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Executives

Diana Purcel - Chief Financial Officer

John Gilbert - Chief Executive Officer

Famous Dave's of America, Inc (DAVE) F3Q2012 Earnings Conference Call October 25, 2012 11:00 AM ET

Diana Purcel

Good morning everyone and thank you for joining us for the Famous Dave’s fiscal 2012 third quarter conference call. I’m Diana Purcel, Chief Financial Officer. With me today is John Gilbert, our newly appointed 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, national or global 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 John Gilbert, Famous Dave’s Chief Executive Officer. John?

John Gilbert

Thank you, Diana.

Good morning everyone, and thanks for taking the time to join us on this call.

Let me quickly introduce myself and share a little bit of why I’m here. I’m not new to Famous Dave’s. I’ve been a board member for over a year and have been working closely with Christopher O’Donnell and the Famous Dave’s team on a number of initiatives currently in process. Many of these have been discussed on prior calls. The reason I came to Famous Dave’s as a board member is the same reason I came to Famous Dave’s as a CEO. I wanted to be a part of something special, something unique, a chain restaurant with a scratch kitchen producing award winning food and great service – I believe that this is a high growth brand waiting to happen. You can read my biography, including my experiences and qualifications, but it can be summed up simply - I have a strong track record of assembling and leading teams that have created restaurant shareholder value; from creating Jack Daniels Grill at TGI Friday’s to launching the America Runs on Dunkin’ campaign at Dunkin’ Donuts. What I see at Famous Dave’s, and what attracted me to the Board and now the CEO role, are the raw materials for brand greatness. The more I got to know Famous Dave’s as a board member, the more I loved the potential. Famous Dave’s is the real deal and we have the trophies to prove it. In fact, we’ve won exactly 646 awards for food, flavor and quality so far. Consumers do care about this stuff, but for them to act on it - to visit our restaurants and spend their money - they need to know about it. My job is to make sure they know, and while doing so, drive same store sales, revenue and profits. I’ve led growth efforts in some of America’s best restaurant brands. In some of those situations we’ve had to fix the food, fix the service, or fix both. At Famous Dave’s we don’t need to fix anything, just simplify the message and amplify the branding.

What is clear to me is that this brand needs to get credit for the 17 years’ worth of details, discipline, artistry and science that goes into making award-winning BBQ. There are casual dining brands attempting to reinvent themselves to achieve the degree of differentiation we already own. At Famous Dave’s our emerging vision is to beat them all by simply being better at communicating what we do so well; make great food that serves three robust occasions; dine-in, to-go, and catering. The truth is, we have food so good people bring it home. Most mainstream restaurant brands wish they could say that.

I should pause to recognize Christopher for his leadership as CEO during the last four years in stabilizing and reigniting growth. We have a solid balance sheet and are generating meaningful cash flow due to his leadership. I am excited to continue to partner with him to accelerate what he started. Together we are going to find growth and invest in it.

As a board member, a shareholder and now as the CEO, I am disappointed in our third quarter results. We fell short of everybody’s expectations. Our focus going forward will be on delivering the value to our shareholders that they expect.

We released our results after market close yesterday and reported revenue of $39.9 million and earnings of $0.11 per share for the third quarter.

Comparable sales for the quarter were slightly positive for our company-owned restaurants. Our dine-in business was down 0.9 percent relative to last year, To-Go was up almost 4.4 percent and catering was down 0.7 percent.

Our franchise comparable sales were down 2.8 percent during the quarter, and unfortunately, the decline was seen across the system, from East Coast to West Coast. When we compare ourselves to industry sales trends the evidence links overall performance to macro economic factors influencing consumer sentiment – and then behavior - like gas prices and unemployment levels.

As we said last quarter, we believe that, open-ended discounting does not drive long-term customer acquisition, particularly without the media muscle to incent incremental visits. It only serves to erode the bottom line. We have found, however, that the consumer, in general, remains very value conscious and discount-driven. We did execute a modest direct mail discount program during the early part of the summer, and saw a positive lift, but as often happens, sales quickly softened in the latter part of the quarter when the promotion ended.

Dine-in traffic was one of several challenges experienced during the quarter. The bottom line is that on a higher revenue base, we weren’t able to realize the flow through, primarily due to continued pressure on our margins. Diana will get to the specifics related to the quarter.

