BBQ Holdings, Inc.
Q3 2016 Earnings Call Transcript

Published: 15 Nov 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Famous Dave's Third Quarter 2016 Earnings Release. All lines have been placed on a in a listen-only mode, and the floor will be open for questions and comments following the presentation. [Operator Instructions]. At this time, it is my pleasure to turn the floor over to your host, Dexter Newman, Chief Financial Officer. 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 third quarter 2016’s 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 Web site 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. Before we get started, I would like to officially introduce Mike to all of you following a process that was conducted thoroughly and with great care in early October, the Board decided to name Mike Lister as Famous Dave’s new Chief Executive Officer and Chief Operating Officer. We are all very excited about the addition of Mike to the organization. Mike brings tremendous experience to the job. His deep expertise in the restaurant industry, including a previous stint with Famous Dave's as SVP of Operations and has demonstrated success as a Famous Dave's franchise owner including being a four-time franchise Chairman of the Franchise Advisory Board gives us full confidence that he's the right person to continue the efforts, leading our company to improved operating and financial performance. Over the past six months, Famous Dave's management team worked to define four key priorities to focus on as a part of the transformation including number one, revitalizing sales and traffic by putting the guests at the center of what we do. This involves addressing their needs and providing superior value to them. Number two, reducing costs with a primary emphasis on lowering our prime costs. We plan on achieving these increased operating efficiencies by minimizing food waste, recipe and menu simplification, labor scheduling, lean kitchen initiatives and supply chain efficiencies. Number three, elevating organizational effectiveness which places importance on enabling a culture of accountability via data-driven decisions, stronger processes, clear roles and responsibilities and effective communication. And finally, number four, rebuilding culture which returns us to better serving our guests and enhancing collaboration with our franchisees. Mike will inherit a good deal of advance work on that front, as the team has already begun to confront the challenges Famous Dave's faces. This is a pivotal time in Famous Dave's history and Mike will play an important role in achieving our goal of driving sustained value for all of our shareholders. I, along with the full executive team, are doing everything to ensure a smooth transition to provide continuity of leadership and to ensure Mike has the benefits of the good work done to-date so that he hits the ground running. Collectively, we build upon the aforementioned foundation with his deep history with the brand and accomplished 35 years within the industry. With that, I would now like to turn the call over to Mike Lister. Mike?

[Mike Lister:]

