Famous Dave's of America Management Discusses Q1 2013 Results - Earnings Call Transcript

| About: Famous Dave's (DAVE)

Famous Dave's of America (NASDAQ:DAVE)

Q1 2013 Earnings Call

April 25, 2013 11:00 am ET


Diana Garvis Purcel - Chief Financial Officer, Principal Accounting Officer, Vice President and Secretary

John F. Gilbert - Chief Executive Officer, Director and Member of Strategic Planning Committee


Conrad Lyon - B. Riley Caris, Research Division

Shannon Richter


Good day, ladies and gentlemen, and welcome to your Famous Dave's First Quarter 2013 Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Diana Purcel. Ma'am, the floor is yours.

Diana Garvis Purcel

Thank you, Rich. Good morning, everyone, and thank you for joining us for the Famous Dave's Fiscal 2013 First Quarter Conference Call. I'm Diana Purcel, Chief Financial Officer, and with me today is John Gilbert, our Chief Executive Officer. Before we begin, we'd like to remind those listening that certain matters discussed within are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Famous Dave's believes that the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors that could cause the actual results to differ materially from Famous Dave's expectations include financial performance, restaurant industry conditions, execution of our restaurant development and construction programs, franchisee performance, ability of our franchisees to meet their development commitments, changes in local or national economic conditions, availability of financing and other risks detailed from time to time in the company's SEC reports. Our earnings release, which contains the financial and other statistical information being discussed this morning, was issued yesterday afternoon after market 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 will call -- turn the call over to Famous Dave's CEO, John Gilbert.

John F. Gilbert

Thanks, Diana. Hi everybody on the call. Thanks for calling in today and listening to us. Yes, it was a difficult quarter, and yes, we were disappointed with the results. So I'll just start off with that. But, a quarter does not a year make, and we have the advantage, at Famous Dave's, of seeing the daily impact of the work we are doing. So while it's not yet apparent, there's actually much good that's happening.

As I mentioned at the last call, and certainly I've talked to some of you folks individually about, Famous Dave's is in the process of implementing pretty significant strategic and operational initiatives designed to increase sales and improve profitability. It is our goal to be considered one of the best restaurants across all measures by our shareholders, our customers and our employees.

It will come as no surprise, as CEO, I have 3 areas of focus: sales, costs and deployment of capital, with an all-encompassing mandate of increasing shareholder value. When I joined Famous Dave's 6 months ago, it was completely evident that our first focus had to be on our biggest opportunity, which was sales, followed shortly by gaining insight on how to squeeze more cost out of our business and then bottom line, improve our P&L.

So while the first quarter was disappointed, I am pleased with our gains on the sales front and believe that we are on the right track. This is actually where we've made the most progress. To give you some sense of that, we've gone from the bottom quartile in sales for fourth quarter of 2012 to the top half of our competitive set in 1 quarter.

And this is according to Black Box Intelligence, which is our sales tracking tool that we use to keep up with our performance versus our peers. So that's a pretty big delta in 1 quarter.

Obviously, we're encouraged by this traction, and we are focused on continuous improvement. We've developed a framework, a strategic framework, for performance improvement, and we've tested -- since I got here, but probably most intensely in the latter part of the first quarter, we've tested a number of smart new tactics and actually launched most of these tactics in the company restaurants.

We're getting real results in the marketplace. Let me share some of the tactics with you so you have a sense of what's been going on in our restaurants. So, yes, same-store sales for the first quarter for company restaurants were minus 1.8%. It's an odd bit of irony that, that actually represents pretty solid improvement from where we were. And in fact, we do believe the first quarter of 2013 is the turning point in our long-term performance, even though we did see declines in EBITDA and EPS.

So what did we do in the company restaurants that impacted performance? We talked about it, again, last quarter, but we had fairly ineffective discounting in place. We're essentially giving out discounts for planned occasions. And so we've radically overhauled our discount strategy and implemented a new approach to discounting, and it's yielding some pretty significant positive results for us. We're only discounting, to a large degree, incremental transactions.

Early in the first quarter, we realized a favorite menu item, catfish. We also expanded, something that we've mentioned before, to a national level, we expanded the rollout of a new house-smoked beef brisket, which does a couple of things for us: One, it improves the product cost on the brisket, replacing what was pre-smoked before. It also is a significantly better product in terms of flavor. It also did one huge thing for us that is really quite exciting. It allowed us to launch nationally this Burnt Ends products, which we had mentioned in the past and certainly we'll talk about today.

So in the first quarter, we developed and executed widespread testing of Burnt Ends, starting in a small number of company restaurants, and then based on success, expanding that to all of the company restaurants in the first quarter. We've created more effective digital support for our to-go menu, and we executed a material test of a holiday meal program, featuring hams at Easter, which turned out to be a fantastic program for us.

Again, as we launched these activities first as test, we saw a continued improvement in our company store performance, and actually, during period 3, we saw positive same-store sales despite the fact that there was a negative Easter holiday timing this year. These were our first positive comps since the summer of 2012, and we're pretty excited about that and really gets to the core of my optimism today.

