primarily due to the previously mentioned increase in management labor and sales deleverage on fixed labor costs and partially offset by declines in direct labor.
Operating expenses for the first quarter of fiscal 2016 as a percentage of net sales were 30.1%, or 180 basis points unfavorable to the comparable period in fiscal 2015. This increase was primarily related to sales deleverage on fixed operating and occupancy costs and higher supply costs year-over-year, both was partially offset by a decrease in utility and repairs and maintenance expenses.
G&A expense for the first quarter of 2016 was $3.8 million, compared to $4.9 million in the first quarter of 2015. This favorability was due to a decline in core recurring cash G&A spend, and declines in stock-based compensation as a result of executive departures. These savings were partially offset by increased legal fees and sales deleverage.
As a reminder, the first quarter of 2015 included professional fees for brand development, which were not repeated in the first quarter of 2016. Our effective tax rate for the first quarter of fiscal 2016 was 31.7%, reflecting a year-over-year increase in GAAP pre-tax income. This compares to 3.8% during the first quarter of fiscal 2015.
Turning to our balance sheet. We were in compliance with all covenants of the credit agreement for the quarter ended April 3, 2016, except for two financial covenants, consolidated cash flow ratio and a minimum adjusted EBITDA. On May 16, 2016, we entered into a forbearance agreement with Wells Fargo Bank pursuant to which the company agreed to forbear from exercising its rights and remedies under their credit agreement for the 30-day forbearance period that ends June 11, 2016. During the forbearance period, we intent to seek an amendment to or restructuring of the credit agreement.
As of April 3, 2016, the company had $7.6 million in cash and cash equivalents. During the quarter, we generated $1.3 million in cash from operating activities with the first quarter being historically the lowest sales volume quarter. We ended the first quarter with total net debt of approximately $7.7 million. This compares to $15.7 million of net debt as of June 28, 2015, approximately when the company changed its CEO and added new members to its Board of Directors, including a new chairman.
In summary, these first quarter financial – in summary, despite these first quarter financial pressures, the energy in the organization around the four priorities Adam outlined that gets us back to basics is incredible. The actions that we continue to take and now these priorities has given the organization something that they have had not had in a long time, pride in driving toward an outcome and a belief in what is possible.
We are confident that we have ample opportunities to enhance the return on invested capital by increasing the sales they produce and taking out unnecessary or unproductive costs.
I’ve been with Famous Dave’s for five weeks, and I’m excited by the opportunity to turnaround and transform the company and drive the four priorities we highlighted.
Thank you very much for your attention and your support as we move forward.
With that, I’ll now open the call up for questions. Operator?
Thank you. The floor is now open for questions. [Operator Instructions] And our first question comes from Mark Rosenkranz. Mark, please state your question.
Hey, great. Thanks for taking my question. This is Mark in for Alex Furman at Craig-Hallum.
Hey guys. And Dexter, congrats on the new position.
Yes, yes. Real quick is, I was just wondering if you could talk a little about G&A. You mentioned that you’re pursuing a little bit lower year-over-year obviously without professional fees from last year. But is this $3.8 million kind of getting close to where you see a kind of as a run rate going forward, or do you still see some room for improvement in that front?
Yes, we’re not giving any forward projections or guidance. I will say that we’re laser focused on G&A. We highlighted some one-time expenses in the quarter. That said, we’ll continue to be adding some people back to the organization to support Dexter and to support Alfredo. But overall, we believe we have opportunities to continue to reduce G&A going forward.
Okay, great. And then kind of on that same discussion, the food and labor costs, and when you talk about the cost savings, is that kind of more better efficiencies, or are you seeing better cost management, can you just discuss where you see the opportunities for that to improve over time?
I would say that I think you’ve highlighted the bigger opportunity for the organization going forward and we have significant opportunities on both food costs and labor costs to put in place better systems, practices, and controls throughout the organization. And we believe this quarter was more challenges due to – last year we had the smaller portions than we have this year.
We had some events last year that led to significant turnover in the quarter, which we were under understaffed at the managerial position. But going forward, I can assure you, we are laser focused organization on how do we get more efficient kitchen how do we get more better staffing at the restaurant levels to improve our efficiencies.
Sure, and then last question from me if I could. You’ve opened the branches in the Middle East, which is great and you’ve gotten some pretty good response. So anything else you’ve been learning since those have been kind of operating and how the customer views it anything that’s different there versus in North America, just kind of your thoughts on the area so far?
