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Executives

F. Lane CardwellActing Chief Executive Officer

Diana Purcel - Chief Financial Officer

Analysts

Unknown Analyst – Dougherty and Company

Mark Smith – Feltl and Company

Robert Reilly – Piper Jaffray

Kenneth Smith – Lennox Equity Research

Famous Dave’s Inc. (DAVE) Q4 2007 Earnings Call February 28, 2008 11:00 AM ET

Operator

Good morning. My name is Darla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Famous Dave’s Fourth Quarter 2007 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press * then the number 1 on your telephone keypad. To withdraw your question, press the pound key.

Before we begin this conference call, call participants are reminded 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 make their development commitment, changes in local or national economic conditions, availability of financing, and other risks detailed from time to time in the company's SEC reports. I would now like to turn the call over to Diana Purcel, CFO of Famous Dave’s.

Diana Purcel

Good morning everyone, and thank you for joining us for the Famous Dave’s Fiscal 2007 Fourth Quarter Conference Call. I am Diana Purcel, chief financial officer, and I am pleased to have with me today Lane Cardwell, our interim chief executive officer. Our earnings release which contains the financial and other statistical information being discussed this morning was issued yesterday afternoon after market closed 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 7 days. Now, I’d like to introduce Lane Cardwell to begin our discussion.

Lane Cardwell

Good morning everyone, and thank you for joining us. As Diana had indicated, since December as part of our previously adopted succession plan, I have been serving as interim CEO for this great brand. I have spoken with many of you over the past couple of months, but for those of you I have not spoken with, I have been on the board of Famous Dave’s for 4 years. I am also on four other restaurant boards; one public, P.F. Chang’s, and 3 private. I was given this assignment because I am the restaurant person on the board. I have been in the restaurant industry for 30 years and worked most of my career in two Norman Brinker-led restaurant companies. Between my 10 years at Steak & Ale and my 11 years at Brinker International, I have worked on 25 different restaurant concepts and had been involved with the opening of over 1000 restaurants. That is about me, lets talk about Dave.

Our restaurant operations team delivered solid results in the fourth quarter, with same-store sales for company-owned restaurants up 3.3% and a full-year same-store sales increase of 2.1%. This is an extremely gratifying result in light of the very difficult economic conditions facing the casual dine-in sector.

In my remarks today, I am going to talk about 3 things. The first is our quarterly results and the outlook for the business; second, our plans for new restaurants and franchise operations; and third, I will provide an update on our search for a permanent CEO. Before we get going on that, I’d like to make a quick comment about the structure of today’s call. Over the past couple of years, our conference calls have been very detailed in both the amount of marketing-related cover that we have provided and the financial metrics we’ve discussed. This quarter, I will be focusing more on the broad strategic direction for the company. As for the financials, we have tried to provide more of the details of our business in our press release, and we will provide additional details in our SEC filings. In our prepared remarks, we are going to provide you with more context and insight into the numbers. In a nutshell, same overall quantitative information, but a bit of a shift in focus and, we hope, an improvement in the quality and nature of our information.

Now on to an overview of the business: In spite of all the bad news you have been hearing from the retail and the casual dine-in sectors, Famous Dave’s fourth quarter results were very good in our view. First, we are pleased that our guests continue to recognize the value proposition we offer. Genuine award-winning barbecue, ample portions cooked from scratch every day by dedicated, highly motivated, and passionate restaurant professionals. We added over 30 more “best of” awards during 2007 bringing our total to over 300 awards for best of ribs, best of sauce, best of barbecue, you name it. The states that we have won in are as numerous as the awards we have won. This points out once again that there is no regionality to great barbecue.

From a business perspective, we are also pleased that even in these more challenging times, we have been able to deliver solid results to our shareholders. Our model which capitalizes on a variety of revenue sources—dine-in, to-go, catering, and retail sales—enables us to potentially capture more wallet share than many of our competitors in the casual dine-in segment. This was clearly demonstrated in 2007 as we enjoyed great growth in same-store sales for our company-owned restaurants driven by increases in dine-in as well as to-go and catering.

During 2007, to-go and catering represented 33.5% of our sales, with both categories growing as compared to 32.6% for fiscal 2006. Our industry-leading off-premise sales continue to be a point of differentiation, a source of opportunity, and a focus for us system wide. We have continued to refine and improve our menu offerings. During the quarter, we completed our most successful limited-time offer promotions to date. The fall promotion of our Memphis-style dry rub baby-back ribs and our fall sandwich offering called Barbecue Buddies which feature 4 mini-sandwiches with 4 different barbecue items; Georgia chopped pork, Texas beef brisket, pulled chicken barbecue, and hotlink sausage. These two menu items performed so well that they will be introduced as permanent items when we update our menu in June 2008. Our spring promotion is in full swing and features barbecue shrimp. Grilled skewers of shrimp enhanced by our Rich and Sassy sauce are being featured as an appetizer, a platter, or as a combo with ribs or with pork and brisket. Additionally, if you want just a sample, you will be able to add a skewer to your meal for a nominal charge. Initial results are extremely encouraging as sales to date have far out performed the great results we saw during the initial test period.