As I mentioned, I’ve been working with the team on a number of initiatives, one of which is a complete menu re-engineering. A restaurant’s menu is the soul, and voice, of its brand, and we are analyzing every component of Famous Dave’s menu to ensure that it is delivering a message of quality, authenticity and BBQ expertise. We’re looking at size, design, readability, the number of items offered, which items are offered, and how they’re offered, including price point as well as the contribution that each of the items on our menu makes to overall traffic generation, sales and profitability. We’re also re-examining our current strategy with a critical eye regarding limited time offerings and new menu item introductions.

In the coming weeks, we will be launching several critical menu tests throughout our system. Each of these tests will exploit our BBQ positioning in uniquely different ways, and our guests will tell us what resonates and what doesn’t.

The research conducted over the past several months, along with an analysis of our previous direct mail campaigns and consumer response, has provided great information for us to reach our targeted customer segments.  In the fourth quarter, we will be utilizing this customer segmentation to drive incremental sales, by featuring a direct mail campaign, and coupling this with an in-store bounce back offer. This sales driving program proved effective last year.  

We’re also taking a fresh look at our guest feedback programs. While our guest satisfaction scores remain among the highest in the industry, they are not translating into growth.

These are just some of the tools and initiatives that will help us grow the brand, but we’ll also be growing the system. During the third quarter, we had a successful new restaurant opening in Winnipeg, Canada, our first international location. Our experience in Canada reinforces our belief in international expansion. We will continue to focus on Canada and are investigating Mexico. Additionally, though not truly international, we expect to open in early 2013 our first restaurant in Puerto Rico.

These new geographies, combined with our variety of restaurant formats, have helped invigorate our pipeline of both new and existing franchise partners.

Also, during the quarter, we opened new restaurants in Noblesville, Indiana and Temecula, California, and are on track to open total of up to 13 restaurants — 11 franchise locations and 2 company locations— in 2012. We did have 3 franchise restaurants that closed during the quarter, and had another restaurant close after the end of the quarter, in LaHaina, Hawaii as well as anticipate a closure of a franchise-operated restaurant in Abilene, Texas at the end of October. The number of closures is concerning, and it’s something that we will investigate in order to identify trends. Also, we continue to look at opportunities to build franchise and company restaurants where it makes strategic sense. Along those lines, we anticipate issuing a press release, early next week, with some exciting growth opportunities.

For 2013, we plan to open up to 15 locations, including two company-owned restaurants, consisting of one brand new location and a re-location of an existing restaurant in Maryland.

The smaller footprint format is key to our growth initiatives. In April, a franchise-operated restaurant opened in Beaverton, Oregon, just outside of Portland and based on the results so far, the franchisee is extremely pleased. Next month we’ll be opening a counter-style, fast- casual, 3,600 square foot location in Evergreen Park, Illinois. This is an excellent location, an end-cap at a shopping center in an area of Chicago with excellent demographics and high retail traffic.

We beat other restaurant companies to it and were awarded the spot because of the flexibility we’ve built into our restaurant formats.

I’ll wrap my bit up by saying this. The American consumer, and perhaps the international consumer, is rewarding specialization today. Famous Dave’s is the expert in scratch-made BBQ. My job is to get for the credit we are due. My intent is to simplify in order to amplify. Simplify the menu, simplify the offering, simply the messaging, simplify everything that gets in the way in order to amplify the truth; scratch made award winning BBQ, is here. With that, I’ll turn the call over to Diana, who will take you through the details of our financial results.

Diana?

Diana Purcel

Thank you, John.

To those on the call, please refer to our press release issued yesterday. Famous Dave’s reported revenue of $39.9 million and net income of $845,000, or $0.11 cents per diluted share for the third quarter of 2012 compared to revenue of $38.9 million and net income of $1.6 million or $0.19 cents per diluted share for the third quarter of 2011.