This does explain some of our first quarter performance as it relates to sales, but it's no means all that we're working on. And so I will turn a little bit to second quarter here and just talk about the things that we are working on and plan on launching or have already launched into second quarter.

So we did launch our new menu last Monday, and our new menu is across-the-board, company and franchise restaurants. I'm sure some of you have been in the restaurants and seen it. If not, I really encourage you to get out into our restaurants this weekend, there's something special going on. The new menu had a new pricing structure, new graphics. We elevated our burger platform to a premium level, we have a new dessert strategy, and added new products, which I'll talk about.

We also optimized product placement and merchandising message, and in a way, we did all of that but concurrently simplified the menu so it's a substantially easier menu for consumers to navigate, and frankly, it's easier for us to execute.

This menu, we used the first of our RMS pricing recommendations, and we talked about RMS in the past so I won't be spending time on it today. But these are the guys who made recommendations for pricing based on kind of an optimal demand curve. So we think we're going to see some of our pricing really stick this time. We launched that house-smoked beef brisket I talked about. And then last week, beginning of last week, we also launched our new Burnt Ends product, supported by television.

We began the testing, so while we're launching nationally, we're also testing activity for the future. So we began testing a comprehensive summer rib program, leveraging some pretty favorable buy-in opportunities that we saw in the marketplace and Diana will talk about later as well.

Beyond sales, we also the realized operating scale with a net promoter program that we launched last year, and so that will be a bigger and bigger part of our customer feedback loop. And anyone on the phone who's worked with net promoter scores, this is a really strong tool for measuring customer support or affinity for our brand, and it also has a direct impact on same-store sales.

We introduced new online and mobile ordering technology this quarter -- or we will introduce it, we're testing it right now. And as I mentioned, we just launched a new TV campaign in conjunction with our Burnt Ends launch, which is pretty fantastic work compared to where we've been. And you can see that on our website if you want to take a look.

The last bit that we're working on for Q2, and this will happen in early Q2, is the launch of a new beverage strategy. Our goal with beverages, and I know we talked about this, is to take our adult beverage mix from 9% to 12% over the next 3 years. We'll do this with a very logical approach to beverage -- adult beverages that work in a barbecue setting. So craft beer will be a big part of this initiative. We are in the process of optimizing every single restaurant domestically for the right mix of local craft beers. We don't have that today. We pretty much have a national beer offering. So starting in summer this year, we'll have craft beers that fit the local market.

We have tested and will launch a new line of Moonshine-based cocktails. So I don't know why, but Moonshine is sizzling hot right now. You go to any liquor store, and it's gone from 0 facings to 9 and 10 facings, and we've been tasting the product for about 1.5 months, so we're pretty excited about that.

And then we've been looking at launching a signature bulk nonalcoholic beverage program. So one of the opportunities for us is, with our to-go business which is growing very quickly, we don't really sell many beverages with that to-go occasion. And yet you look across the industry and there's some standout performers in the to-go space that have signature bulk nonalcoholic beverages. Things like sweet tea and lemonade, that would be a natural for us, and they're very high margin, big upside.

These beverage initiatives are very important to us as every 1% increase in beverage mix adds about $14,000 in profit per restaurant. So just for our company store alone, not including the royalty implications for us, that's about $0.75 million in profit for us. Won't happen all at once, but we do believe it's there for us. And these are all things that are going to happen in the second quarter, and most of these have already launched.

So we are confident in this recipe for success, as just a handful of these initiatives in our test markets during first quarter delivered positive same-store results. In fact, that March performance or period 3 performance I cited, we had a lot of these activities going on in most of our restaurants.

So despite slightly outperforming the BBI index, which was negative, Black Box, we're not satisfied with these results. And while there were several headwinds during the quarter that you will be as familiar with as we are, which included poor weather and the impact of payroll taxes in mid-February, we recognize that we're in the restaurant business and not in the excuse business, and we are prepared and feel we're well positioned to take on whatever challenges the future holds.

So the challenging areas in the first quarter, the biggest shortfall in EBITDA and EPS, came from the franchise side of our business. And this is a bit of a wrinkle that I think has resolved itself, but we'll see going forward. We, as the franchisor, are responsible for testing all activities before we ask the franchisee to launch them, that's part of the deal.

In the process of this testing in the first quarter, the company restaurants found success across several areas, which is a wonderful thing as a brand builder when you see things working in a couple of different areas, there are 3 or 4 different areas in our case. So the company stores saw this success, and we expanded rapidly, in fact, took winning ideas to all 53 of our company restaurants, within a week or so, starting to see success. The franchisees were not able to add these tactics to their restaurants during the first quarter fast enough to impact the first quarter, although many of them did employ the same activities we were doing.

So where the company restaurants were negative by 1.8%, franchisees were negative by 6.1%. That's a huge gap, a gap that we've seen evaporate in the last few weeks, but certainly, a big gap and, certainly, in the middle the quarter that had a significant impact on our performance during the quarter.

So what was the result? The royalty and franchisee fee shortfall was about $412,000 of lost EBITDA in the quarter or $0.04 per share. The good news is that what we tested in corporate restaurants worked and worked well, the better news is that our franchisees are rolling these tactics out as part of their second quarter marketing plans. And so you will see Burnt Ends and you will see the new menu for sure, and you will see almost all the tactics that we were getting success with in Q1 in their stores already.

