BBQ Holdings, Inc.
Q2 2016 Earnings Call Transcript

Published: 15 Aug 2016

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Famous Dave’s Second Quarter Fiscal 2016 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 floor over to Dexter Newman, Chief Financial Officer for Famous Dave’s. Please go ahead sir.

[Dexter Newman:]

Thank you and good afternoon, everyone. Joining me on the call today is Adam Wright, our CEO. By now you should have access to our fiscal second quarter 2016 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 Adam Wright. Adam?

[Adam Wright:]

Thanks Dex. Good afternoon everyone and thank you for joining us. Before talking about the quarter, on behalf of the entire Famous Dave's organization, I'd like to congratulate our founder, Dave Anderson, and long-time Philadelphia franchisee David Marks on earning the title SMOKED Champion on Destination America's hit TV series SMOKED. After multiple rounds of competition, Famous Dave and David were victorious over Sonny's BBQ. Not only was it a well-earned victory, it also raised money for two barbeque-related charities, Operation BBQ Relief and Random Acts of BBQ. Dave and David, on behalf of everyone at Famous Dave's, we can't thank you enough for the outstanding job you did representing our great company. Congrats on adding yet another trophy to the case, and we're all looking forward to featuring the winning pork loin and wild boar sausage in the restaurants this fall with our SMOKED LTO. Turning to the quarter, today we reported our second quarter financial results. The Board and management team continues to focus and make progress against the four key priorities that will enable the rejuvenation of the company's long-term performance by driving sales and traffic, reducing costs, elevating organizational effectiveness, and rebuilding culture. While we are confident and focused on the refreshed direction of the company, our priorities and their associated changes will take time to take effect and to win back our guests and acquire new guests. Our first priority is sales and traffic and we continue to take significant steps to reverse the decline. As a reminder, the first actions we took to revitalize sales and traffic were to roll back portion sizes to the original state, bring back iconic menu items, such as cornbread muffins, and refocus the operations team on food execution and hospitality. This strategy has continued to improve guest satisfaction. We also continue to improve both value and affordability on our menu. This strategy, informed by guest research, makes us more competitive. As an example, during the quarter, affordability was highlighted via our lunch menu, happy hour and a special $9.99 Sunday fried chicken offering. Since the start of August and to further add to our value offerings, the company has started a day of week offering called Wednesday Slow Down Lowdown, which offers a three-course barbeque meal, including soup or salad, selected entrees with one side, and a mini dessert. This offering has three pricing tiers, starting at $10.99, $13.99, and $17.99. Lastly, and of note, we engaged Colle+McVoy as our agency of record to build upon the brand strategy and activation work we started last October with our franchisees. We're confident that Colle+McVoy is the right partner to execute this work, help us reengage with new and lapsed users, and drive brand awareness. Both our corporate marketing and national spending has been significantly reduced over the past year as we revisited the brand strategy. For context, we spent approximately 40% less on corporate marketing in Q2 this year versus the same quarter last year. With improved guest satisfaction, we now look forward to redeploying marketing dollars to bring guests back into our restaurants. Turning to our second priority, reducing costs, our operations team is refocused on the redevelopment of labor schedules based on time and motion studies that will be used to create an optimized labor matrix to improve our labor management. Additionally, we have continued work to lower operations complexity and drive simplification. As an example, we have aggressively pursued a return to focus on actual versus theoretical food costs and remain diligent and judicious through the lens of our guests on recipe and menu simplification to streamline, both food, waste, and labor while maintaining quality and increasing consistency. Finally, on costs, we continue to place emphasis on G&A, but this quarter appears elevated due to higher costs associated with franchise-related matters, such as legal and bad debt costs, and adjustments to reserves associated with plateware and other miscellaneous supplies. Priority number three focuses on elevating organizational effectiveness. We have taken several steps to enhance the flow of information and communication system-wide. We continue to place importance on enabling a culture of accountability via data driven decisions and stronger systems and processes. Most noticeably, we continue to further strengthen our relationship with our franchise base. Bolstered by the quality of the new leadership team, we recently concluded very productive meetings with the Advisory Board. Last, but not least, priority number four, which focuses on rebuilding culture. Our founder, Dave Anderson, is actively inspiring our culinary team, who constantly has our guests at the center of everything they do and remain instrumental through our simplification initiatives and subsequent innovation. Our training and recognition are also important to our revitalization and knowing that our guests experience is only as good as our employee experience, we're confident we have made progress, but are by no means declaring victory. To-date, our financial results do not reflect all the recently completed and ongoing foundational work. We're confident the combined effect of these efforts will reposition our company for long-term sustainable success. During the quarter, we opened two franchise-operated restaurants in Alameda, California and Santa Isabel, Puerto Rico. Both restaurants opened strong and are owned and operated by two of our company's strong franchisees. We closed one franchise-operated restaurant in Smithtown, New York. You may recall, during the first quarter we had successfully opened our first restaurant outside of North America in Abu Dhabi. It continues to be well received and we look forward to our partner opening a restaurant in Dubai and an additional restaurant in Abu Dhabi later this year. As I always do, I'd like to thank and acknowledge our hard working team and franchisees who care deeply about our company and future success and work diligently to move the business forward. I'm confident that with our efforts to rebuild our culture and our unfaltering passion for serving our award-winning barbeque, we are moving the company forward. Our sole focus is on maximizing long-term shareholder value and I remain confident our company's long-term growth prospects remain intact. With that, I'll now let Dexter provide more detail on the second quarter. Dexter?