We’ll speak to the specifics in more detail later, but in summary, earnings for the third quarter of 2012 were negatively impacted by the timing of the spend for media and direct-mail marketing initiatives, that shifted from the fourth quarter of 2011 to the third quarter of 2012, as well as an increase in direct marketing costs, equating to a total impact of $0.09 per diluted share. Earnings were also negatively impacted by continued margin pressure from increased commodity costs and labor and benefit costs. The decline in third quarter earnings was partially offset by an approximate $0.07 per diluted share cumulative impact from a favorable tax rate adjustment for employment tax credits for the current year, as well as two years for which we can amend the returns. The favorable impact for the remaining two open tax years is expected to be realized during the fourth quarter of 2012.

The year-over-year increase in third quarter sales reflected a comparable sales increase of 0.2 percent, the addition of two new-company owned restaurants since the third quarter of 2011 and a weighted average price increase of approximately 2.2 percent. These increases were partially offset by the closure of the Vernon Hills, Illinois and Tulsa, Oklahoma restaurants. John gave you the absolute percentages, but on a weighted basis, To-Go represented 0.9 percent of the comparable sales increase, and was partially offset by a 0.6 percent decline in dine-in sales and a 0.1 percent decline in catering sales.

For the third quarter of fiscal 2012, off-premise sales were 35.2 percent of total sales, with To-Go representing 21.9 percent and catering representing 13.3 percent. This compares to off-premise sales of 34.1 percent for the prior year.

For the third quarter of fiscal 2012, our per-person average was $15.66 compared to $15.39 for the third quarter of 2011 primarily reflecting the weighted average price increase. The breakdown by day part was $13.72 for lunch and $16.80 for dinner.

On the franchise side, the year over year increase in franchise royalties reflects a net increase of three franchise restaurants since the third quarter of 2011 partially offset by a 2.8 percent decline in comparable sales. As previously mentioned, three new franchise-operated restaurants opened during the third quarter; Winnipeg, Manitoba, Canada, Noblesville, Indiana, and Temecula, California and three franchise-operated restaurants closed in New York City, Mankato, Minnesota, and Springfield, Massachusetts. Subsequent to the end of the third quarter, a franchise-operated restaurant closed in Lahaina, Hawaii.

At the end of the third quarter of 2012, we had 53, company-owned restaurants and 134 franchise-operated restaurants for a system-wide total of 187 restaurants in 34 states and 1 Canadian province. By comparison, at the end of the third quarter of 2011, we had 53 company-owned restaurants and 131 franchise-operated restaurants for a system-wide total of 184 restaurants in 37 states. As of today, we have 53 company-owned restaurants and 133 franchise-operated restaurants for a system-wide total of 186 restaurants in 33 states and 1 Canadian province.

I will now take a few moments to review the expenses for the quarter and provide updated guidance with regard to fiscal 2012:

Our food and beverage costs for the third quarter of fiscal 2012 were 31.5 percent of net restaurant sales compared to 30.0 percent for the same period in fiscal 2011.

As discussed on our previous calls, we continue to face pressure on our margins primarily due to an increase in commodity costs because of rising corn prices, and as many of you know, corn is a key ingredient to many of our products. Additionally, continuing a trend we saw throughout the second quarter, as guests looked for greater value, we saw a shift in our menu mix during the third quarter toward lower priced, but lower margin items. Lastly, we have strategically slowed the progress of some of the initiatives shared at the beginning of 2012 to ensure their long-term success, both in terms of dollar savings, as well as delivering a value proposition to our guests. As such we have seen a delay in anticipated savings during 2012 from certain strategic initiatives, but still expect to realize savings in the near future.

As we continue to combat the pressure on our margins, in September, we took a price increase of 1.0 percent on selected menu items, which combined with a price increase from earlier in the year, will result in a 2.85 percent weighted average menu price increase for all of fiscal 2012. Additionally, a key for us to effectively manage food costs will be to have a number of suppliers in various geographic regions. As such, we continue to grow our supplier network, particularly in the west. These new suppliers will allow us to optimize our freight costs since our restaurants will be closer to the distribution centers, thereby lowering freight costs across the rest of the system.

Another key initiative for the remainder of 2012 and 2013 is to transition to selling some of our key proteins in the same unit of measure we receive them. An example of this would be selling wings by the weight as opposed to by the piece. It is important to note, that as we evaluate this strategy, we will not change portion sizes or the value delivered to our guest. We will also be transitioning to a new method of preparation for our brisket. Each brisket will now be slow smoked; hand crafted in our restaurants each day and will result in a more authentic signature BBQ item, but with an improved food cost.