Good afternoon, everyone, and thank you for joining us. Before talking about the quarter, I wanted to take a moment to say thank you to the entire Famous Dave's organization for the warm welcome extended to me as I return to work side-by-side with our strong team of talented professionals that make up our field and corporate management teams. I have been onboard for five weeks and I’m truly excited by the opportunity to further the turnaround and transform Famous Dave's. I am pleased with the progress we continue to make, setting clear direction, solidifying the team at the top and mobilizing our organization around our key priorities. I look forward to successfully tackling our challenges and realizing our opportunities. Now onto a few updates. During the quarter, we started to experiment with the refresh of our locations via brand initiative entitled Fire It Up. Fire It Up presents a new exterior color scheme, new décor, uniforms, menu design, and plate ware. The test is in play at our Maple Grove in Bloomington, Minnesota locations. This refresh was launched in conjunction with our national fall LTO SMOKED, which featured award-winning recipes from our SMOKED Champions Founder Dave Anderson and long-time Philadelphia franchisee David Marks. Working together, they earned the title on Destination America's hit TV series SMOKED earlier this year. Turning to the quarter, today we reported our third quarter financial results. As noted in this afternoon's earnings release, our adjusted third quarter diluted net income per share was $0.01, an increase from the prior year's net loss of $0.01. While encouraging, we remain relentlessly focused on continued and necessary investments in our core guest experience to restore higher-quality sales growth and profitability over the medium to long-term. In the face of a challenging restaurant environment, we saw continued pressure on comparable store sales this quarter. Comp store sales were down 1%, which was our best comparable performance in the past 12 quarters, a significant improvement down from the 9.1% in Q3 of last year and a marked improvement from the down 6.4% since Q2 of this year. We benefited from strong performance in our to-go and catering lines of business which accounted for 46% of company-owned restaurant sales in the quarter. However, in totality, we saw the continued self-selection by our guests in the lower ticket menu items. While I am only five weeks into this role, I reaffirm that the Board and management team continues to operate with the right sense of urgency and are confident that our focus on the refresh direction of our company, coupled with the right investments which place emphasis on progress against our four key priorities, will enable the rejuvenation of the company's long-term performance. Our number one priority is to revitalize sales and traffic. As you may recall and as Dexter mentioned, this places the guests at the center of what we do and involves addressing their needs and providing superior value to them. To support this effort we have shared on prior calls the necessary investments to elevate all aspects of the guest experience. Actions taken in the past 12 months included the rollback of portion sizes to their original state, the return of iconic menu items such as cornbread muffins, sauces on the table, revisions to uniforms and the refocus on food execution and hospitality by our operations team, this strategy has continued to improve overall guest satisfaction. Specifically during the past quarter in our corporate locations, which function as our learning lab for our entire brand, we redesigned our lunch menu which was restructured to highlight the hidden values for this daypart. We also launched our new day of the week offering, the Wednesday Slowdown Lowdown, which offers a three-course barbecue meal including soup or salad, selected entrées with one side and a mini dessert. The objective is to drive value and affordability. We are encouraged by the trends on Wednesdays, despite industry headwinds. Both our corporate marketing and national ad spending has been conservative over the past year as we revisited the brand’s strategy. As we prudently commenced redeploying marketing investment, we intend to deliver to our entire system high-quality brand building activations and tools, enhance digital capabilities, famous barbecue innovation and authentic community engagements. Turning to priority number two, reducing costs. We remain focused on investing dollars back into our labor model initiative via the redevelopment of labor schedules based on time and motion studies that will allow us to achieve greater sustained levels of labor efficiency. Additionally, from our last call, we continue to progress with work to remove operations complexity and drive simplification. Our operations team is committed to the use of our actual versus theoretical food cost platforms. We expect this to be a positive lever for us. Through the lens of our guests, our culinary team is actively engaged in recipe enhancement and menu innovation with the goal to improve execution of the fundamentals and further augment guest satisfaction. Finally on costs, we continue to place emphasis on G&A, but this quarter appears elevated due to higher costs associated with settlement agreements and other franchise-related matters. Our overarching premise on reducing costs focuses on a thoughtful level of productivity that could be employed to fund innovation. Priority number three focuses on elevated organizational effectiveness. We have taken several steps to enhance our allocation of time to more value enhancing activities in support of elevating the total 360-degree experience. Though our guests satisfaction scores are up since last year, our continued commitment to hospitality and culinary training are at the backbone of our experience and is a differentiator that we take seriously. As an example, during the quarter, we started to reinstitute the processes and systems to enable teach backs throughout our field organization of the fundamentals from the food and service standpoint. Most notably, we continue to refocus and strengthen our franchise relationships. In recent weeks, we added a SVP of franchise operations who brings broad and deep industry relevant experience to the business. He has worked with large franchise organizations and has formed a strong bond with many of the franchisees with whom we partner. Last but not least, priority number four focuses on rebuilding culture. Our Founder Dave Anderson is actively engaged in our company; furthering the enhancement of our menu and organizational culture. There is a top-down commitment to operations and teambuilding and the enthusiasm and energy that once we get the cornerstone of the brand is here again, our entire organization is committed to the turnaround of our company one guest at a time. To-date, our financial results do not reflect all of the recently completed and ongoing foundational work. We are confident in the vitality of the brand that we are making the right and necessary investments to support its long-term sustainable success. In summary, I would like to thank and acknowledge our franchisees, our system-wide hard-working team members and our vendor partners all of whom continue to work so diligently with immense passion and continued dedication to our success. Collectively, we are all excited about the long-term prospects for Famous Dave's and are investing behind the aforementioned opportunities across the business. I look forward to successfully addressing our opportunities to return to healthy growth and maximizing long-term shareholder value. With that, I'll now let Dexter provide more detail on the third quarter. Dexter?

[Dexter Newman:]