Yes, great question I mean I think obviously we have a different menu there. We have beef ribs, we have lamb, we have chicken, and I think and no alcohol in the menu. So it’s a different mix of what we’re serving, I would say having visited there and visited number of our competitors, the customers love American brands and I think there’s nothing more American to export the barbecue. It’s kind of interesting. We’re going to Endemol next to PF Chang’s, Pizza Hut, which are both U.S. brands of international food.
So I think there is tremendous opportunity as we go forward to create a following and highlight, how authentic an American we are as a company. I think the Dubai store is going to be extremely exciting. It’s in a great location at a new part of the Dubai parks, the Riverland development there and it should be an outstanding addition and I think that there will obviously be some tweaks and learnings, but we’re working with our partner there to make a development success than the success of the first restaurant has had.
Okay, great. Well thanks for taking question guys.
Yes, thank you.
And our next question comes from Mark Smith. Mark, please state your question.
Hey good afternoon guys. First just looking at G&A, with this stock recapture of the $126,000 was that a decrease to G&A expense?
Yes, it was.
Okay, perfect. And then Adam, can you just talk about franchisee relationships maybe profitability franchisees, how are they doing out there today?
Question – good question Mark. We are spending a lot time with our franchisees and improving their relationships. I visited franchisee last Friday, I visited another one a week before and I’m visiting another one later this week. We continue to change the organizational culture to better serve them moving forward. I would say, they’re facing, a lot of the same challenges we are facing in the rest of the industry, which is guest traffic and sales, as well as food costs.
And I think we’re putting in place with the new team, the controls we need on food costs to better improve their businesses, as well as our own, but also with Alfredo and his work with the marketing committee to – and some of the testing we have in process right now around different value as well as hospitality to help improve their business going forward.
We’re not quantifying it and I’m not going to ever get into whether or kind of the makeup of our comp base. But we did have some geographically depressed region to enter the comp base this quarter, which weight on it. And I would also say just – due to some of our franchise locations and some of our own company locations rather played an issue this quarter that we’re not going to elaborate on. But I think they did mask some of the underlying strength within our franchise community.
And then you’ve brought a food cost, can you just give us an update of where you guys are on how much of your core proteins is on contract right now? Maybe when those roll off, or any other insight into your outlook for food costs?
Specifically, as it applies to the 2016 about – I would say about 25% of our food spend is like completely fixed through year-end and approximately 50% fixed through sort of like December.
Okay. And then Adam, this is really a broad question, but can you just speak to – do you feel like results have kind of bottomed out here, you said that you’re not satisfied with the quarter and the comp. Do you feel like you’re down at a bottom, you’re – or do we still have more time where things were tough for another quarter to before we start to see an uptick, and maybe in that, this year or maybe early next year, can you get this back to a flat comp?
Good question. We’ve not given forward projections or guidance. I will say, this is a quarter where we were lapping the significant changes to the restaurant. So think about a year ago guests really and expected the traditional Famous Dave’s experience that I think materially different then – and then they stop coming back.
What I can tell you is, when I look at our data, we’ve recovered our guest satisfaction score significantly and we believe that’s the leading indicator. We believe – and as we go back out, we’ve held back on spending marketing dollar. So we could back more effectively understand the levers of returns on that money being spent, as we start to redeploy that capital, as we go through the year, some of the test we’re doing on value, some of the things we’re doing with respect to guest experience and improving hospitality and service that will start seeing improvements in our sales and also our profits going forward.
And then last question for me, just looking at the Dine-in comp, I know you guys haven’t taken a core menu price increase for quite sometime now. But has there been any shift in ticket on people maybe trading down in the menu, shrinking the ticket a little bit, or your limited time offers or bar promotions or anything that you guys have maybe been testing changed the ticket at all, or is this all just a pure traffic number decline?
Hey, Mark, it’s Dexter. I would say the given – what we saw in the first quarter, I would say, the answer to that is actually, no.
No, it’s not all ticket – no, it’s not all traffic, that’s down?
No, that we haven’t actually seen any further suppression in the ticket declining, if you will.
All right. That is helpful. Thanks, guys.
And that is the last question in queue.
With that, we would like to thank everyone for joining us today and we look forward to updating you on our Q2 results in August.
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 good day.
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