Earlier we said we expected food cost inflation for fiscal 2012 to be approximately 5.0 to 7.0 percent for all of our contracted food items such as pork, chicken, and brisket, and we affirm that, as food inflation will be approximately 6.0 percent for 2012.

Predominantly due to the strategic delay in certain initiatives and an expected increase in discounts associated with our fourth quarter direct mail and bounce-back programs, we are updating our previous guidance, and now anticipate food and beverage costs, as a percentage of net sales, to be approximately 140 to 145 basis points higher than the prior year.

In spite of the challenges in the commodity markets, we are cautiously optimistic about 2013. Based on

what we have contracted to date, in combination with our previously mentioned strategic initiatives, we are currently anticipating a 2.0 percent decline in our contracted food and beverage costs next year. During the third quarter of 2012, we executed a new contract for the majority of our pork product for all of fiscal 2013 at a minimum of a 0.5 percent year over year decline, which positions us well to capitalize on future savings should we see further opportunities in 2013. Certain components of our chicken and brisket contracts have been negotiated through the first quarter of 2013; however, we are still negotiating our final pricing and we will give you a more definitive update on the next call.

For fiscal 2012’s third quarter, labor and benefits, as a percentage of net restaurant sales, were 120 basis points unfavorable to the comparable quarter of fiscal 2011. This increase was primarily due to higher direct labor costs as well as higher medical claims and workers compensation premiums year over year.

Based on the results from the first nine months of the year and the anticipated increased level of discounting in the fourth quarter, resulting in less cost efficient labor, we are updating our previous guidance, and now expect labor and benefits costs, as a percentage of sales, to be 110 to 115 basis points unfavorable to fiscal 2011’s percentage.

Operating expenses for the third quarter of fiscal 2012 were 30.9 percent, which were 310 basis points unfavorable to the prior year. As mentioned at the onset of the financial portion of this call, this increase was primarily due to the shift in timing of media spend from the fourth quarter of 2011 to the third quarter of 2012, largely driven by the timing of the election. We also accelerated the timing of our direct-mail marketing initiatives into the third quarter this year as compared to the fourth quarter of last year. These timing shifts resulted in a year over year increase of approximately 280 basis points. There were also minor increases in other restaurant operating cost categories year over year due to price inflation.

Due to an increased spend for a more targeted direct mail promotion in the fourth quarter; we now anticipate, on an annual basis, advertising expense will be approximately 3.4 percent of net sales for 2012 including a 1.0 percent contribution to the Marketing Fund.

We are updating our previous guidance and are now projecting operating expenses, as a percentage of net sales, for fiscal 2012 to be approximately 40 – 45 basis points higher than 2011’s percentage. This change from our previous guidance reflects actual results from the third quarter, where we realized significantly higher utility costs in the northeast, particularly in our Long Island restaurants, due to the unseasonably warm summer and early fall. The change also reflects an increased marketing spend from an original estimate of 3% to the current estimate of 3.4%, as well as the expected increase in discounts associated with our fourth quarter direct mail and bounce-back programs.

Our G&A expenses, as a percentage of total revenue, for the third quarter of fiscal 2012 was 10.9 percent compared to 10.3 percent for the comparable quarter of fiscal 2011. This increase was primarily due to the annualized impact of purposeful investments in corporate infrastructure, as well as a year over year increase in required franchise opening assistance. Our G&A expenses do not incorporate any corporate bonus accrual for the third quarter of fiscal 2012 which compares to approximately $219,000 of bonus accrual for the third quarter of fiscal 2011.

We are updating our previous guidance, and now anticipate G&A expenses as a percentage of revenue, to be approximately 30 – 35 basis points unfavorable to 2011’s percentage, primarily due to the addition of the Chief Operating Officer position earlier this month as well as increased stock based compensation related to a restricted stock grant for our newly appointed CEO.

Fiscal 2012’s third quarter had $19,000 of pre-opening expenses, compared to $237,000 for the third quarter of fiscal 2011. We anticipate pre-opening costs for 2012 to be approximately $502,000 for the opening of two company-owned restaurants including pre-opening rent of $85,000.

Interest expense for the third quarter of fiscal 2012 was flat as a percentage of revenue compared to the prior year and we still expect it to be essentially flat as a percentage of revenue for the remainder of 2012.

