BBQ Holdings, Inc.
Q1 2017 Earnings Call Transcript

Published: 16 May 2017

[Operator:]

Ladies and gentlemen thank you for standing by. Welcome to the Famous Dave's First Quarter Fiscal 2017 Earnings Conference Call. At this time all participants a in a listen-only mode, later we will conduct a questions and answer session. As a reminder this call is being recorded for play back and will be available for replay for seven days. I'd now like to turn the conference over to Dexter Newman, Chief Financial Officer for Famous Dave. Sir, the floor is yours.

[Dexter Newman:]

Thank you, and good afternoon, everyone. Joining me on the call today is Mike Lister, our CEO. By now you should have access to our fiscal first quarter 2017 earnings release. This afternoon’s conference call must be considered in conjunction with the earnings release we issued this afternoon. It can be found on our website at www.famousdaves.com in the Investor Relations section. Today’s release and conference call both contain non-GAAP financial measures that exclude the impact of certain business events. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons, which should not be considered superior to, as a substitute for, and should be read in conjunction with the GAAP financial measures for the period. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful can be found in this afternoon’s earnings release. Today’s earnings release and conference call also include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are not guarantees of future performance and therefore you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ from our forward-looking statements. Some of these risks are mentioned in our earnings release, others are discussed in our SEC filings, which are available at www.sec.gov. With that, I would now like to turn the call over to Mike Lister. Mike?

[Mike Lister:]