So as we move into second quarter, our next commitment is to focus on improving our restaurant level P&Ls and reducing overall G&A, kind of the 2 other pieces of the puzzle for us. We believe there are at least 250 to 300 basis points in restaurant level P&L savings available to us this year using new initiatives and approaches to managing our restaurants.

And we are already in testing or about to begin testing several of these initiatives. I'll give you some examples of these things. One that we have mentioned in the past that's going to expand nationally is the reduction of the costs associated with to-go packaging. We do over 25% of our sales now in to-go. And as a consequence, we've got an item associated with to-go packaging that's much higher than our peers and perhaps higher than it needs to be. And what I mean by that is there may be some savings -- well, not maybe, there are some savings in to-go packaging.

So we're well into testing alternatives that cost us less, and here is the irony, work better for our products, they're more green. And from a food quality standpoint, in our tests, our customers actually prefer these. So we're getting credit for taking costs out of packaging, not just from a shareholder perspective but also from a consumer perspective. So during the second quarter, we'll roll beyond the tests and roll the packaging out to the system.

Another exciting initiative will begin shortly this week or next, and that's the start of an off-premise call center test, which will handle all the to-go and catering orders in one of our major markets, Minneapolis. Now when we've looked at call centers in the past, we've done audits, and the audits suggest that we've missed a number of calls that come into our restaurants. Not because we don't care, but when people call a to-go order in, they're typically handled by a manager or an assistant manager, and this isn't just to-go, it's to-go and catering, but these guys and gals have jobs, so they're often busy running the restaurant and we can't get to every call when the phone rings.

So by having a call center, it's our belief that our call conversion or call capture will go up, and that's pretty straightforward proposition. So that's one thing we're testing for. Additionally, when you get into a restaurant, we don't really have the ability and the time to up-sell customers, and these are restaurant managers, restaurant employees, assistant managers taking these calls, and these calls come in at busy times, particularly the to-go ones. So with the call center, you get the benefit of professional up-sell programs. And so we believe that with this call center test additionally, we'll be able to leverage the ability to add desserts, to add appetizers, to add beverages, to add whatever it is that's not in the order to complete that order, for both, again, catering and to-go.

And then lastly, as you can imagine, pulling the labor from the restaurant to the call center is a much more efficient use of both restaurant labor and call center labor. And so we believe we'll be able to manage down some of our labor costs associated with taking these calls in our restaurants today. So that's a really good example of where the areas we believe there's upside.

Another one is something that we have taken advantage of, and we'll talk about a lot at this call, but certainly next quarter as well. And that's we'll be featuring products in our menu that have opportunistic cost advantages. When these products meet or exceed our guest expectations, we'll jump on them for better pricing. And so we have 2 products, oddly enough, they're both center of the plate, core products for us, where we've seen, because of different factors, opportunistic buy-in situations arise, and that's for baby back and St. Louis ribs. And so our summer promotion is going to be basically a rib promotion, with some interesting product news that we're in the process of testing now that could be a gangbuster for us and has the double advantage of taking advantage of favorable food cost to where we've been.

And a final example, and these examples by the way aren't everything that we're working on, but you can start to get a sense they accumulate to be meaningful. A final example is shifting from selling 2 key proteins, wings and ribs, by weight as opposed to piece count.

And so when sold by weight, we're much better able to manage long-term cost appreciation for these key high-volume and high-cost proteins. We've already moved our wings in this direction, so we're selling wings by weight now, and we're moving -- we're testing ribs right now. It's obviously a bigger opportunity for us in this size of the business, it's also a bigger risk. So we want to be very careful but we feel very good about this opportunity.

So these are just a few of the initiatives underway today in terms of restaurant-level P&L and costs. The Famous Dave's leadership team is focused on delivering between 250 and 300 basis points in the restaurant level savings this year. Why do we believe this is possible? And it's an interesting thing, because many of you on the phone and certainly others who aren't on the phone had asked me, "Well, what about 2007? With lower sales, you guys are able to deliver a 350 basis points more in operating income?

So we looked at 2007, and we agree. So the team is finding the answer, what did we do then and what are we not doing now? And I think we're going to be pleased with the outcome of that work. It won't happen all at once, but it will happen.

With regard to G&A, much of the year-over-year increase can be explained by our new executive and board structure. We recognize the need to identify and realize meaningful G&A savings over time. And we've done a number of things, they don't show up in Q1 necessarily in terms of G&A savings. But we have organized ourselves differently, and we continue to organize ourselves differently, with an eye towards being more efficient, but also leaning towards reducing G&A.

It has to be pointed out that a significant portion of our G&A is dedicated to our desire to be an attractive franchisor, offering the right mix of support and services to our franchisees. While we are a small operator, and you can see that in our size of our overall revenues, we're a big brand. So obviously, we have most of our sales done by franchisees. So we are seeking balance in becoming a lean operating organization while offering the right services to current and prospective franchisees.