You can’t read a report or release without seeing a mention of food cost pressures these days. Like the rest of the casual dine-in sector, we are closely watching food costs. In December, we took a 2% menu price increase. When we last spoke with you, we indicated that we believe this price increase would essentially offset food cost increases for the first half of ’08. However, cost pressures in some of our recent contracts associated with corn and grains such as muffin batter, oil, and bread products in particular, will impact our first half food costs more than was originally anticipated. A recently negotiated contract for chicken which is locked through September 2008 increased approximately 12% year over year. We have most of our major contracts negotiated through the end of the year. As we shared with you in the earlier report, which is approximately 30% of our purchases was contracted through December 2008 at a 1% increase. Our beef patty contract is essentially flat to prior year, and while we would normally wait until after St. Patrick’s Day to lock in brisket, due to some relief in this particular market, we locked through July at a price essentially equal to 2007. All in all, we are now expecting that food costs as a percentage of sales will be 30 to 40 basis points higher for the first 5 months of 2008 over 2007’s percentage for the same timeframe. For the remainder of the year, we expect to minimize the impact from these higher costs by offering LTOs and bundling products with higher margins in addition to taking a price increase in June. Economic trends and our own customer trends through the spring will help us to gauge what level of increase in June we will take to mitigate these unexpected cost pressures. If our current strong traffic trends continue, we will feel more confident about our ability to hold these costs in check.

Moving on to development, during the fourth quarter, we opened 11 new Famous Dave’s restaurants and closed two. We ended the year with a total of 164 restaurants including 44 company-owned restaurants and 120 franchise-operated restaurants. For the year, we opened 22 Famous Dave’s, closed 3, sold 1 restaurant to a franchise partner as a seed restaurant for his respected market. The total number of 22 openings included 4 company-owned restaurants that opened in the third and fourth quarters, and as anticipated and as previously discussed, due to preconstruction permitting and zoning delays, our fifth restaurant expected to open in 2007 in Alexandria, Virginia, recently opened—famously I might add on February the 11th. During the fourth quarter, we entered into an area development agreement with 7 new restaurants in the New York Metro area and Westchester County. We are really excited about this partnership which will include a prominent first location in Times Square. Today, we have 141 restaurants in the development pipeline. When we last disclosed this number to you, this number was 163. The difference reflects the addition of the 7 units just mentioned and the opening of 8 franchise-operated restaurants during the fourth quarter and 2 during the first quarter of 2008. Additionally, per mutual agreement, we took back some territory from 2 franchisees during the fourth quarter equating to 19 restaurants in total.

Given the longer development timelines that we are seeing across the country as well as the current softness in the economy, we are tempering our guidance on new restaurant openings for 2008 to a range of 20 to 25 from a previous range of 25 to 30 including 5 to 6 company-owned restaurants. We anticipate that approximately 8 of these will open in the first half of the year, so our pace of openings will clearly be backend loaded.

Finally, I wanted to address an area of continuing concern, and that is the declining same-store sales for our franchise restaurants. As you saw from our press release, same-store sales at our franchise base declined 6.8% for the fourth quarter and 4% year over year. Much of the decline can be explained by weak regional economies, restaurants in 6 states accounted for 70% of the fourth quarter decline of our franchise counts. This fourth quarter comp decline also reflects a number of franchise restaurants entering the comparable sales base that are still impacted by what we consider to be longer than normal honeymoon periods. Many of our restaurants open at much higher levels than other casual dine-in concepts and are still settling in even after 12 months. To give you an order of magnitude on this, slicing the results differently than on the basis of geography, almost half of the decline reflects new restaurants coming into the comparable sales base in which their 18-month sales number is compared to their 6-month sales number. Regardless, any decline is not acceptable to us, and we are actively working to help restore our franchise restaurant base to a positive growth curve. We continue to share with our franchise partners what we have done to deliver comparable sales growth, and they are listening. As a company, we offer a variety of programs to help the system succeed, and while no single initiative is necessarily the secret to success, the combination of all of these programs can in fact have a positive impact on sales and sales growth.

There is a variety of programs that we are highlighting in 2008 such as Fishbowl which is our opt-in email loyalty program. We are proud of the fact that we are approaching 600 email addresses in the Fishbowl database. In addition, we continue to stress the consistent use and evaluation of the IVR program to highlight operational opportunities. This is our guest feedback program that many other casual dine-in companies use. In 2008, we will be establishing a marketing menu council that will include some of our franchisees. Also new to 2008 will be bundle offerings of lower cost yet higher margin items to drive our sales, media outreach, and direct mail opportunities in specific markets. During the second quarter of 2007, our company-owned restaurants benefited greatly from a direct mail piece which was aimed at driving graduation catering sales, and it delivered. Consequently this year, we will be sending a similar direct mail piece on behalf of the entire system to all households with a graduating student to again drive catering sales during the heights of barbecue season.

