BBQ Holdings, Inc.
Q2 2017 Earnings Call Transcript

Published: 15 Aug 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Famous Dave's Fiscal Second Quarter 2017 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. As a reminder this call is being recorded for playback and will be available for replay for seven days. I would now like to turn the conference over to Dexter Newman, Chief Financial Officer for the Famous Dave's. Please go ahead sir.

[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 second quarter 2017 earnings release. This conference call must be considered in conjunction with the earnings release. 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, and good afternoon, everyone. Thank you for taking the time to join the call today. I'd like to begin with a brief recap of our second quarter performance and then provide an update on the progress made against the key initiatives that we have outlined during prior calls. As a reminder, these initiatives are to

[Dexter Newman:]

Thank you, Mike. As a reminder, when I speak to results, I'll be referring to adjusted numbers that excludes certain cost 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. Our second quarter GAAP basic loss per share was $0.18 compared to income of $0.02 per diluted share in the prior year. This year-over-year decline was primarily attributed to $3.5 million of asset impairment, estimated lease termination and other closing costs related to our refranchising and restaurant optimization plan, including costs incurred and deferred rent credits captured from the three company-owned restaurant closures within the quarter. Of the net impairment charge, $3.4 million was related to seven restaurants that were still in operation at the end of the quarter, but that we believe we are more than likely than not too close. As a result of this decision, we anticipate accelerated and therefore elevated depreciation and amortization expense until these restaurants are closed over the next 12 to 24 months. Our second quarter adjusted net income per diluted share was $0.16 compared to $0.19 per diluted share in the prior year. As a reminder, last year's adjusted results were favorably impacted by an effective tax rate benefit of 1.8% compared to an effective tax rate expense of 33.2% in the second quarter of this year. The primary difference between the GAAP and adjusted numbers in the second quarter was due to asset impairment and lease termination costs, stock-based compensation and severance. Total revenue from continuing operations declined from $27.7 million to $25.3 million. This was primarily due to the comparable restaurant sales decreases of 3.2% and 2.2% at franchise-operated and company-owned restaurants, respectively, along with the net closure of seven franchise-operated and five company-owned restaurants since the conclusion of the second quarter of last year. Restaurant-level operating margin at company-owned locations was 8.2% this year versus 9.5% a year ago. This decline was primarily - was driven primarily by sales deleverage on fixed costs and hourly wage rate inflation. Despite these hurdles, we continue to see improvements in efficiencies through our focus on actual versus theoretical food cost and actual versus optimum label platforms, both of which continue to be positive levers for us as we optimize the restaurant model and export relevant insights across our franchise systems. Now onto G&A. As Mike mentioned earlier, our second quarter G&A expense decreased approximately $1 million when compared to the same period last year. This improvement was heavily tied to our focus on reducing use, redesigning services and restructuring capabilities as we redirect our G&A structure to provide the relevant and necessary franchisor services. More specifically, the reduction in expenses in the second quarter were driven by an optimized organizational structure, including the elimination of unnecessary contract labor and professional fees that are typically carried at a premium, along with a reduction in costs related to franchise matters. We believe this is the right step forward on our immediate path towards delivering a more stable and profitable enterprise. When considering these strategic actions that have already been implemented, along with our firm planned pursuit of further substantial G&A cost reductions, we strongly believe that we should see a considerable reductions in our G&A next year, while providing equivalent, if not superior franchisor services to those provided in recent years that would have been far more elevated spend levels. There is much more work to do to get G&A lower. Given this continued restructuring, it is important to be mindful of the quarter-to-quarter ebbs and flows linked to one-time and non-recurring items that will occur. At the end of the second quarter, we had 32 company-owned restaurants and 135 franchise-operated restaurants for a system-wide total of 167 restaurants in 32 states; the Commonwealth of Puerto Rico, Canada and the United Arab Emirates. Subsequent to the end of the quarter, we closed three company-owned restaurants. And as of today, we have 29 company-owned restaurants and a 135 franchise-operated for a system-wide total of 164 restaurants. Turning to our balance sheet. As of July 2, 2017, the company had $5.4 million in cash and cash equivalents, as well as $1.6 million in restricted cash for the system-wide marketing and public relations fund and cash required to collateralize undrawn letters of credit. During the quarter, the company generated $2.2 million in cash from continuing operations compared to $1 million in the same period last year. This year-over-year increase was primarily the result of cash inflows generated from our restricted cash balance and accrued partially offset by an increase in our income tax receivable. We ended the second quarter with total net debt of approximately $5.2 million. This compares to $7.1 million of net debt as of July 3, 2016. In summary, as an organization, we are driving to write 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 were pleased with

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions]. Please hold while we poll for questions. Thank you. Okay. And our first question comes from Alex Fuhrman. Sir, please go ahead.