With this in mind, however, we do believe there are savings to be found that don't diminish that offering, and we have started the process of identifying them. As a sign of our commitment, just as an aside to these goals, the compensation plan for myself and my executive team was changed this year and is now focusing on achieving EBITDA goals. We believe that's more in line with what shareholders and investors would like to see.

The last point I'd like to touch on is really clarifying our capital deployment strategy. I've had a lot of conversations with shareholders and analysts and board members, one-on-one, about we need to be clear about our capital deployment strategy. So I'll take a moment here and explain it. We fully recognize that building out our brand by developing company restaurants is more capital-intensive than leveraging our successful franchising strategy. It is our expressed intent that we will make the occasional large investment in developing company locations where we believe it is important to do so in order to prove out a new aspect of our restaurant offerings.

So you have to almost think about these investments as R&D. Who are we proving this out to? We're proving it out to potential and current franchisees. So these investments will be in, really, areas that we believe we have something to prove in a positive way. What are examples of those? The new prototype quick-serve restaurants. This is a big area for us. It's an opportunity that takes this brand beyond where we are today, both in terms of penetration and size. We are in the process of proving out; that's going to require us to invest capital in these restaurants.

New expressions of our own full-service restaurants featuring a stronger bar presence. So while the quick, casual expression is really important for us, it has to be noted that both domestic and international franchisees are very interested and continue to invest in and continue to be demanding of a full-service restaurant prototype that delivers some of the beverage growth I talked about and some of the upside that we're seeing in the polished casual category. And so we do need to prove out this sort of new bar-centric or, let's say, bar-inclusive restaurant -- full-service restaurant.

And then, lastly, a new remodel prototype that contemporizes the brands and the restaurants that are due for an upgrade. All of our restaurants at some point in time, company and franchise, need to be upgraded and be contemporary with the marketplace. This doesn't need to be a big expense, but it needs to happen in order to keep the brand fresh and vibrant for contemporary consumers, which have a different set of expectations than their parents did. And so we need to invest in prototyping new remodels that get franchisees interested in upgrading their restaurants, and that's part of this deployment of capital. So overall, by demonstrating growth potential with limited amounts of capital -- we're not talking about building new restaurants just for the sake of building new restaurants here, we're talking about building restaurants to prove out the brand.

By demonstrating this growth potential with limited amounts of capital, we will intensify the franchise interest in investment in the Famous Dave's brand, leaving us a large balance of capital leftover that will be deployed in manager -- at a manner that achieves the highest return possible for shareholders and is available for debt reduction, capital expenditures, sort of the maintenance of the business that we have to do here everyday, share repurchases and potentially, ultimately, dividends.

So hopefully, that clarifies the capital structure or the capital strategy. We believe it's sound, it's based on sound principle and it's based on feedback from a lot of different constituents. So I'll turn the call back over to Diana now, and she can clarify some of the key items, and then we'll come back and answer questions a little bit later. Diana?

Diana Garvis Purcel

Thank you, John. To those who are on call, please refer to our press release issued yesterday as I summarize our results. Famous Dave's reported revenue of $36.6 million and net income of $62,000 or $0.01 per diluted share for the first quarter of 2013 compared to revenue of $37.5 million and net income of $817,000 or $0.11 per diluted share for the prior year.

As a reminder, the results for the first quarter of the prior year included closure cost of $92,000 or approximately $0.01 per diluted share for our company-owned location that was sold during the quarter. We generated $3.9 million in cash from operations during the first 3 months of fiscal 2013, and this compared to a use of cash of $33,000 for the first 3 months of 2012. The year-over-year increase in cash generation reflects the improved cash flows due to the lack of a corporate bonus payout in fiscal 2013, as well as the strategic decision to make minor adjustments to vendor terms to allow the company to reduce its debt level.

We used approximately $739,000 for capital expenditures, primarily reflecting continued investments in our existing restaurants. We affirm our previous guidance and still expect total CapEx for 2013 to be approximately $7 million, and this is going to reflect 2 new ground-up full service restaurant openings, continued investments in our existing restaurants, including a remodeling project, and investments in corporate infrastructure systems.

As previously mentioned, our adjusted EBITDA declined during the quarter as a result of a number of factors to $1.9 million, and this compares to adjusted EBITDA of $3 million for the comparable quarter in fiscal 2012.

During the first quarter, company-owned restaurant sales declined year-over-year by approximately 1.3%, and this primarily reflects the comparable sales decrease, again, stemming from adverse weather and macroeconomic conditions that negatively impacted consumers.

Additionally, sales were unfavorably impacted by the shift of Easter from the second quarter of fiscal 2012 to the first quarter of fiscal 2013. These decreases were partially offset by a weighted average price increase of approximately 1.5%.

On a weighted basis, dine-in sales decreased by 3.5%, and while the continued negative trend in dine-in was disappointing, we were pleased with the favorable trends in to-go and catering, which increased 1.3% and 0.4%, respectively, during the quarter.

We saw an almost 10% increase year-over-year in the percentage of off-premise sales, which grew from 28.3% for the first quarter of 2012 to 31.1% for the first quarter of fiscal 2013. As a further breakdown, to-go represented 25.4% and catering representing 5.7%. Our dine-in per person average for the first quarter of fiscal 2013 was $16.08 compared to the $15.72 for the first quarter of 2012. This primarily reflects the weighted average price increase and continued challenges with dine-in guest count. The breakdown by day part was $14.23 for lunch and $14.75 for dinner.