Let me talk a little bit about the CEO search and the qualities and background of the person that we are looking for. First off, our CEO search remains very active. Today, we have identified a strong pool of candidates and are well into the interview process. Keep in mind that this company is not in the same place that it was almost 5 years ago. We have removed the old financial baggage, began opening company stores, and brought in a good number of experienced franchise partners to help bring Famous Dave’s to the rest of the country. We’re an attractive growth stock, although currently at on-sale prices and an attractive growth company. Bottom line, this is an excellent opportunity for the right person. The background and qualification that we gave the search firm are 2 pages long. Cutting through all of the niceties, it says that we want someone with casual dine-in experience, franchise experience, leadership experience, restaurant development experience, and personal qualities that would allow the person to represent us among the investment community and among our franchise partners. We want someone who has a learned a lot of the lessons that this industry is eager to teach on someone else’s tuition payment. We will keep you posted on our progress, but it is important that we fill this position as soon as possible, but we also want to get the very best candidate for our company. In the end, it will take as long as it takes to get the right person.

With that, I will turn the call over to Diana for a recap of our financial performance.

Diana Purcel

Thank you, Lane. Revenue for the fourth quarter of fiscal 2007 totalled approximately $31.4 million, a 12.3% increase over revenue of approximately $28 million for the fourth quarter of fiscal 2006, reflecting a 13.1% increase in net restaurant sales and a 10.1% increase in franchise royalty revenue. Restaurant sales growth reflects the combination of new restaurant growth and a comparable sales increase of 3.3%. As previously mentioned, we took a menu price increase of approximately 1% in June and approximately 2% in December. The increase in franchise royalties reflect the net 15 new franchise restaurants which have opened since the fourth quarter of 2007. For the full year, total revenue increased 7.9% over 2006, reflecting a 7.8% increase in net restaurant sales and a 13.9% increase in franchise royalty revenue. Restaurant sales for the year increased due to new restaurant growth are comparable to sales increase of 2.1% and a weighted average price increases of approximately 1.5%.

During 2007, catering was 10.4% of sales and to-go was 23.1% of sales for combined off-premise total of 33.5% as compared to off-premise sales of 32.6% for 2006. The increase in franchise royalties again is due to the annualization of a net 15 new franchise-operated restaurants since the fourth quarter of 2007. Comparable sales for franchise-operated restaurants for the fourth quarter of 2007 decreased 6.8% compared to a decrease of 1.5% for the fourth quarter of 2006. Comparable sales for franchise-operated restaurants for the full year decreased 4% compared to a decrease of 1.6% for the full year in 2006. There were 85 franchise-operated restaurants in a comparable sales base for the fourth quarter, and there were 68 franchise-operated restaurants in a comparable sales base for fiscal 2007.

Our new restaurants continued to open strong. As Lane had indicated, the decline in franchise comparable sales partially reflects the year over year comparison of higher volume restaurants still in their honeymoon period—a honeymoon period which we believe is longer than traditional casual dine-in. We expect high trial and such a broad reach during our initial months of operation that at the 18-month mark, when casual dine-in is settling into a sustainable level of sales, we are still a good 6 months away from being able to claim them. We want to be able to share our business with you in a meaningful way, and as such, we have elected to adopt a 24-month comparable sales metric and will be reporting this metric along with our previous 18-month calculations during 2008. Beginning in 2009, we will only report the 24-month calculation. To give you an idea as to what this would mean to fiscal 2007, we reported a 6.8% and a 4% decline for our franchise-operated restaurants for the fourth quarter of fiscal year. On a 24-month basis, the fourth quarter decline would have been 4.6% and the full-year decline would have been 3.3%. For our company-owned restaurants, the reported comparable sales of 3.3% and 2.1% for the quarter and year to date timeframe would not have changed.

An additional change that we will be making from a reporting perspective has to do with average weekly sales. While we have consistently reported average weekly sales for our company-owned and franchise locations, sometimes these averages can skew the operations of the underlying business. You’ve heard us speak about the higher level of sales of our newer classes of opening, so in addition to what we have been reporting, beginning in 2008, we will also be reporting average weekly sales for our company-owned and franchise restaurants pre and post fiscal 2005. For 2007, we have reported average weekly sales of $56,729 for a franchise-operated restaurant. This amount reflects average weekly sales of $49,227 for the timeframe prior to 2005, and average weekly sales of $62,446, $64,170, and $74,328 for fiscal years 2005, 2006, and 2007. On the company-owned side, total average weekly sales of $50,385 reflect average weekly sales of $48,051 for the timeframe prior to 2005 and average weekly sale of $67,457 and $75,805 for fiscal years 2006 and 2007.