Thanks Dexter. Before we get started, as noted in this afternoon's earning release, We're all very excited about the addition of experienced industry executive Eric Hirschhorn to our Company's Board of Directors effective today. Eric served in various capacities at restaurant brands international through March of 2017 including Chief Marketing Officer for Burger King of North America. Prior to joining Burger King Eric's serve as General Counsel of 3G Capital, an investment firm based in New York where he served as key counsel in the acquisition of Burger King. Eric brings tremendous experience to our board. His deep expertise in the restaurant industry gives us full confidence that he is a great partner to help to shape the path forward for Famous Dave's. Now on to a few updates. The Company's Board, senior leadership and franchises continue to collaborate and dedicate significant attention and resources to improving the overall performance of our brand. Most recently at our Annual Shareholders Meeting, we reiterated our commitment to return our great brand to a healthier place. Building upon its existing strength we were clear about where we need to focus our attention over the next year. Number one, improving sales and traffic, our comparable sales performance has been soft, simply stated we must find the way to halt the softness and ultimately grow comparable restaurant sales performance. Our focus continues to be building frequency with current and last guests while growing with new audiences. To which we recently completed that consumer research effort aimed at understanding visit motivations and barriers. We are reviewing the results in the coming weeks and expect this deeper understanding to help inform our go-to-market strategy, innovation and communications as we move forward. From the food and beverage innovation standpoint we have completed the new item concept testing that we will leverage in concert with the guest research to re-establish our food and beverage pipeline. This work will position the brand to launch new innovative platforms across the system later this year. Notably we are pleased with the positive results of our specialty cocktail test recently completed after eight weeks in market. This test was proved to improve beverage mix as well as profitability. We are currently building a national rollout plan with completion target as for later this year. While working on our marketing communications strategy in food and beverage innovation coming later this year was exciting, we are also excited about our current and market initiatives. Recently, we rolled a system wide week day traffic promotion called Smoking Deals. This program includes a special offer each day of the week with promotable price points. This marks the first nationally coordinated effort and alignment in our brands history. We will go-to-market with one voice promoting a consistent offer and price nationally. Number two, rallying behind our single stated strategy to build a best in class franchise role model focused solely and supporting our franchises. As we announced earlier this month this requires an acceleration of our existing strategy to refranchise our remaining 33 company owned restaurants. You will recall in the first quarter last year the company refranchised seven company owned restaurants in the Chicago area. We simply cannot sustain the corporate structure required to effectively manage both our Company owned and franchise operations. Though our company owned restaurant operators do a good job we believe that it's time to shift our focus and attention to supporting our talented franchises. This is a major shift over the coming 12 to 24 months. We will approach the divestment [ph] process on a market-by-market basis and will look to a few of our highly capable existing franchises along with new franchises that not only acquire these restaurants, but to develop additional restaurants. It's also possible that some of our current corporate employees and general managers could become franchises of our brand. In addition to refranchising we may close some underperforming locations. So far as fiscal 2017 we have closed four company owned restaurants. We fully believe in this strategy, it will allow us to redesign and redirect our support center resources and capabilities and thus greatly enhance our franchise our services, which helps our franchise better run their businesses. We'll also be able to further drive our efforts in food and beverage innovation, marketing, franchise operations, training and development. Number three, the development in evolution of our Famous Dave's concept. We're currently engaging leaders from our franchise community, corporate employees and industry expert to help devise our prototype concept as a feature. We must create a compelling restaurant model for both existing and new restaurant operators to invest in. We've learnings from recent developments and renovations, but we're not where we need to be, so our cap force will help to find the most optimal prototypes. More than likely this concept will be centered on our highly regarded barbeque credentials with a simplified menu and a smaller foot print. Never the less we have some ways to go before rolling out such a concept. At the end of the day our new developments must make economic sense to our franchises as well as have strong appeal to our guests. Our challenge requires hard work and a determined focus, it is both management and the Board's plans as the year progresses to keep to you apprised of our progress and ultimate success in these three critical areas. I'm pleased with the progress we continue to make that in clear direction, solidifying executive and Board leadership and mobilizing our entire organization, however clearly there is more to do. During the quarter comparable restaurants sales were down 4.8% and 3.3% at franchise operated and company owned locations respectfully, while the significant actions have not yet translated increased comparable restaurant sales over the recent quarters, we have continued to see our guest satisfactions scores meaningfully improve, which is an area of strength for our franchises, who have consistently outpaced company owned performance. Our guest satisfaction scores are up approximately 11% since Q1 of 2015, which was the period immediately before the menu and guest experience changes at the company. We believe this significant improvement in brand health suggests that we're on track to restore this brand to grow. The guest experience metrics we are focused on include but are not limited to overall value, taste of food and pace of experience. These metrics are the significant drivers for overall satisfaction and intent to return to our restaurants. I have a strong believe in this brand it's consumer appeal and its Barbeque niche in the restaurant industry. At the end of the day, we must; One, find a way to mitigate the softness in sales and ultimately grow comparable restaurant sales performance; Two, refranchise our company owned restaurant portfolio and focus our attention on supporting our franchises. And three, create a compelling restaurant model for both new and existing franchise operators to invest in it this is our focus. We concluded Q1 with our Annual General Manager Conference hosted here in Minneapolis. It was the most widely attended gathering of franchise owners and operators General Manager and suppliers across the brand that we have had in quite some time. We all departed with confidence that that heart was once again beating at Famous Dave's. Holding through to our conference's theme to reclaim the frame. As I always do, I would like to thank them as they care so deeply about our company and its future success and work diligently to move our business forward. I remain confident that our company's growth prospects remain intact and look forward to updating you as the year progresses. With that, I'll now let Dexter provide more detail on the first quarter. Dexter?

[Dexter Newman:]