On the franchise side, royalties decreased year-over-year, reflecting the comparable sales decline of 6.1% that John spoke to, partially offset by 9 new franchise-operated restaurants that frankly opened since the first quarter of 2012 at a higher sales volume than the 7 restaurants that had closed during the same timeframe.

We did not have any openings during the quarter, however, one franchise-operated restaurant closed in Burnsville, Minnesota under the laws of eminent domain, stemming from a reconfiguration of the area by the Minnesota Department of Transportation. Subsequent to quarter end, and earlier this week, our first restaurant opening of 2013 took place in Carolina, Puerto Rico, where our brand received an incredible reception.

Please refer to our press release for a detailed breakdown of the number of restaurants at the end of each quarter. As of today, we have 53 company-owned restaurants and 135 franchise-operated restaurants for a systemwide total of 188 restaurants in 34 states, the Commonwealth of Puerto Rico and one Canadian province.

Due to challenges associated with the timing of lease executions and permitting, complexities associated with international growth and concerns over franchise sales results, we're updating our previous guidance and now expect to open approximately 12 restaurants in fiscal 2013, including 2 company-owned locations. We continue to have strong interest in territory, however, and subsequent to year end, we increased our committed units to be developed by 6 restaurants due to the execution of 2 area development agreements.

I will now take a few moments to review the cost and expenses for the quarter and to provide updated guidance as to what we expect to see for the remainder of fiscal 2013. Our food and beverage costs for the first quarter of fiscal 2013 were 30.8% of net restaurant sales, and this compared to 31.1% for the same period in fiscal 2012. And we were pleased with this progress.

Food and beverage costs as a percentage declined during the quarter primarily due to a purposeful decline in discount. Also, we began to see the positive impact from some of the strategic initiatives that we've been working towards, such as our new house-smoked brisket.

Our food contracts performed as expected for the first quarter. And it's important to note that embedded in our contracts are the effects of this historically high corn and soy prices of 2012, which are key ingredients in many of our products as well as livestock feed. We are beginning to see these prices soften and anticipate modest release in fiscal 2013 as it relates to the contracts that are still being negotiated for the remainder of the year. And as we begin to look beyond 2013, we are optimistic that we'll see greater savings in fiscal 2014.

On a same-store basis for fiscal 2013, and based on what we have contracted to date, along with our continued strategy to optimize our distribution networks and freight costs, we still anticipate a 2% decline in our contracted food and beverage costs year-over-year. This decline does not include the purchasing volume of any new restaurant openings during 2013.

As a reminder, we are under contract for the majority of our pork products for all of fiscal 2013, which positions us well to capitalize on future savings, should we see further opportunities in 2013 to blend and extend our contract into fiscal 2014.

With regard to our other key products, we anticipate a decrease for our brisket, which is contracted through yearend, as well as other items such as hamburgers, seafood and French fries. With regards to chicken, the feed and the processing components are now locked in through the end of the year, and we anticipate a slight increase in chicken costs year-over-year.

Despite an anticipated decrease in contracted food costs from prior year, we will continue our efforts to further improve margin through key core item promotions as well as through opportunistic commodity purchases and strategic menu mix management.

As John had previously mentioned, one of the strategies we will utilize this year is to take advantage of opportunistic commodity purchases. For example, we were able to secure, at favorable pricing terms, baby back ribs. Along with some promotional support from our vendors, we will feature them along with our St. Louis ribs in our summer rib promotion.

Also, we just took a price increase of approximately 1.5% on selected menu items in April, concurrent with the new menu launch and in accordance with our RMS' recommendation. As we move through 2013, we will determine whether or not we will take additional price later in the year based on greater insight attained from our work with RMS.

As you've already heard, during the quarter, we began selling our chicken wings by weight as opposed to by the piece. This has allowed us to standardize food cost by protecting us from the variability of size and weight, but most importantly, it did not change portion sizes or the value delivered to our guests.

As previously mentioned, during 2013, we will continue to test and evaluate expanding the strategy to our ribs. Based on the results from our first 3 months, a year-over-year decline in contracted food costs and the strategy previously mentioned, we're updating our previous guidance and now anticipate food and beverage cost for fiscal 2013 as a percentage of net sales to be approximately 145 to 150 basis points lower than fiscal 2012's percentage.

For the first quarter of fiscal 2013, labor and benefits as a percentage of net restaurant sales were 10 basis points unfavorable to the comparable period of fiscal 2012, primarily due to sales deleverage on fixed labor, partially offset by a decline in direct labor cost and lower-than-anticipated employee benefit costs due to our workers' compensation refund.

We affirm our previous guidance and still anticipate labor and benefit costs as a percentage of sales to be 30 to 35 basis points favorable to fiscal 2012's percentage. Operating expenses for the first quarter as a percentage of net sales were 27.8% or 50 basis points unfavorable to the prior year due to sales deleverage, increased gas cost due to an elongated and frankly colder winter and increased advertising cost due to a shift in media spend. These increases were partially offset by lower cost associated with the timing of menu printing.