We remain the category leader in off-premise sale. Catering and to-go had accounted for 33.4% of sales in 2007 compared with 32.6% of sales for 2006. Our per person average was $13.82 for the fourth quarter 2007 and was $13.59 for the full year. The breakdown by date prior to the 2007 fourth quarter was $12.10 for lunch and $15.05 for dinner. Average weekly sales for company-owned restaurants for the fourth quarter fiscal 2007 were $48,887 as compared to average weekly sales of $45,711 for the fourth quarter of 2006. Full year average weekly sales for company-owned restaurants were $50,385 for the current year as compared to average weekly sales of $47,894 for the prior year. The average weekly volume for full-service restaurants was $50,866 for the fourth quarter of 2007, while the average weekly volume for our counter-service restaurants was $36,861.

At the end of 2007, we have 44 company-owned restaurants and 120 franchise-operated restaurants for a total of 164 restaurants in 35 states. In comparison, at the end of 2006, we had 41 company-owned restaurants and 104 franchise-operated restaurants for a system-wide total of 145 restaurants in 35 states. Subsequent to the quarter, we opened in Alexandria, Virginia, a company-owned restaurant; in Bakersville, California, and Kansas City, Missouri, both franchise-operated restaurants. Today, we sit at 167 total restaurants, 45 of them company-owned and 122 of them franchise-operated. As previously mentioned, we now have signed area development agreements for a total of 141 franchise-operated restaurants.

Our net income for the 2007 fourth quarter totaled $800,000 or 8 cents per diluted share, compared with net income of approximately $1.1 million or 10 cents per diluted share for the 2006 fourth quarter. These are all detailed in our press release, but let me quickly run through this quarter’s one-time items, the some of which on a net basis is a positive 2 cents per share. The reversals of bonus and stock-based compensation related to the departure of our CEO contributed 8 cents per share to the quarter. Due to an overage of funds in our national ad fund, we elected to reimburse the system for this overage based on 2007 beverage usage. This rebate contributed 2 cents to the quarters P&L. We took a 3-cent per share impairment charge on our Palatine, Illinois restaurant, and a 3-cent per share write-down for a software development project for which it was determined there was no future value, and finally, we recorded a total of 2 cents for catch up of depreciation on our Florence, Kentucky, and Tulsa, Oklahoma, restaurants. They were previously classified as held for sale and are now classified as held for use.

Full-year net income totaled $6.1 million or 59 cents per diluted share versus $5 million or 46 cents per diluted share in fiscal 2006. In addition to the one-time items just discussed specific to the fourth quarter, two additional items impacted our full-year results. Fiscal 2007 results reflect an accounting adjustment to interest expense of 1 cent related to the current year impact from a prior year accounting correction on a financing lead transaction initiated in 1999. Please note that as a result of this adjustment, our previous reported quarter net income changed minimally, and these revised quarterly results will be included in our 2007 10-K.

Fiscal 2007 results also reflect an effective tax rate of 33.8% compared to a 2006 tax rate of 35.6%. The decline in the rate reflects a multiyear adjustment of a permanent item, the results of a state audit, and a proper reflection of our deferred tax assets. For 2008, we expect an effective rate of 35%. As a reminder, fiscal 2006 included 7 cents per share of non-cash charges as related to the closure of our Streamwood, Illinois restaurant and an impairment charge resulting from the sale of our Mesquite, Texas property in addition to 1 cent per share on the early extinguishment of debt.

As you see from our earnings release which included a breakdown of our prime costs, namely cost of sales and labor as a percentage of sales, as well as food and beverage costs, labor and benefit costs, and restaurant level operating expenses. So I would refer you to the release for all those figures. I will comment briefly on the more meaningful numbers in some of these categories. Food and beverage costs decreased for the fourth quarter and for the full year primarily reflecting the recording of the beverage rebate previously mentioned equal to approximately $350,000. Restaurant labor and benefit costs increased in both fourth quarter and full year 2007 compared to 2006. The increase in the quarter is primarily due to inefficiencies experienced during the first 12 to 14 weeks of operations related to the opening of one new company-owned restaurant late in the third quarter and the opening of 3 new company-owned restaurants in the fourth quarter. For the full year, labor and benefit costs reflect higher health insurance claims and increased management wages, partially offset by lower workers’ compensation due to a third quarter premium adjustment of approximately $120,000. For 2008, we expect labor and benefit costs as a percentage of net restaurant sales to increase slightly over 2007 level primarily as a result of higher health care costs in addition to increases in the federal and various state minimum wage rates.

Restaurant level operating expenses for the 2007 fourth quarter and full year increased over 2006 levels. Fourth quarter operating expenses as a percentage of sales also reflect the inefficiencies during the first 12 to 14 weeks from the 4 restaurants previously mentioned, in addition to increased advertising in the fourth quarter 2007 compared to the fourth quarter of 2006. For the full 12 months, in addition to the fourth quarter explanation, restaurant operating expenses reflect costs associated with hiring new managers and preparation for company-owned restaurant opening that were originally slated to open in second and third quarters of 2007. For 2008, we expect restaurant-operating expenses as a percentage of net sales to remain essentially flat to 2007 percentage.