Thank you, Mike. 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 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 noted earlier, our adjusted third quarter diluted net income per share was $0.01 compared to a prior year loss of $0.01, highlighted by an improvement in restaurant level operating margin and an improvement in G&A expenses, absent nonrecurring charges. GAAP basic loss per share was $0.34 compared to diluted net income per share of $0.14 in the prior year. The quarter's results were impacted as the company reviewed its underperforming assets as part of a restaurant optimization plan. In connection with this plan, we incurred approximately 3.4 million of impairment charges in the third quarter. As we continue to evaluate the restaurant portfolio, we anticipate addressing the ongoing operations of the 11 locations impaired over the next three years by a way of lease restructuring, lease assignment or subsequent closure at the end of their natural lease term. Total revenue from continuing operations declined from 27.9 million to 25.5 million. This was primarily due to the refranchising of five company-owned restaurants since the end of the third quarter of fiscal 2015 and a 1% comparable sales decline. During the third quarter, royalty revenue remained flat year-over-year at 4.3 million which was driven by a net four new restaurants since the end of the third quarter 2015, partially offset by a comparable sales decline of 3.8%. During the quarter, we had three franchise-operated restaurants closed in Casper, Wyoming; Council Bluffs, Iowa; and Rochester, Michigan. At the end of the third quarter and as of today, we had 37 company-owned restaurants and 139 franchise-operated restaurants for a system-wide total of 176 restaurants in 32 states, the Commonwealth of Puerto Rico, Canada and United Arab Emirates. Restaurant level operating margin was 3.8% this year versus 3.4% in the prior year. The 40 basis point improvement came as a result of a decline in direct labor and management labor due to open positions in the manager matrix partially offset by increased restaurant operating costs and sales deleverage. Food cost remain essentially flat year-over-year as a result of food contract deflation partially offset by increased food costs due to increases in portion size, a shift in product mix given additional affordable menu options, and lower than anticipated vendor rebates. As it relates to G&A, expense for the third quarter of 2016 was 4.5 million compared to 4.1 million in the third quarter of 2015. This increase was primarily the result of a settlement agreement, increase costs incurred for franchise-related matters and stock-based compensation which was partially offset by declines in severance and travel costs. Our effective tax rate for the third quarter of fiscal 2016 was 39.9% reflecting the results of the first nine months of 2016. This compares to 9.1% during the third quarter of fiscal 2015. Turning to our balance sheet. As of October 2, 2016, the company had 6.8 million in cash and cash equivalents as well as 1 million in restricted cash which was required to collateralize undrawn letters of credit during the quarter. During the first nine months of 2016, the company generated approximately $2.7 million in cash from operating activities compared to 2.1 million in the comparable period of the prior year. This year-over-year increase was primarily the result of the timing of working capital spend. We ended the third quarter with total net debt of approximately 5.8 million. This compares to 11.4 million of net debt as of September 27, 2015. At the end of the third quarter 2016, we were in compliance with all covenants of the credit agreement, except the two financial covenants; adjusted leverage ratio and a minimum adjusted EBITDA. On November 9, 2016, we entered into a forbearance agreement with Wells Fargo bank pursuant to which the bank agreed to forbear from exercising its rights and remedies under the credit agreement for the 30-day forbearance period that ends December 9, 2016. During the forbearance period we intend to finalize our refinancing arrangements. In summary, the organization has made meaningful progress on the four priorities Mike and I outlined that returns us to basics. We remain 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 costs. We remain excited by this opportunity to turnaround and transform our company. Thank you again for your attention and your support. With that, I'll now open the call up for questions. Operator?

[Operator:]

Certainly. Thank you. The floor is now open for questions. [Operator Instructions]. Our first question comes from Mark Rosenkranz. Mark, please state your question.

[Mark Rosenkranz:]

Hi, guys. Thanks for taking my questions. Mike, congrats on the new role.

[Mike Lister:]

Thank you, Mark.

[Mark Rosenkranz:]

Just kind of a broad base, you’ve been there now for five weeks and I was wondering have you been able to kind of come across anything now that you’ve gotten your head under the hood a little bit, what kind of are you thinking will be the key points to lean on as you kind of look to reverse the sales trends here? Maybe more confidence or any kind of observations you’ve had since you’ve really gotten to get in there the last five weeks a little more?

[Mike Lister:]

Yes, Mark, a lot of it’s what we outlined in the call. We really need to focus on driving sales and guest traffic and we’re doing that through a variety of ways. We’re reengineering our menu which will come out there a little bit later in the spring, as we get ready for the mandated calorie counts in May of 2017. We’re also looking at repositioning our marketing approach. Alfredo, our CMO is doing some amazing work around connecting with guests in different and nontraditional ways that have really helped us here in the last – in third quarter and early here in the fourth quarter. So that coupled with a renewed focus on company operations and just delivering the guest experience as we promised it to our guests will have a big impact.

[Mark Rosenkranz:]

Okay, thanks. That’s helpful. And then one more for me, if I could. You talked a little bit about the Fire It Up format. I had a chance to see that a couple of weeks ago. I’m just wondering what the reception has been on that and how you see that going forward, if you can see that building out over time? Thanks.

[Mike Lister:]

Mark, overall, we’re optimistic about how that program and how that refresh is going to work out for us. But as you know, we can’t and choose not give out restaurant-specific information. So I will tell you that it’s intriguing at this point as we continue to watch it. As we all know, it’s early in the process. So we need to continue to evaluate the data, but it’s encouraging so far.

[Mark Rosenkranz:]

Okay, great. Thanks for taking my questions and good luck moving forward.