For the remainder of 2013, we've made the purposeful decision to pull back on non-productive media. While we're not eliminating efforts entirely, we need to further evaluate whether they provide the intended results and a satisfactory return. As a result, we're updating our previous guidance and at this time, anticipate advertising expense will be approximately 2.85% of net sales for all of fiscal 2013, which includes a 0.75% contribution to the marketing fund. This compares to a 2012 spend of 3.4% in net sales, which included a 1% contribution to the marketing fund.

Based predominantly on the change in our advertising spend, we're updating our previous guidance and now anticipate operating expenses as a percentage of net sales for fiscal 2013 to be approximately 115 to 120 basis points lower than the 2012's percentage. G&A expenses as a percentage of total revenue for the first quarter of fiscal 2013 was 13.7% compared to 11.9% for the comparable quarter of fiscal 2012.

Approximately 130 basis points of the 180 basis point increase in G&A as a percentage of revenue reflects the previously mentioned reorganization of the CEO and COO positions, including bonus and stock-based compensation, as well as legal and professional fees incurred related to board activity. The remainder of the increase was primarily due to a decline in total revenue leverage.

As John had mentioned, over the course of the year, we will be taking a hard look at reducing G&A in 2013. If we were to exclude stock-based compensation and achievement of full bonus, collectively equaling 170 basis points year-over-year, G&A expenses as a percentage of revenue would actually be 30 to 35 basis points favorable.

Fiscal 2013's first quarter had $6,000 of preopening expenses compared to $18,000 in the first quarter of 2012. We're updating our previous guidance and now anticipate preopening costs for 2013 to be approximately $529,000 for the opening of 2 ground-up full-service company-owned restaurants later this year.

Interest expense for the first quarter of fiscal 2013 was slightly unfavorable in dollars and as a percentage of revenue due to a year-over-year increase in weighted average interest rates and a higher average outstanding balance on our line of credit. For full fiscal 2013, we still expect interest expense to be essentially flat as a percentage of revenue to fiscal 2012, and we still expect an approximate 29% effective tax rate for 2013.

With regard to our balance sheet, we typically maintained a cash and cash equivalent balance of around $2 million. We ended the quarter with a balance of $10.5 million on our revolving line of credit, reflecting over a 20% decline from yearend and a 12.5% decline from the prior year.

As of today, we have a balance of $11 million on our line, and we were in compliance with all of our covenants during the quarter. Lastly, although we are still within the buyback authorization, we did not repurchase any shares during the quarter.

At this point, we'd like to take your questions. Rich, if you could pool for the questions.

Question-and-Answer Session


[Operator Instructions] And we have a question from Conrad Lyon of B. Riley & Co.

Conrad Lyon - B. Riley Caris, Research Division

John, you said something earlier that I think kind of really hits the nail right on the head about sales and margins, and where sales were years ago and where margins were and where they are today. With -- to that end, can you provide any color of where you think margins can go? And I'll preface that by saying that, gosh, I think 8, 10 years ago, it used to be -- so you have a restaurant level profit of maybe 15%. I don't think we'll get back to that just given where food cost and labor are, but any sense of where you could take it over the next several years?

John F. Gilbert

Boy, that is a terrific -- yes, a sense. And it's certainly a big part of our strategy. So there's a couple of things that I'll put out there and maybe try to avoid giving you a number other than what we talked about in the near term. But there is a number of features inherent to barbecue and the way that we do barbecue, and I've talked before about batch and hold cooked process and the type of products that we make. Barbecue is a food item that's highly fungible. You can make a lot of things with; for example, pulled pork, tacos, flatbread, salads. And so one of the things that we have to figure out how to do is take advantage of those assets that barbecue presents to us in terms of the manufacturing process rather than not taking advantage. And I guess the best way to answer that is through conversations in the 6 months I've been here with the team, R&D, restaurant operators, we've identified a number of places to look for restaurant-level P&L improvement that has to do with leveraging the advantage that barbecue presents to us directly based on some of the things I just mentioned. Some of that will be in, hopefully, long-term menu management. So what that means is maybe what I would call more of an urban barbecue menu in the future that has some of those barbecue-infused product ideas like tacos, for example, that we're testing in some markets right now. But some of that then ends up impacting food costs, obviously, in a positive way, because if you can take the protein down and take the other elements up, you end up -- and still satisfy the consumer, which is incredible here -- and critical, you end up with clearly an advantage of where you are today, which is heavy emphasis on bone and [ph] protein, which will still be part of our menu and it's still generates a huge amount of gross margin per item. We won't lose sight of that. But I think there are a number of initiatives, and I'm still talking within the P&L, that give us the opportunity to go beyond the 250, 300 basis points that we already believe we've identified to get something even more exciting out of this business. And I don't know what we get to, but certainly, we want to get significantly north of where we are. I don't think I would be -- fair for me to go too much further in answering that only because it's such a wide range of issues. Looking at different equipment is an example. I mean, we have heretofore held out a standard on equipment that we can only use certain smokers and certain pieces of equipment. And those have actually limited our ability from a lot of angles in terms of production time, hold time. And there's improvements to be had in both those areas. And you can imagine what might happen if you can decrease production time and increase hold time, for example. And so, while those are central and basic to operating restaurants, there are also a lot of basis points in P&L improvement there. I mentioned some of the things that we're doing as it relates to labor in restaurants with call center, for example and some of the other initiatives, we talked about packaging. And so you'll get a sense, I think, as we start to talk about these things that cumulatively, they amount to something substantial. And they may not be that we get back to 2007 numbers by doing 2007 stuff, and maybe we get back to 2007 numbers by leveraging current technology and taking advantage of what the market will bear or what the market presents to us in terms of equipment advantage and technology advantages and a whole bunch of different things that frankly, we're not a pioneer in many of these areas, we're a bit of a follower.