Thank you, Mike. As a reminder, when I speak to results I'll be referring to certain adjusted numbers that exclude certain costs and benefits. Please see the earnings release for reconciliations between non-GAAP metrics on our most directly comparable U.S. GAAP measures. We also provide a discussion of the nature of each adjustment. With that in mind, as Mike delineated, the road ahead requires clear focus and strong execution against our strategic initiatives to continue reasserting Famous Dave's presence within the marketplace. Refranchising the 33 company owned locations places sole focus on our franchisees. Allowing for the redesign of our DNA structure commensurate with the franchise and services provided, positioning us to be a more stable and profitable enterprise. Our first quarter GAAP basic loss per share was $0.18 compared to income of $0.02 per diluted share in the prior year. Adjusted net loss per basic share was $0.05 compared to $0.00 per basic share in the prior year. The primary difference between the GAAP and adjusted numbers in the first quarter was due to asset impairment and lease termination cost. Stock based compensation and severance. The asset impairment and lease termination costs were related to the current quarters closure of two underperforming company operated restaurants, along with lease termination costs tided to two previously refranchised restaurants. Restaurant level performance improved over the same period last year, given improved operational execution. With the decline in our consolidated adjusted net loss driven primarily by decreases in total revenue and an increase in general administrative expenses. Total revenue from continuing operations declined from $23.5 million to $22 million. This was primarily due to the comparable restaurant sales decreases at both franchise operated and company owned locations. The net closure of three franchise and two company restaurants and a lack of franchise fee revenue from two area development agreements in the same period last year. While our company owned comparable restaurant sales performance decreased during the quarter, the primary driver to decrease was our average check. In addition, it is also important to note that our off-premise business that consist up to-go and catering, represents a sizable component of our overall sales at 43% and has a lower average check then dine-in. As a reminder, the company has not taken a formal price increase since October 2013. Restaurant level operating margin at company owned locations was 2.8% this year versus 2.1% a year ago. This improvement despite a soft comparable sales performance came as a result of our continued focus on actual verses theoretical food cost initiatives and the more effective and efficient management of labor versus optimum. Both of which continue to be positive levers for us as we optimize the restaurant operating model and export relevant insights across our franchise system. Additionally, this decline was driven by commodity deflation at the timing of marketing spend. These savings were partially offset by way trade inflation and sales deleverage on the fixed cost. Combined with these prime cost savings initiatives that we already have in motion, we've recently engaged with spend difference, a managed services provider, provides customized supply chain solution in an effort to further improve our supply chain franchise services through their supply chain expertise, business intelligence leverage and technology. As we navigate the path to a lower G&A expense level, commensurate with the franchiser focus model, emphasis remains on a reduced use, the redesign of services and the restructure capabilities as we optimize the business model. The Q1 2017 G&A expense when compared to the same period last year was driven by employee severance and professional fees incurred in the current quarter as we restructure to the franchisors model. And last years early removal of a short-term incentive compensation approval and recapture of stock based compensation associated with an executive departure. Separately we're continue to make strategic investments in the growth of our beverage program, which through testing has produced positive results that on a system wide basis, we expect to cover the cost of that capital employed. Excluding the impact of these cost G&A expense would have been flat year-over-year. Our effective tax rate for the first quarter of fiscal 2017 was 42.7%, this compares to 31.7% in the same period last year. At the end of the first quarter we had 35 company owned restaurants and 138 franchise operative restaurants for a system wide total of 173 restaurants in 32 states, the Commonwealth of Puerto Rico, Canada and the United Arab Emirates. As of today, we have 33 company-owned restaurants and 135 franchise-operated restaurants for a system-wide total of 168 restaurants. Turning to our balance sheet. As of April 2, 2017, the company had $4.9 million in cash and cash equivalents, as well as $1.8 million in restricted cash for this system wide marketing and public relations fund and cash required to collateralize undrawn letters of credit. During the quarter, the Company generated approximately 900,000 in cash from operating operations, compared to $1.3 million in the same period last year. This year-over-year decrease was primarily the result of the timing of working capital spend and year-over-year decline in net income. We ended the first quarter with total net debt of approximately $7.2 million. This compares to $7.7 million of net debt as of April 3, 2016. In summary, as an organization, we are driving the right long-term decisions to strengthen our brand, bolster our people and reestablish our relevance in the marketplace, thereby enhancing the return on invested capital. We remain excited by the opportunity to help reinvigorate and elevate our company. Thank you again for your attention and your support. With that, I'll now open up the call for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Alex Fuhrman. Please state your question.

[Alex Fuhrman:]

I wanted to ask first and foremost about the plans to be refranchising the remainder of the company operated stores. I'm curious if you've gotten any interest yet from perspective buyers or some within your existing franchises network ever since you put out the press release and then as you think about all the different considerations that go into selling those restaurants, I guess to be helpful to understand what your priority here is; it price, is it getting in operators that you think could have the potential to open more units or potential getting operators who might come on and sign on for a nice franchise royalty just curious as you think between price and royalty and ability to develop future units what are really your priorities that you looked to refranchise those properties?

