BBQ Holdings, Inc.
Q3 2017 Earnings Call Transcript

Published: 14 Nov 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Famous Dave's Third Quarter 2017 Earnings Release Conference Call. All lines have been placed on a listen-only mode. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Dexter Newman, Chief Financial Officer for Famous Dave's. Sir, the floor is yours.

[Dexter Newman:]

Thank you, and good afternoon, everyone. Joining me on the call today is Mike Lister, our current CEO. By now, you should have access to our fiscal third 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?

[Michael Lister:]

Thanks, Dexter and good afternoon, everyone. Thank you for taking the time to join the call today. Before we get started, as noted in this afternoon's earning release, I would like to take this opportunity to personally welcome Jeff Crivello to the management team and congratulate him on his recent appointment to Chief Executive Officer effective November 14. Jeff joined our company's Board of Directors earlier this year, where his visionary leadership and contributions were immediately recognized. He will ultimately play a critical role in advancing Famous Dave's into the next phase of its transformation, bringing extensive experience along with him. Most recently, since January of 2015, Jeff has served as the Chief Financial Officer of PW Partners Capital Management, LLC where he has primary responsibility for operations and accounting. I am tremendously proud of the progress that we have made over the last year in order to position the organization for this next step. The swift successes that we have realized against our restaurant optimization and re-franchising strategy will now allow for Jeff and team to focus on the continued restructure and lowering of the company's general and administrative expenses, the development and evolution of our Famous Dave's concept and the improvements in our comparable restaurant sales performance, which has much focus on delivery, online ordering and menu enhancements. So although it is with mixed emotions that I step away from the role, I am confident that the timing of this transition makes strategic sense for our company and its shareholders. With that being said, I'd like to now turn to a brief recap of our third quarter performance. Our same-store sales were down 2.1% in our franchise-operated restaurants and up 0.9% in our company-owned restaurants for our first positive comparable sales performance since the second quarter of 2013. Performances particularly notable as it comes amidst further industry declines, which experienced one of its more challenging quarters in recent years with traffic and sales down minus 4.8 and minus 2.2 respectfully. The recent hurricanes certainly contributed to a portion of the industry softness to which our franchise-operated restaurants in Puerto Rico and Florida also experienced the effects of ultimately contributing negative 60 basis points to our franchise performance within the quarter. Although there is certainly more work to be done as franchise-operated comparable sales were still down in the quarter, we are very pleased with the successive trend improvements that we've seen throughout the year. As we continue to test and implement sales-generating initiatives within our growing off-premise lines of businesses, we're confident that Famous Dave's is on the right path to return our franchise community to a place of comparable sales growth. I mentioned earlier that our company-owned restaurants realized positive comparable sales for the first time in 4 years, to which our to-go and catering lines of business were the primary contributors of that growth. With the continued expansion of online ordering capabilities, leveraging of national contracts for delivery service providers, which contributed 90 basis points to the company-owned total comparable restaurant sales performance, and new sales lead generation tools for catering, we are creating a variety of avenues for our franchisees to grow their businesses in a similar fashion. Additionally, as we look to identify and implement strategic track [ph] check-driving initiatives that will not negatively impact our guest value perception, I'm pleased to report that we have significantly completed the system-wide rollout of our dine-in signature cocktail beverage program to which all early signs point to a successful customer response with 50 basis points of the company-owned total comparable restaurant sales within the quarter being attributed to this important beverage initiative. With that being said, our focus is certainly on building frequency with current and lapsed guests, while attracting new audiences. The recent consumer research and segmentation work aimed at understanding visit motivations and barriers, as well as new concept testing to inform our food and beverage innovation pipeline, has played an integral role in the build of our 2018 marketing calendar. From a profitability standpoint for the third quarter, adjusted EBITDA was $1.4 million, an increase of approximately 50,000 from the same quarter of the prior year. Given the continued industry sales headwinds and inflationary pressures, our teams are hyper-focused on tightly managing all of the costs and expenses in our immediate control. At the restaurant level, we continue to see meaningful improvements in food costs by way of our actual versus theoretical platform or food waste management, along with a similar tool on the labor front that allows managers to more effectively schedule and manage hourly labor efficiency in their restaurants. All of these learnings and best practices are in various stages of deployment within our franchise system. Additionally, we've continued to place emphasis on making material improvements to our general and administrative structure as we look to optimize expenses to be more commensurate with that of a dedicated franchisor. I'm pleased to note that G&A expenses were down approximately 600,000 or 14% versus the third quarter of the prior year. This follows up on the $1 million year-over-year reduction in expense that we realized in the second quarter of this year. The progress on this front is attributable to two primary tactics. One, our G&A optimization plan to reduce use, redesign services and restructure capabilities; and two, our restaurant optimization and re-franchising strategy. I will allow Dexter to elaborate on the former later in this call. However, I would like to reiterate the progress on our restaurant optimization and re-franchising strategy that brings with it a lessened impact to our G&A expense structure. Although these decisions and conversations are extremely difficult to execute upon, I cannot be more proud of how the team has responded. It is through these decisions that we've been able to optimize our existing company-owned portfolio, allowing for the re-franchising strategy to commence. As we recently announced, subsequent to the end of the third quarter, we successfully re-franchised 8 restaurants in Maryland and Virginia to an existing franchisee, Elliott Baum. Elliott has consistently been one of our strongest franchisees and we cannot be more excited about the expertise and successes that he will ultimately bring to that market. As we progress through discussions with our potential partners and iterate upon the franchisor-focused financial model, we continue to have the utmost confidence in the viability of this strategy. It truly is allowing us to redesign and redirect our support center resources and capabilities and, thus, greatly enhance our franchisor services in order to help our franchisees better run their businesses. In summary, the company's Board of Directors, executive leadership and franchisees continue to collaborate and dedicate significant attention and resources to improving the overall performance of our brand with promising improvements realized over the past quarter once again. I remain as confident as ever in the company's growth prospects, especially as Jeff looks to continue the progress and elevate the relevance of this great brand once again. As I always do, I would like to conclude one last time by saying thank you to our franchise owners and operators, general managers, suppliers, support center employees and everyone else across the brand that cares so deeply about this company and its future success. With that, I'll turn it over to Dexter.