As previously mentioned, during the third quarter we realized the benefit from a cumulative impact of tax credits for employee reported tips for the current year as well as previous tax years that can be amended. As such, the Company has amended certain of these tax returns to capture this additional credit during the third quarter of fiscal 2012.  During the fourth quarter, the Company anticipates completing the amendment process for the remainder of the open tax years and we expect an approximate 16.0 to 19.0 percent effective tax rate for 2012. This tax credit will continue to benefit us in the future, and for fiscal 2013, we anticipate our tax rate to be approximately 30.0 percent.

Now to our balance sheet:

Our unrestricted cash and cash equivalents balance at the end of the third quarter of 2012 was approximately $2.0 million.

We ended the quarter with a balance of $14.4 million on our revolving line of credit and were in compliance with all of the covenants on our credit facility. As of today, we have a balance of $14.9 million on our line.

During the third quarter we amended our credit facility to better align our agreement with our expected growth plans. The maturity date for the credit agreement remains at July 2016. We will be filing this amendment as an exhibit to our 10Q, so please refer to that filing for specifics.

We generated $6.9 million in cash from operations during the first nine months of fiscal 2012 compared to $8.5 million for the comparable timeframe of fiscal 2011.

Of the cash generation, we used approximately $4.3 million for capital expenditures primarily reflecting continued investments in, and remodeling projects for, our existing restaurants, as well as the conversion costs for the company-owned restaurant in Gainesville, Virginia and various corporate infrastructure projects.

We are updating our previous guidance, and now expect total 2012 capital expenditures to be approximately $6.5 million, reflecting two new restaurant openings, continued investments in our existing restaurants, including several significant remodeling projects, and continued investments in corporate infrastructure systems.

For the first nine months of fiscal 2012, we used approximately $5.9 million to repurchase 539,596 shares at an average price of $10.68, excluding commissions, under our current share repurchase program and the recently completed, previous share repurchase program.

For the remainder of 2012, the primarily use of our cash will go towards our new company-owned restaurant opening in mid-November in Evergreen Park, Illinois, as well as remodels of our existing restaurants and paying down our debt.

John will have a few additional comments, prior to your questions.

John Gilbert

Let me wrap-up by tying this story together.

Our research has told us consumers get it. They understand the details and nature of BBQ. They know how BBQ "works" and BBQ works for them due to advantages inherent to the product. Two examples:

One: Because its batch cooked and held, BBQ enables certain service truths. It can be very quick from order to customer delivery. In today's world, quick means convenient and convenient means sales and sales means growth.

Two: Because much of BBQ is cooked with the bone in, as a foodstuff BBQ delivers flavor and quality truths. The product holds moisture well and thus travels well. In today's world, traveling well enables location independence which means it tastes good wherever you are. Highly portable quality means taste and taste means sales and sales means growth.

Currently, we're not connecting the dots for most consumers, call them prospects. First dot, BBQ is a deeply American, richly and complexly flavored traditional food that is also a contemporary solution to our biggest meal problem: how do I get great tasting, scratch quality food on my terms, where and when I want it, consistently. Second dot, Famous Dave's is the only meaningful BBQ brand that creates award winning BBQ every single day, all across the country. Final dot, Famous Dave’s is the modern solution to some of your biggest dining needs.

It's absolutely clear; my job is to connect these dots

I suspect some of the folks listening to this call are some of our earliest, and longest, shareholders. Probably our biggest too.

If I could see you now, I'd bet you are nodding your heads. I bet you are nodding, not because I'm so smart, but because what I'm saying is why you invested in the first place. You invested in the idea: impossibly great food, served quickly, wherever you want it, by people who care, and it’s deeply American. It sounds like a good investment story. One you bought, for all the right reasons years ago.

I'll close by saying, you were right.

You are right.

And if you hang with us, you will be right in the future.

It's our time. America cares about this more than ever before. She knows more about food, the ingredients, cook times, temperature, technique and more. She knows but she's not necessarily cooking. She knows and she is spending. She needs to know about Famous Dave's. And, that’s where I come in. By connecting these dots we create significant growth.

John Gilbert

Thanks for listening in on our call this morning.

Question-And-Answers

14

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