[Mike Lister:]

I appreciate that. Thank you.

[Operator:]

Our next question comes from Mark Smith. Mark, go ahead.

[Mark Smith:]

Hi, guys. A couple for me. First, you guys talked a little bit about G&A. If we looked at G&A excluding that 410 and kind of one-time item, is that do you feel like a decent run rate? Do you feel like there’s maybe more that you can cut or do you think that with some of the people that you guided that you maybe see that come up a little bit?

[Dexter Newman:]

Mark, that’s a great question. It’s Dexter. Yes, I would say if you were to most definitely exclude the one-time impact; that obviously gets us to a slightly lower base. Clearly, we think there is a level of added opportunity within G&A but I think as we look to next year, we have to be cognizant also of the puts and takes that I think would come with the relevant investments that we know we need to make in the business to kind of honor the delivery of the totality, the experience that we’re trying to go after. That said, there’s still things that we can work on within that space, most notably our buckets I would say are probably travel costs, legal costs, et cetera. But we need to – we are really committed to retraining our team and getting after much higher levels of execution around food and service, like Mike talked about in his comments. So there’s some reinvestment that we also need to do but I think it’s safe to kind of work along the lines that you’re sort of mentioning.

[Mark Smith:]

And then second, looking at the restaurant level of expenses, the operating expenses were higher than we’d expected and I think are probably the highest on record as a percent of sales. What are the opportunities there and is there anything that was maybe one time that’s in that line, or any additional insight you can give us into the restaurant operating expenses would be great?

[Dexter Newman:]

Mark, again, it’s Dexter. I think the big items I think that are impacting us there is most definitely I think we have some deleveraging that’s going on because of the top line in the business. But we also made some investments, and again in that experience though be it in test form in the quarter, we talked a little bit about the work on Fire It Up. We have the cleanup work that we’re trying to engage in around our restaurants from a repairs and maintenance standpoint, R&M, to kind of help fuel the revitalization effort. A lot of the restaurants haven’t been touched in quite some time. And we have a little bit of expense in that that’s just associated with our catering business. So, yes, a little bit elevated but I would say it’s in many ways tied to first the deleveraging on the business and then most notably secondly, I would say the R&M expense that’s been tied to – at least from an OpEx standpoint, tied to the work that we’ve been doing on the Fire It Up initiative. And then the R&M work that’s tied to just a core revitalization work that we want to do to improve the experience within the four walls of all of our restaurants.

[Mark Smith:]

Okay. And then it seems like I’ve seen a few more email coupons and promotions. Is that something that – is that right? Have you guys spent a little more promotional? Is that something that we should expect to see going forward?

[Mike Lister:]

Mark, this is Mike. Strategically, we’re cognizant of not jumping back into the discount game. We are experimenting with some theme and lifestyle-based opportunities for our guests. You probably have noted that they’re tied to things like Monday Night Football offers or we had a National Pork Day offer and a National Sandwich Day offer. So we’re trying to be strategic that way versus every Monday we do this and every Friday we do that kind of stuff. So, we’re trying to pick opportunities – I think what you will notice is the offers are not nearly as aggressive as they once were. For example, we did 10 off 40 on Monday Night Football a few weeks back when the Vikings played the Giants and it had smashing success, yet it was probably our – from a value perspective it was one of our lower value offers yet it was more received. So trying to be strategic, trying to pick opportunities where our guests would appreciate leveraging our product with their lifestyle experiences and it’s having some success.

[Mark Smith:]

And then last one for me, how bad a shape are the 11 units that you impaired – the ones that are under evaluation? If we excluded these ones, would we have seen comps positive? And then additionally, have these restaurants been put together to try to sell to franchisees at all at this point?

[Dexter Newman:]

Mark, it’s Dexter. These restaurants I would say are restaurants that we have struggled with for quite a period of time, which ultimately resulted in the impairment. Of the 11, they are all across the landscape. They’re not unique in any way, shape or form to a specific part of the country or anything of that nature. No, the answer – we have not looked to make them a part of our refranchise efforts in any way, shape or form. And I would say if you were to perhaps exclude them from our comp base, I haven’t – it’s a number that we have not disclosed but I would say it’s suffice to say we’d still probably be somewhere in the range closer to where we ultimately ended to slightly accretive.

[Mark Smith:]

Perfect. Thank you.

[Operator:]

That appears to be the last question at this time.

[Dexter Newman:]

Okay, operator, I think in that case we are all good. Thank you all once again for your participation in the third quarter earnings call, and we look forward to connecting with you once again next quarter.

[Operator:]

Thank you. This does conclude today’s conference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.