Preopening expenses for the fourth quarter of fiscal 2007 were $763,000, reflecting expenses and rent associated with our 3 company-owned restaurants that opened during the fourth quarter of 2007 and rent for a restaurant that just opened in February. This total compares to preopening expenses of just $177,000 for the fourth quarter of fiscal 2006. On a full year basis, preopening expenses of $1.2 million for fiscal 2007 compare to preopening expenses of $625,000 for fiscal 2006. As indicated, we expect up to 6 company-owned restaurants in fiscal 2008 with total preopening expenses including rent at approximately $275,000 per restaurant.

G&A expenses as a percentage of total revenue were 8.5% for the fiscal 2007 fourth quarter compared with 13.3% for fourth quarter of 2006. For the year-to-date period, G&A expenses as a percentage of total revenue were 12.4% compared to 13.2% for the prior full-year period. Excluding stock-based compensation, the percentage would be 10.5% for fourth quarter of 2007 and 12% for the comparable period in 2006 and 11.7% for fiscal 2007 as compared to 11.9% for fiscal 2006. The decrease in the percentage excluding stock-based compensation for the fourth quarter and year-to-date period compared to prior year primarily reflects the recapture of bonus for our prior CEO who left the company in December, an additional position at the executive level that has remained open for the entire fourth quarter of 2007, in addition to other savings. For 2008, we expect G&A expense as a percentage of total revenue to be flat or slightly lower than 2007 level due to revenue leverage in addition to G&A savings related to key executive position that will remain open at a minimum through the first quarter. Stock-based compensation for 2008 is expected to be approximately $1.3 million.

Turning now to our balance sheet, our unrestricted cash and equivalents balance at the end of 2007 was approximately $1.5 million, flat to the balance at the end of 2006. We ended the year with a balance of $13 million on our line of credit, and today, we have a balance of $12 million. Year to date, we have generated approximately $13 million in cash from operations, and coupled with our borrowing, have invested approximately $14.3 million on capital expenditures and spent approximately $14.2 million on our share repurchase program. These 2007 capital expenditures have been largely for the construction of new company-owned restaurants. Our preliminary capital expenditure budget for 2008 is approximately $17.5 million.

During the 2007 fourth quarter, we repurchased approximately 482,000 of our shares under our 4 million share authorization at an average price of $14.38 excluding commission. During the 2007 full-year period, we repurchased 871,000 of our shares representing the combination of our third authorization and approximately half of the fourth at an average price of $16.52 cents excluding commission. We are committed to shareholder value, continued restaurant development, and repurchase of shares from cash flows generated by operations and will continue to discuss further repurchases with the Board of Directors. Our first quarter ends on March 30, 2008. We plan to report our first quarter results on April 23, 2008, after market close and conduct our first quarter conference call on April 24, 2008, at 10:00 am Central Time. Lane will have a few closing comments, but at this point, we would like to take your questions.

Question-and-Answer Session

Operator

At this time, I would like to remind everyone in order to ask a question, press *, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of [__________] with Dougherty and Company.

Unknown Analyst – Dougherty and Company

Good morning, I was wondering if we could go back to the company-owned performance versus the franchise performance, and clarify why the company-owned stores are doing so much better than the franchise stores.

Lane Cardwell

You are trying to understand that what is different between our system and the franchise system?

Unknown Analyst – Dougherty and Company

Yeah, we’ve seen that the average unit volumes or the weekly sales come down now for quarters in a row and the comp numbers come down. It’s just a stark contrast.

Lane Cardwell

I would agree. In my four years on the board, it has been a consistent question we’ve asked of the management team. I am not used to seeing differences of this magnitude. Usually if there are differences, it is a spread between either positive numbers or a spread between negative numbers, but not one system negative and one positive. We had a conference a few weeks ago with our franchise partners, and we talked in great length about the comp stores sales trends. To be honest, it is a lot more of a concern to us than it is to them. So many of them are seeing volumes at such high levels that they are still very content with the overall levels of sales, even though they are down from prior periods. We did walk them through though and reminded them of the extra profit that you get from comp sales and that everybody should be trying to pocket that extra money. One of the things that we have done is we have analyzed what is different. We have a system of 40+ company stores versus 120+ franchise stores. We serve the same food, we essentially charge the same prices, we have some restaurants that offer rate better than others, and they have some restaurants that operate better than others. They use the same marketing programs we do, not necessarily across the system all the time, but there is enough people using enough of our components that we don’t think that the difference is essentially one system versus another. One of the things that we are exploring and it is still in the very early stages is that we have had a program in place where the company general managers that rewards them a very good trip at the end of the year if each store accomplishes certain goals. This year, approximately three quarters of our general managers qualified. One of the key components of that is a comp sales metric of 3%. There is another metric of an increase of about $40,000 in restaurant operating profit. There is other metrics that are looked at that aren’t as big and can add up to qualify a general manager, but we have essentially, as I said, 75% of our system qualify for this program. They are going to be leaving in a couple of weeks to go to Spain on a trip that has been the focus of their attention throughout the fiscal year. It’s part of the weekly conversation that supervisors have with their restaurants. In fact, area directors, the multiunit supervisors go on this trip also if a certain percentage of their general managers qualify. There is linkage up and down through this system that rewards general managers for not just a good job but a great job. We think that this has, looking back, explained a lot of our variance against the franchise system, and we think it explains a lot of our variance against casual dine-in in general. We are exploring ways that we can broaden this across the whole system, and again very preliminarily, but see if there is a way that we can offer it for our franchise partners. Other than that, I don’t really see any difference that would explain the magnitude of the sales numbers.