Conrad Lyon - B. Riley Caris, Research Division

Got you. Maybe I can also ask about this one particular line item, specifically operating expenses in general have grown, call it, 300 basis points since that fiscal '06, '05, '07 timeframe. And the other -- I get food and beverage costs, labor, that you can probably do some tweaking to improve that, but is there -- I sort of view operating expenses, and it might be a misguided view, as something that is a little bit more easier to work with. Is that a safe assessment? I mean, might we see some improvement there?

Diana Garvis Purcel

Yes, Conrad, I'll take this one. Several of the initiatives that John mentioned in his portion of the script will address operating expenses. One of them, obviously, being the supplies initiative. We really believe that there are real dollars there, and as he mentioned, also providing a more quality experience for our guests. And so certainly that's an area that we're looking into. We continue to look for opportunities in terms of utilities and leveraging those. And as he mentioned, we've also -- are looking really hard at our advertising spend and making sure that we are getting the most productivity out of that spend and it's delivering the results that we intend. And so that's a hard area of focus for us. The other thing I just want to mention and it's always difficult, we speak in terms of the percentage of sales, the percentage of revenue. One of the things that have changed, and it happened in the first quarter of 2010, that certainly does impact the percentages but has a positive impact on EBITDA, and that was our acquisition of the 7 restaurants in New York, New Jersey, which frankly have higher rent structures. So you go back to those restaurants and you look at as a percentage of sales, those 7 restaurants do, if you isolate them, have higher rent structures, frankly, than any of our restaurants in the base and predominantly as compared to our East Coast restaurants. However, those restaurants, collectively, deliver terrific EBITDA on the bottom line. So we certainly recognize that we have to do be able to deliver the operating income and have the strategies in place. If you look at the guidance we provided, you'll see that it gets us pretty darn close to 2000 level -- 2007 operating income level. But we just have to dissect it a little bit further.

John F. Gilbert

Let me jump back in too, just to talk a little about the advertising expenses. I don't want to send the wrong message here. We are not throwing in the towel as it relates to marketing spend. I would categorize my position on this as very straightforward. I've spent a long time, probably too long, 30-plus years running advertising and marketing functions. It's very difficult to tell me that some spend is working in the advertising world when I can see that it's not. And I know where those things are, I know where to look for them. And frankly, this also applies to discounts. And so what I said when I first got here 6 months ago was that we were not an LTO promotionally-driven brand. And the fundamental reason for that is we simply don't have the media clout to be that kind of thing. We don't have enough media efficiency. There are brands in the marketplace that are tremendously media efficient, and they can pull off for 3% or 4% of sales significant impact from a sales standpoint, sales growth standpoint, when they get it right with their LTO. We're not wired that way. And so we were acting that way, and we were spending that way. And I think that as I've gotten deeper into it, I've recognized that our path is much more based on a progressive and aggressive use of the digital space which we've been testing extensively over the last 6 months, which is more of a one-to-one type of approach. It's working for us. Concurrent to that -- and so if I can still grow the top line and eliminate or reallocate nonproductive marketing spend, it just makes the -- it makes the marketing dollars left over work that much harder. So we're really proud of the marketing initiatives that we're making, and the implication of those is that we've been able to effectively reduce both discounts and, let's call it, wasteful media spend in material ways, and we've just started that.

Conrad Lyon - B. Riley Caris, Research Division

Yes, fair enough. Question on guidance. It's probably for you, Diana. If I look at your outline for expectations for this year relative to what happened in the first quarter, it looks like that to achieve the expectations that there's going to be some catch-up in the subsequent quarters, what quarters, if you can talk about this, should we expect to see a bulk of the pickup?

Diana Garvis Purcel

I think you're going to see continuous momentum. Keep in mind, first quarters are lowest sales volume quarters, so any blip, one way or the other, gets magnified. We're moving into barbecue season and as John had indicated, off of the terrific period 3 and starting to see the results of a lot of the sales initiatives start to take fruition. So even from a cost perspective, you'll see continuous improvement throughout the quarter. So I'm not going to peg for you how that lays out quarter-by-quarter, but as we've contracted, certainly from a food cost, from a contract perspective, I would tell you that this is our most unfavorable quarter.

Conrad Lyon - B. Riley Caris, Research Division

Okay. Labor. I may have missed it. Did you talk about what you expect to see in terms of unfavorability relative to what you had said last quarter?