[Dexter Newman:]

Thank you, Adam. I'll start with a discussion around our sales and profit performance for the quarter versus last year. 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 and our most directly comparable U.S. GAAP measures. We also provide a discussion of the nature of each adjustment. With that in mind, as Adam stated, results in the second quarter were unsatisfactory, highlighted by the decline in comparable sales and operating income. Total revenue from continuing operations declined from $32.7 million to $28 million. This was primarily due to the closure of a company restaurant, the refranchising of five company-owned restaurants since the end of the second quarter of fiscal 2015 and a 6.4% comparable sales decline. Also the second quarter of 2015 had $250,000 of franchise fee revenue associated with an international development agreement for the United Arab Emirates. These revenue declines were partially offset as a result of an increase in royalty revenue from $4.6 million to $4.7 million in the second quarter of 2016. This increase was driven by the refranchising of five restaurants in 2015 and seven Chicago restaurants in the first quarter of 2016, partially offset by a comparable sales decline of 4.3%. At the end of the second quarter of fiscal 2016, we had 37 company-owned restaurants and 142 franchise- operated restaurants, for a system-wide total of 179 restaurants in 33 states, the Commonwealth of Puerto Rico, Canada, and the United Arab Emirates. Subsequent to the end of the quarter, one franchise-operated restaurant closed in Casper, Wyoming. GAAP diluted earnings per share was $0.02, compared to $0.07 in the prior year. This quarter's results included the impact of approximately $1.1 million in asset impairment charges related to a restaurant held for sale, as well as $171,000 of costs related to a software implementation project that was discontinued. Adjusted diluted earnings per share was $0.17, flat to the same quarter in fiscal 2015, primarily driven by the exclusion of these non-recurring charges and a year-over-year decrease in the effective tax rate. Restaurant level operating margin was 9.5% this year versus 10.1% a year ago. The 60 basis point decline on a year-over-year basis came as a result of increased food costs due to increases in portion size, a shift in product mix given additional affordable menu options, and labor and benefit cost as a result of sales deleverage. These increases were partially offset by food contract deflation and a year-over-year decline in operating expenses. As it relates to G&A, expense for the second quarter of 2016 was $4.8 million, compared to $4.9 million in the second quarter of 2015. This decrease was moderated by increased legal costs for franchise-related matters, adjustments to reserves associated with plateware and other miscellaneous supplies, and professional fees related to brand development which were not repeated in the second quarter of 2016. Our effective tax rate for the second quarter of fiscal 2016 was a benefit of 1.8%, reflecting the results of the first six months of 2016. This compares to 28.3% during the second quarter of fiscal 2015. Turning to our balance sheet, as of July 3rd, 2016, the company had $6.3 million in cash and cash equivalents as well as $2.9 million in restricted cash, which includes $1.2 million that was required to collateralize undrawn letters of credit during the quarter. During the first six months of 2016, the company generated approximately $1 million in cash from operating activities, compared to $2.7 million in the comparable period of the prior year. This year-over-year decrease was as a result of the increase in restricted cash and the timing of working capital spend. We ended the second quarter with total net debt of approximately $7.1 million and were in compliance with all covenants of the credit agreement. In summary, despite these results, the organization has made meaningful progress on the four priorities Adam outlined that gets us back to basics. As I mentioned on our last quarterly call, and now 100 days in, these priorities have given the organization something that they have not had in a very long time, pride in driving toward an outcome and a belief in what is possible. We're confident that we have ample opportunities to enhance the return on invested capital by increasing the sales they produce and taking out unnecessary or unproductive cost. I remain excited by this opportunity to turn around and transform our company. Thank you again for your attention and your support. And with that, I'll now open the call up for questions. Operator?