Unknown Analyst – Dougherty and Company

I guess what you are saying is that these franchisees are still profitable. What is the financial health of the franchise system if these average unit volumes and same-store sales are going down? Are they still profitable? We haven’t seen many closures.

Lane Cardwell

The way I gauge it and it’s another way of getting at profitability, if there was an issue with our franchise system that there is something that we are doing not making available to them, or that there is something inherently different in the way that we run our 2 businesses in parallel, they would be storming the corporate office. We spent 3 days together at a franchise conference. I had two of our 44 different partners talk to me about comp store sales. One of the two said it wasn’t really an issue for them, that they understood why it was an issue for us. Across any system of people of varying geographies and varying ways of financing businesses, there is always going to be some people with more financial capabilities than others, but we haven’t seen any evidence of financial strain across the system.

Unknown Analyst – Dougherty and Company

Alright, thank you.

Operator

The next question comes from the line of Mark Smith with Feltl and Company

Mark Smith - Feltl and Company

Hi guys, kind of a followup to that question. Are you seeing franchisees taking the same amount of pricing or more or less and are they being as successful in the price increase and not losing track?

Lane Cardwell

I will let Diana handle that, and she has more of a historical perspective.

Diana Purcel

You know Mark, I think we’ve talked about this historically that our franchisees have not historically taken as much price as we have. We have consistently taken price up moderately twice a year really since 2004, and our system has some catching up to do on the franchise side for a variety of reasons. In their market, they either did not take price or did not take price to the levels we did. To give you an order of magnitude, there is some catch up that are seeing, so when we took price up 2% in December, our franchise system ended up taking price up 2.8%. Now, that wasn’t across the system. We still have some franchise partners that for a variety of reasons are still electing not to take price up, but that gives you an idea of the catch-up that is occurring.

Mark Smith - Feltl and Company

Okay. Does some of that come back to as Lane talked about some regional weakness or those regions that aren’t taking that price?

Diana Purcel

Yeah.

Mark Smith - Feltl and Company

Okay. Looking at labor expense for company-operated restaurants, how we had this bump in fourth quarter due to some of the new restaurants. I would imagine first quarter, these are still working through the first couple of months of progress and inefficiencies that first quarter could be pretty tough on the labor line.

Diana Purcel

Well, that is typically what we see. That’s why we say the first 12 to 14 months, and it is not only in the labor line but is also in the op expense line. We do see those inefficiencies and our ops team is working tremendously hard to get that in line sooner than later and really have done a tremendous job, but typically we have seen those inefficiencies for about 12 to 14 months.

Mark Smith - Feltl and Company

My obligatory alcohol sales question. Any change in mix?

Diana Purcel

We are seeing a moderate increase in our newer prototypical restaurants, and we are still struggling with that metric. We’ve talked in the past that we are never going to be a destination bar, and that continues to be a point of frustration for the organization that we haven’t been effectively able to move that metric. A high component of our alcohol sales comes from beer sales, and I am sure you know that if have your favorite bottle of beer, people are very price sensitive, so our ability to take price on a product such as that that is so highly so visible is very limited. People want their beer with a rack of ribs.

Mark Smith - Feltl and Company

Are you seeing any difference between some of the smokehouses, the ones open for a year now and others that are still newer? Are you seeing a pretty big difference between the smokehouse alcohol sales compared to some of the older formats?

Diana Purcel

That’s what I said. We are seeing a moderate increase certainly. Our smokehouse restaurants have seen improvements versus the system, but keep in mind we have 6 counter service restaurants that only have beer and wine, so it is a system that is skewed a little bit when you look at the 9.5% to 10% number. We are seeing some impact, not enough to talk a difference and not enough to feel successful about it at this point in time.

Mark Smith - Feltl and Company

As far as anecdotal evidence of how the consumer is doing and pulling back on beverage—any any insight there?