[Dexter Newman:]

I'll say it's probably too early on to get into the real specifics with regard to the refranchise other than the time period I would say that we've delineated. To the question about whether or not I think we have engage in discussions with existing and our new franchises with regard to the portfolio that's something that being consistently ongoing, so it's not in any way, shape or form new, given the most recent announcement, but it's really too early on I would say to really comment with regard to the underlying dynamics associated with the discussions that we have ultimately started or we'll continue to have as the months progress.

[Alex Fuhrman:]

So that's makes sense Dexter. And just turning to the same-store sales I mean obviously an improvement from the run rate for 2016 on the company owned side and I guess it looks like about three quarters in a row now where the company operated stores have done a little bit better lease in terms of comparable store sales than the franchise operated properties are there any specific changes that have been piloted at the corporate level that our standing out as being successful that are helping to drive that outperformance or just wondering if maybe some of that could be a function of easier comparisons from the prior year period as well.

[Dexter Newman:]

No Alex, thanks again its Dexter, thanks for the question. I think it’s a good, a very good call I think the probably the most prominent thing to note with regard to the company owned restaurants versus that of the franchise operated, is just a fact that the company owned restaurants are really coming from a lower base, given the changes that will make that system over the past years that got adopted. The franchise restaurants didn’t that just fairly adopt all the changes that you heard us historically talked about on some of the calls that when we referenced the in-restaurants experience so on and so forth that happen back 24 months or so ago. So I think important thing to call out is probably just that the company owned restaurants is may be perhaps coming from a lower base and that's simply because the fact that they adopted many more of the changes as opposed to that of the overall franchise system. That said they are being we've also being testing in those and the company owned restaurants that's lead to some moment and what I'll let you do is, to let Mike talk a little bit about some of the things that we’ve done example from a menu prospective.

[Mike Lister:]

Thanks Dexter, certainly we're testing in different formats on menus, we're testing some different service sequences on the corporate side that once proven to work, we'll be able to roll those out and we're seeing some real positive success, I mentioned earlier the cocktail test that we did, that was a real positive a piece for us that we did in most of the full-service restaurants in the Twin cities. And we're really excited to roll that out, we show cased it at our conference to the franchise along the system and there is high level excitement and energy to get that program lifted up and trained throughout the system. So there have been some pockets of things that have tested and worked well and now we're working towards deploying those to the rest of the system at large.

[Alex Fuhrman:]

That’s really helpful and then just one last quick question, I seems like you guys have obviously had some pretty nice additions to the board, people with some pretty tremendous restaurants experience. I'm not sure if I might have missed this on the call, is someone leaving the board of directors or are you expanding the board by one seat?

[Dexter Newman:]

Good question Alex, its Dexter, for clarity there was an open position on the Board, given John Lenin did not stand for reelection at the most recent annual shareholders meeting.

[Operator:]

Thank you. And our next question comes from Mark Smith. Please proceed with your question.

[Unidentified Analyst:]

As you might have said this, but just to clarify was the severance expense all in G&A?

[Dexter Newman:]

Hey Mark, its actually -- to answer that, yes.

[Unidentified Analyst:]

And just looking at post refranchising the 33 units, what would be a goal for G&A with that goal would be based kind of a percent of system wide sales?

[Dexter Newman:]

Hey Mark its Dexter again, I would say it's too early to get into, I think this specific on, really were the ultimate outcome or target for G&A could land, but what I would feel, most comfortable I think sharing at this point it is like very clearly, we're going to look at the continued redesign of our support center and the services that they provide to the franchises that would ultimately take us down to a point that's more commensurate with that operating model that we're going to go to. If that makes a sense at all. I don’t think that you would anticipate us being up at the levels that you've seen historically.

[Unidentified Analyst:]

Okay, great. Thank you.

[Operator:]

[Operator Instructions] And there appears to be no further phone questions at this time.

[Dexter Newman:]

Thank you, operator.

[Operator:]

You are welcome.

[Dexter Newman:]

So thanks everyone this concludes our Famous Dave’s first quarter fiscal 2017 earnings conference call. Thank you all for your participation and you can now disconnect.