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions] Okay, our first question comes from Alex Fuhrman [Craig-Hallum Capital Group]. Please state your question.

[Alex Fuhrman:]

Great. Thank you for taking my question and congratulations on the SMOKED event. That sounds great. Did want to ask a little bit, just I mean I guess the overarching theme here is the topline has been a little bit disappointing still. You mentioned that the comp decline here in the second quarter was disappointing. At what point do you think there's a good chance getting some of these headwinds behind you? And as you start to get maybe some momentum from some of the PR you've been getting, and in particular, I believe marketing, sounds like that was down substantially in the second quarter. When you put all those things together, I mean at what point do you think there's really the opportunity to get comps back up to flat positive territory? Is that something that would be possible to see this year? Or do you think it will take a few quarters of getting traction with some of the new marketing efforts and getting a little bit more word of mouth to spread over the course of several months or quarters?

[Adam Wright:]

Alex thank you for the question. Yes, just as a matter of policy, we don't give any forward-looking statements or guidance, but we believe we're taking the right steps as an organization to rebuild our sales for the long-term. That started with increasing portion sizes. It started with retraining, focus on food execution, hospitality, and those changes have led to meaningful increase in guest satisfaction. And as you said, the word of mouth that comes from that will be helpful long-term in building our sales. Second, you talked about our marketing. We've taken the past year and really studied what we were doing from a marketing perspective and are just now redeploying marketing spend and activating it from work that we did in collaboration with our franchisees. And third, I'd highlight, we talked a lot about our affordability and affordability is very important in helping us get traffic and guest counts back into our restaurants. And the one negative on that is it does lead to a lower ticket, but over time, we think that the guest counts will offset that and that will help us lead to positive sales.

[Alex Fuhrman:]

Great. That's really helpful, Adam. And then secondly, just thinking about the affordability that you just referenced. Obviously, I mean that creates a little bit of a headwind with ticket size, but it seems like your food and beverage costs as a percentage of sales looked okay here in the second quarter. I mean is the focus on value and affordability? I mean is that really just more about having more offerings at some of those lower price points? Or is that something that could impact your margins when you look at the whole business a couple quarters down the road?

[Adam Wright:]

Yes, good question, Alex. I think thinking through our margins and one thing that we had in the quarter year-over-year was much larger portions on the menu. And not until we get to January will we starting having an apples-to-apples on portion size. That said, it's a testament to Abe Ruiz and the operations team that have been very focused on our food costs and really minimizing waste to help control food costs. And then as we get further in the year, we will see more benefit just from some food deflation on the cost side.

[Alex Fuhrman:]

Great. Thanks Adam.

[Adam Wright:]

But as far as affordability, I mean obviously, there are some of the items, when you craft them, you look at the cost of the items you're going to offer at attractive prices and you design the menu so that you can continue to hit the food costs that we strive to do in our business model.

[Alex Fuhrman:]

Thank you.

[Operator:]

Okay. And that was the only question in the queue. [Operator Instructions]

[Adam Wright:]

Okay operator, thank you. And that concludes today's Famous Dave's second quarter fiscal 2016 earnings conference call. Thank you for your participation. You may now disconnect.