Diana Purcel

We haven’t seen any indication of the consumer from the adult beverage sales pulling back.

Mark Smith - Feltl and Company

Can you comment on gift card sales year over year?

Diana Purcel

Our gift card sales year-over-year were down, and there are couple of reasons for that. We are looking at some opportunities for next year. One of the reasons is that we had chosen for a variety of reasons not to offer some of the significant discounts that some of the other casual dine-in concepts had offered. Particularly, in the twin cities market, they were several concepts that offered buy $100 in gift cards and get $25 off. We did not offer that, and consequently our gift card sales were down. The other thing that we hadn’t done was partner up with some of the larger footprint discount providers such as the Costco’s and the Sam’s Club, so we believe that battered our visibility as well. So this is a strategic initiative perhaps to look at this next year. Obviously declining gift card sales does make it difficult for those gift cards to come in the first quarter, but it is something we are absolutely looking at for year end.

Mark Smith - Feltl and Company

Last question from me. Can you just talk about your unit growth as far as company operated in ’08? Are you locked into these 5 or 6 units or is it something where you could scrap one or two of these units and is that something that you considered - a slowing of the growth on the company-operated side?

Diana Purcel

As we talked about, we are really committed to finding the right location, so we are not going to even go so far as to executing a lease and worry about scrapping it if we did not believe it was a great location. We have made several decisions to walk away from opportunities because we did not believe that they were the right long-term strategies for us. That being said, we have 5 leases signed, and we are working on the sixth, and we sort of tempered that message of up to six because we have 2 restaurants that are back loaded in the fourth quarter and don’t know if one of those is going to flip into the subsequent year, but we feel really good about our 2008 pipeline of restaurants.

Lane Cardwell

We are coming at it from a different place than a lot of the chains that we see out in the marketplace. You read all the time about companies that have been opening 30 to 50 units per year cutting 10 out of that. We are coming from a situation where we were not opening units 5 years ago. We are still trying to ramp up our corporate growth to a level that we think represents the magnitude of the opportunity out there, so we are not pulling back because of economic pressures or we are not reacting to things the way you see others in the marketplace, again because we are trying to get our unit growth up to a level commensurate with our size.

Mark Smith - Feltl and Company

So we won’t see Famous Dave’s jump on the bandwagon of re-franchising restaurants and moving to a higher percentage of franchise compared to company operated?

Lane Cardwell

No. We are opening units because we see and have seen for many years the strong economics and the high levels of sales that our franchise partners are enjoying. We want to share in that too and get the full margin instead of just the royalty. We want to open units in tandem with our partners.

Mark Smith - Feltl and Company

Great! Thank you.

Operator

Your next question comes from the line of Robert Reilly with Piper Jaffray.

Robert Reilly – Piper Jaffray

Good morning.

Lane Cardwell

Good morning.

Robert Reilly – Piper Jaffray

A couple of questions for you. First of all, do you guys anticipate closing any stores in 2008?

Diana Purcel

Not at this time.

Robert Reilly – Piper Jaffray

Okay. Going back to the franchise development, the long-term outlook, that means you guys are going to stay at about 25% company owned, 75% franchise, or is that going to go more towards a 50-50 breakout or how do you look at that going forward?

Lane Cardwell

I think you are going to see just from the law of large numbers stay at about the 25% range. It would be even difficult to get it up to 30. Our ability to really move the needle with our current base of units over the next several years just isn’t possible.

Robert Reilly – Piper Jaffray

Okay. Finally, I believe you said the CapEx number was $17.5 million in FY ’08. For a new store cost, is that still about $2.3 million?

Diana Purcel

Yeah, depends. In the Chicago market, we are seeing some union labor which pushed that up about 10%, so we are seeing about somewhere in the neighborhood of 2.3 to 2.5 depending on the region.

Robert Reilly – Piper Jaffray

Ok, thank you very much. That’s all I had.

Diana Purcel

Thank you.

Operator

Our next question comes from the line of Kenneth Smith with Lennox Equity Research

Kenneth Smith – Lennox Equity Research

Thank you. Can you talk about your willingness and ability to buy stock right now given your use of the credit line and so forth?

Lane Cardwell

Yes. I will let Diana handle that.

Diana Purcel

We had indicated that we are committed to buying back stock. Clearly, we made great progress on our fourth authorization and will continue to have these discussions with our Board of Directors, and obviously, we were buying our stock back at a 20-dollar price target and thought it was a great value then, and clearly we are trading at what we believe to be a discount currently, so we are in the process of evaluating our cash needs for 2008. To be perfectly honest with you, just like with everybody else, the cost pressures, the economy is making us more nervous, and we want to make sure that we have adequate cash for our growth needs and make sure that we are opportunistic. We may be able to benefit from some of these other larger casual dine-in operations pulling back on their growth and might be able to look at opportunities to continue our growth in the near term. So we are absolutely committed to buying back our shares of stock and continue to have discussions with our Board of Directors, and we currently have approximately half a million shares on our current fourth authorization and we plan to continue to fulfill that. I can’t tell you the timeframe at this time now.