[Alex Fuhrman:]

Great. Thank you very much for taking my question, with Craig-Hallum Capital Group. One thing I wanted to ask about here was the general and administrative expense. Looks like you guys made some really nice progress getting that down here in the second quarter. And Dexter, if I'm understanding your comments correctly, it sounds like there is a little bit more room to go and thinking that that number could be even lower next year. So just trying to get a handle on, at least for now still have the handful of company-operated restaurants, what is the go-forward run rate for G&A for the rest of the year? The $3.5 million that you put up here in the second quarter. Is that more or less a quarterly G&A rate we could see in the back half of the year, or maybe somewhere in between the Q1 level and the Q2 level? Just anyway we can think about the back half of the year G&A, would be very helpful.

[Dexter Newman:]

Yes, Alex, thanks. It's Dexter. The - good question. The answer is essentially that at this point we've stayed away - we continue to stay away from providing financial guidance on the business. That said, you have heard from us historically, and once again, I guess, today that we have a relentless commitment to taking the company's G&A expense down from the levels that you have seen from us historically. I think that over the - we think that over the next series of quarters or so, we have a number of restructuring activities that we are going to have to ultimately work ourselves through and that's to my point about ebbs and flows that I think we should potentially expect on - within the P&L as we make those critical decisions to restructure the business. But at the end of the day, the lower G&A that we all come to expect is something that's going to be dictated by the pace and the outcome of the refranchising effort and by coupled with some prudent investments that we might perhaps need to make along the way. But there is no doubt about it that Mike and I and the entire management team, as well as the company Board is very much still committed [indiscernible] a step down, a material step down in the G&A on the business and you started to see some of that ultimately this quarter.

[Alex Fuhrman:]

Thanks Dexter. That's really helpful. And then, Mike, I think you mentioned in the prepared remarks that delivery is becoming a little bit more of a focus for the company. Can you give us a sense just right now within the total system, how many of your restaurants are able to offer delivery? And for the ones that do have delivery, can you give us a sense of how much of the sales that represents, and if delivery has been added recently in any meaningful cohorts? Are you able to triangulate how much of a lift there has been to sales and profits? And then, I guess, lastly along those lines, as you look at your portfolio of stores in the system how many of the stores you think are in markets where there are reliable delivery partners that would give you that option?

[Mike Lister:]

Sure, Alex. Great question. Let me start off by saying, as we move into the digital world of providing our products online ordering is certainly the first big initiative that we've tackled. We are roughly at 50% of the entire system currently on the online platform. We got about another 25% in the pipeline, all franchise-related and probably another 25% that are in some level of consideration to bring online on board. So as far as the delivery space is concerned, it's been a recent initiative. We've negotiated contracts with four of the largest providers across the country, the UberEATS and Amazons of the world along with some of the strong local regional players. We have recently - we certainly have some franchisees that have got out in front of this on us, so we probably have a half a dozen restaurants that are offering delivery. We've recently started a test here in the last couple of weeks we’ve had great success and will launch an expanded test here shortly. The evaluation on whether it's accretive to sales or not is still a little bit early in the game. We hope to be able to maybe give you some better guidance here on the next call or two as we monitor that closely, although we do have high expectation that this will be a great opportunity for us to provide the convenience that our guests are looking for. So we are really very bullish on the overall long-term success of delivery and online ordering for that matter. So too early to tell right now but we look forward to providing, what we believe, will be some exciting results going forward.

[Alex Fuhrman:]

Great. That's very helpful. Thank you very much and good luck.

[Mike Lister:]

Thanks.

[Operator:]

Okay. There are no further questions at the moment.

[Dexter Newman:]

Okay operator. Thank you. Thank you, ladies and gentlemen. That concludes our fiscal second quarter 2017 earnings conference call. Thank you for your participation. And you may all now disconnect.