[Dexter Newman:]

Thank you, Mike. As a reminder, when I speak to results, I'll be referring to adjusted numbers that exclude certain costs and benefits. Please see the earnings release for our reconciliations between non-GAAP metrics and our most directly comparable U.S. GAAP measures. We also provide a discussion of the nature of each adjustment. Our third quarter GAAP net loss per basic and diluted share was $0.26 compared to a loss of $0.34 per basic and diluted share in the prior year. This year-over-year improvement can be explained by the lower asset impairment, estimated lease termination and other closing costs related to our re-franchising and restaurant optimization plan and lower general and administrative expenses, which were down $1.2 million and $600,000, respectively. Of the net impairment charges incurred during the third quarter of this year, $1.5 million was related to lease termination charges incurred for 7 restaurants that we closed during the quarter. Our third quarter adjusted net loss per basic share and diluted share was $0.01 compared to $0.02 per basic and diluted [ph] share in the prior year. The primary difference between the GAAP and adjusted numbers in the quarter were due to asset impairment and lease termination costs, stock-based compensation and severance. Total revenue from continuing operations declined from $25.4 million to $21.9 million. This was driven primarily by the net closure of 12 company-owned and 10 franchise-operated restaurants since the conclusion of the third quarter of last year, along with the franchise-operated comparable sales decrease of 2.1%. Restaurant-level operating margin at company-owned locations was 7% this year versus 3.8% a year ago. This improvement was driven primarily by lower occupancy costs, the timing of advertising spend and prime cost efficiencies gained through our focus on actual versus theoretical food costs and actual versus optimum labor platforms, 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. These improvements were partially offset by hourly wage rate inflation and an increase in fixed labor costs as management teams were fully staffed against their par level expectation this year in comparison to operating with fewer managers during the same time last year. Now on to G&A. As Mike mentioned earlier, our third quarter G&A expense decreased approximately $600,000 when compared to the same quarter last year. This improvement was driven by our continued 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 and similar to the prior quarter, the reduction in expenses were driven by an optimized organizational structure, along with the elimination of unnecessary contract labor and professional fees that are typically carried at a premium and a reduction in costs incurred for franchise matters. These decreases were partially offset by bad debt expense recognized for a previously struggling franchisee. When considering the strategic actions that have already been implemented, along with our planned pursuit of further substantial G&A cost reductions, we believe that we should see considerably lower G&A next year, while providing equivalent, if not superior franchisor services to those provided in recent years at far more elevated spend levels. As Jeff alluded to within his commentary and this afternoon's press release, we believe this can be achieved while targeting a G&A expense run rate of approximately $8 million within the next 90 days. As a reminder, given this continued restructuring, it is important to me mindful of the quarter-to-quarter ebbs and flows linked to onetime and nonrecurring items that will occur. At the end of the third quarter, we had 25 company-owned restaurants and 129 franchise-operated restaurants for a system-wide total of 154 restaurants in 32 states, the Commonwealth of Puerto Rico, Canada and the United Arab Emirates. Subsequent to the end of the quarter, we completed the re-franchising of 8 restaurants in Maryland and Virginia and as of today, we have 16 company-owned restaurants and 136 franchise-operated restaurants for a system-wide total of 152 restaurants. Turning to our balance sheet. As of October 1, 2017, the company had $7.4 million in cash and cash equivalents, as well as $1.7 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 approximately $2.3 million in cash from continuing operations compared to $1.7 million in the same period last year. This year-over-year increase was primarily the result of cash inflows generated from tax refunds received during the quarter. We ended the third quarter with total net debt of approximately $1.9 million, inclusive of $9.3 million of notes payable less $7.7 million - less $7.4 million of cash and cash equivalents. This compares to $5.4 million of net debt as of October 2, 2016. In summary, as an organization, we are driving the right long-term decisions to strengthen the brand, bolster our people and re-establish our relevance in the marketplace, thereby enhancing the return on invested capital. We remain pleased with, one, the improved - the improvement in comparable restaurants sales trends at both franchise-operated and company-owned restaurants. Two, the continued decrease in general and administrative expenses by approximately $600,000 from the third quarter of fiscal 2016. Three, the generation of approximately $2.3 million in cash from continuing operations, and four, albeit difficult, the continued execution of our restaurant optimization program, which recently allowed for the successful re-franchising of our Mid-Atlantic market to Elliott Baum, a strong, respective leader and operator within our franchise system with an extraordinary team. Last, but not least, on behalf of the Board of Directors, our management team, franchisees and all employees, I would like to thank Mike for his hard work and dedication to the company as its Chief Executive Officer. He stabilized our operations and ultimately delivered upon the company's key initiatives in a commendable fashion. His contributions were quickly recognized and played an integral role in positioning the company for an exciting future. Thank you all again for your attention and support. With that, I'll now turn the call back to the operator.

[Operator:]

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