Kenneth Smith – Lennox Equity Research

Where did you stay you stand on your line of credit?

Diana Purcel

We are currently today at $12 million.

Kenneth Smith – Lennox Equity Research

And you have what, 20 on that or 25?

Diana Purcel

We have $20 million right now.

Kenneth Smith – Lennox Equity Research

Okay. Lane, going back to talking about the franchise. Is availability of credit a factor in the number of franchise units that are going to open this year? Are you having any trouble with that?

Lane Cardwell

Well, it is always an underlying factor, and there is always going to be some people who are pretty fully leveraged in all aspects of their life, not just the restaurant business, and will have a tougher time getting the restaurant loans in an environment where people aren’t exactly beating down the door to give restaurants money, but the biggest factor that has caused us to dial back the visibility of the number of openings this year is more related to how long it is taking to get deals done. The development time lines which not very many years ago used to be very typically 18 months, now not atypically have ranged up to 24 months. Developers are moving more slowly, cities are using zoning and permitting delays as the way of controlling growth in their communities. It is the way that they can ratchet down without violating laws of governance, so essentially it is just a stretching out of the development pipeline, the amount of time it takes to get something open. There will always be in a system of this size people who are slowing down because of access to capital, but we are not seeing that as the central reason why we have dialed that number back. It’s time-lined really.

Kenneth Smith – Lennox Equity Research

Okay. One more question going back to the food costs. Overall what portion of your food costs are not locked in for an extended period of time, to what extent you are exposed to the spot market if you will?

Diana Purcel

Well, we indicated that we are pretty much locked in with our major food contracts for the majority of the year. Chicken, we are locked in through September, so we have some risk in chicken or opportunity as it may be for the fourth quarter, and then brisket, we are locked in through July, so we will be watching that market closely, but everything else were pretty locked in. Any major contract we are locked in through the remainder of the year.

Kenneth Smith – Lennox Equity Research

The protein items you talk about, you are locked in there too?

Lane Cardwell

Yes. It’s essentially the proteins that we have been able to lock in on. There are always items like produce that you always have to ride with the market, but the ones that really drive cost of sales up and down are the ones that we have, I think, done real good job of locking in and getting some very favorable rates on.

Diana Purcel

And Ken, just to give you an idea, 88% of our purchases are on contract.

Kenneth Smith – Lennox Equity Research

Okay. Very good. Thank you very much.

Operator

Once again, to ask a question, press *, then the number 1 on your telephone keypad.

We do have a followup question from the line of [__________] with Dougherty and Company.

Unknown Analyst – Dougherty and Company

The recapture of the depreciation charge, what is the back story on that? Are those going to be sold to a franchisee?

Diana Purcel

They were. To go back a couple of years, we acquired our Florence, Kentucky restaurant from a franchisee that came out of bankruptcy, and immediately put that up for sale. We actually had a potential franchisee that was interested in buying that, and the deal had fallen through. Likewise, with our Tulsa, Oklahoma restaurant which was also for sale at the same time as the Rogers, Arkansas restaurant. Those were put up for sale and were de-marketed. We have sold Rogers, Arkansas, to a franchisee as Lane had indicated as a seed restaurant for our franchisee’s market and had Florence and Tulsa available for sale. Per accounting regulations, you have a short timeframe for which to market that for sale and to actually sell the property, and if you don’t complete it during that timeframe, you need to put it back into health review regardless of the fact whether you are actually marketing it or not and recapture the depreciation that you otherwise would have recorded during that timeframe, so these are 2 locations that are still being marketed for sale, but again per accounting regulation, we had to recapture the depreciation.

Unknown Analyst – Dougherty and Company

Alright, thanks.

Operator

At this time, there are no further questions. Any closing remarks?

Lane Cardwell

Yes. I want to thank you all for calling in today. As always, we appreciate your interest and investment in Famous Dave’s. As we said at the beginning of this call, we are very pleased with the quarter we just reported. Our strategy remains in place. We believe we are on a solid trajectory to continue to improve our operations, build our base of company-owned and franchise restaurants, and prove that our model can function well even in the most difficult economic environments. We have a great concept. When most in casual dine-in talk about 15% off-premise sales being a pipedream, we routinely have restaurants doing more than twice that. We have a product that travels well and is highly sought after for celebrations and gatherings. We are the largest chain in a relatively small group of barbecue chains in a category that is the domain of the independent operator. We are approaching the half billion dollars in system wide sales and have the opportunity to dominate this category for many years. It has been a real honor to have been asked to serve in this position as the acting CEO of this great company, and I look forward to the chance to welcome my replacement in the hopefully near future. Thanks again for calling in. This concludes our call.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: Famous Dave’s of America Q4 2007 Earnings Call Transcript
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