Diana Garvis Purcel

Yes, we affirmed our guidance. So we're still expecting 30 to 35 basis points year-over-year.

Conrad Lyon - B. Riley Caris, Research Division

And the prior guidance included bonuses and accruals and things of that nature, correct?

Diana Garvis Purcel

Well, not in labor. So our bonus accruals, that's in G&A.

Conrad Lyon - B. Riley Caris, Research Division

Right. Exactly, exactly. Okay.

Diana Garvis Purcel

So did you catch our guidance on G&A?

Conrad Lyon - B. Riley Caris, Research Division

I did.

Diana Garvis Purcel

Okay, perfect. And that reflects a similar bonus expectation to what we would have given guidance on at the end of the fourth quarter.

Conrad Lyon - B. Riley Caris, Research Division

Okay. The other big variable which I know you, as a policy, don't talk about, but I'll ask this anyways, but obviously same-store sales, is there -- can you talk about a range perhaps of what is expected that goes into the line item guidance?

Diana Garvis Purcel

Well, you started off the conversation by saying I know it's a policy, you don't really talk about it. We really can't. We just can't go there. So I know that's probably disappointing.

Conrad Lyon - B. Riley Caris, Research Division

Maybe I can ask this. I know that things look encouraging from a March perspective. I'm not sure -- obviously, we'll see how April is. But do you guys have a sense that you're seeing some more of a stabilization less volatility with consumer spending versus the earlier part of the year?

Diana Garvis Purcel

Yes, I would say that, that is fair. And I think even as -- I don't if you follow Black Box Intelligence or if you follow Knapp-Track or what you use to sort of gauge the industry, but I think the industry, in general, has seen that. And so we feel good about the momentum we saw in period 3, and we feel good about going into what's our, we deem, our season. I mean this is where we make haste, so we feel really good about the second quarter.

John F. Gilbert

Conrad, I will say, and you will need to bring your credit card, but please, go out to the restaurant this weekend and you'll be able to see something exciting going on. So I think it is, without talking about same-store sales, you can certainly get in and see the energy around the new menu and the new products.

Conrad Lyon - B. Riley Caris, Research Division

Let me ask you this. I'm glad you brought it up. I haven't seen the menu yet. Is there a greater section dedicated to sort of value offerings?

John F. Gilbert

Actually, there's not. We've gone to a more barbecue-authentic menu. We were very parsimonious in price increases and really stayed very conservative, so we didn't take a lot. We do have what I would call a good price value offering in the new menu. But we did not -- for sure, we determined that we did not need a national, based on our testing in Q1, we did not need a national menu price value adjustment. We do have reasons in the country where there's clearly a lingering effect as it relates to consumer unemployment and stuff like that, where we do have fairly aggressive value initiatives underway that are providing very encouraging results, but our strategy is pretty basic, where we don't need to be in the value game, we're not going to -- let me say it differently, where we don't need to be in the reduced price game or the loss of revenue game, we're not going to be. We're seeing significant improvement in performance without having to resort to either discounts or value menus but we do deploy both in areas where we deem it necessary.

Conrad Lyon - B. Riley Caris, Research Division

Final question. With a kind of counter service kind of fast, casual format, any evolving there, or how is that, if you will, that initiative looking? Are there plans to perhaps be more aggressive with the rollout in the future, redesign, things of that nature?

John F. Gilbert

I think there -- our plans, for us, is to continue to evolve it. It is a very promising part of our business. Diana mentioned in her part that our mix attributable to to-go continues to grow and grow meaningfully. And part of that is because of the energy we're putting behind it, we believe that we will invest appropriately into proving that concept out. Again, our capital strategy is invest where we prove -- in order to prove, so that we're able to incent interest from franchisees to develop out that part of the portfolio. So at some point, the responsibility or the opportunity for growth is going to come from franchisees in that space, and we're working with several franchisees right now who have different versions of the shack to help them improve profitability and to get this thing to where it needs to be.


We have another questioner, Mark Smith from Feltl Inc.

Shannon Richter

This is Shannon, on for Mark Smith. Just a couple of questions here. First, what was behind the reduction of franchise unit growth guidance?

John F. Gilbert

I'll start, and then Diana can jump in. I think the biggest issue for franchisees is not inconsistent with consumers, is confidence based upon current performance. So as they came off of Q4, late Q4 and into Q3, I mean -- excuse me, Q1 2013, there were several projects that were on the table that, based on their performance, they slid back slightly. So the biggest issue with domestic franchisees was when they're showing a minus 6% for Q1, there's a confidence issue, we believe that based on the deployment of the stuff that we attested in Q1, that confidence is bouncing back.

Shannon Richter

And then second, what's the cadence of openings through the year?

Diana Garvis Purcel

So if you want to [ph] model it out, 2 in the second quarter, 1 of which we indicated that we opened this past Monday, 5 in the third quarter and 5 in the fourth quarter.


There are no further questions at this time.

John F. Gilbert

Okay. Thanks, everybody, for listening in. We certainly appreciate the interest and the time. Please all go out and enjoy our Famous Dave's meal this weekend. I think you'll be very pleased. Bye-bye.


Thank you. This concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.

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