BBQ Holdings, Inc.
Q4 2016 Earnings Call Transcript

Published: 7 Mar 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Famous Dave's Fourth Quarter 2016 Earnings Release and Conference Call. All lines have been placed on a in a listen-only mode, and the floor will be opened for your 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 fourth 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 Mike Lister. Mike?

[Mike Lister:]

Thanks Dexter. Before we get started, as noticed - as noted in this afternoon's earning release, the Board of Directors appointed current Board member, an experienced industry executive, Charles W. Mooty, Non-Executive Chairman of the Board. He succeeds Joe Jacobs, the President and Co-Founder of Wexford Capital, who was our Non-Executive Chairman since 2015. Joe will remain on the Board and we look forward to his continued leadership. We are all very excited about the appointment of Chuck to assume the responsibility of Chairman. Chuck brings tremendous experience to the role. His deep expertise in the restaurant industry, including his executive and board tenure with International Dairy Queen, owned by Berkshire Hathaway, gives us full confidence that he is the right leader to help us shape the path forward for Famous Dave's at such a pivotal moment for the company. Chuck currently serves as President and CEO of Jostens, Inc. I speak for our entire aligned and dialed-in board, senior leadership and franchisees when I say how thrilled and grateful we are with a proven instrumental experience and expertise Chuck brings to aid the positioning of Famous Dave’s for long-term success. Now on to the quarter. Over the last nine months, we worked to define four key priorities to focus on as a part of the turnaround. Number one, improving sales and traffic by putting the guest at the center of everything we do. Number two, reducing costs with an emphasis on prime costs and G&A expenses. Number three, elevating organizational effectiveness by placing importance on enabling our culture of accountability via data-driven decisions, stronger processes, clear roles and responsibilities and effective communication. And finally, number four, rebuilding culture, allowing us to better serve our guests and enhance collaboration with franchisees. I am pleased with the progress we continue to make, setting clear direction, solidifying executive and board leadership and mobilizing our entire organization around these key priorities. 2016 was a challenging year for the industry and a year of transition for Famous Dave's. The Company's Board, senior leadership and franchisees continue to collaboratively dedicate significant attention and resources to improving the overall performance of the brand. Rest assured, we have not been at a standstill and are very focused on the restoration and elevation of our differentiated total guest experience. As you may recall, this encompassed food quality and portion enhancements, the return of iconic menu items and the reversion to interior décor that created our authentic barbecue environment to name a few. While the significant attention and actions haven't translated into comparable store sales increase quite yet, we continue to see positive guest feedback and trends year-on-year across the brand. The measures we are focused on include but are not limited to overall value, taste of food, pace of experience and intent to return to our restaurants. Throughout 2016, we also continue to increase both value and affordability on our menu. This strategy, informed by guest research, makes us more competitive. As an example, during the quarter and year, affordability was highlighted via our lunch menu redesign, Happy Hour and the Special Sunday chicken offering. We will continue to provide our guests with brand appropriate value offers. We recognize there is more to do in 2017. Like any tough challenge, we are focused on it and we’ll continue to address and learn from it, utilizing these learnings to shape our strategy as we move forward. In a phase of a challenging restaurant environment, which has remained depressed with negative traffic for an extended period of time, our dine-in line of business experienced headwinds and saw continued pressure on comparable sales this quarter and year. Our off-premise line of businesses, which include To-Go and catering, and accounts for a significant percentage of the overall business, has stayed better. We continue to build system-wide organizational capabilities, including online ordering and testing delivery services, to strength what we feel could be a competitive advantage for us long-term. As mentioned throughout the year, 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. This will be a continued focus as the labor landscape continues to evolve. Additionally we have continued 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 platform. We know this is a positive lever for us as we continue to optimize the restaurant operating model and export relevant insights across our franchise system. Through the lens of our guests, our culinary team remains actively engaged in recipe enhancement and menu innovation, with the goal to improve execution of the fundamentals and further augment guest satisfaction. Finally, and as you can see on both the quarter-on-quarter and year-on-year basis, we've continue to place emphasis and make material improvements on G&A, as we reduce use, redesign services and restructure capabilities. Our overarching premise on reducing cost and expenses focuses on a thoughtful level of productivity that could be employed to fund the innovation across our business and augment services to our franchisees. As I always do, I would like to thank and acknowledge our hardworking team and franchisees, who care deeply about our company and future success and work diligently to move the business forward. Although I have only been in my current role for one quarter, I have been with Famous Dave's since 1997 and I continue to have the utmost belief in the strength of this brand and it's a great consumer appeal. I want to reaffirm that the Board, management and franchisees continue to operate with the right sense of urgency to get our business back into the healthiest place possible. I am confident that with our efforts to rebuild our culture and our unfaltering passion for serving our award-winning barbecue, we are moving the company forward. Our sole focus is on maximizing long-term stakeholder value, which includes our guests, franchisees, employees, communities and shareholders. I remain confident our Company's long-term 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 fourth 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. From a revenue and earnings perspective in 2017, we will not be providing financial guidance. With that in mind, as Mike stated, 2016 remained a year of transition. However we believe we are ending 2016 with clear focus and stronger initiatives to continue to reassert Famous Dave's presence within the marketplace. Our fourth quarter GAAP basic loss per share was $0.12 compared to a loss of $0.05 per basic share in the prior year. Adjusted net loss per basic share was $0.10 compared to a prior-year loss of $0.08 per basic share in the fourth quarter of 2015. This decline was primarily driven by year-over-year decrease in revenues and erosion of restaurant-level operating margin, partially offset by an improvement in G&A expenses. Total revenue from continuing operations declined from $25.4 million to $22.6 million. This was primarily due to the decline in restaurant sales and franchise royalty revenue, due to company-owned and franchise-operated comparable sales declines and the inclusion of a 53rd operating week in fiscal 2015. During the fourth quarter, royalty revenue was $3.7 million, down from the prior year's $4.3 million, as a result of a comparable sales decline of 5.5% on the loss of royalties earned from the 53rd week of 2015, partially offset by a net addition of four franchise restaurants. From a development perspective, one franchise-operated restaurant opened and another closed during the quarter. At the end of the fourth quarter, 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 the United Arab Emirates. As of today, we have 35 company-owned restaurants and 138 franchise-operated restaurants for a system-wide total of 173 restaurants. Restaurant level operating margin loss at company-owned locations was negative 0.7% this year versus 2.6% a year ago. This 330 basis point decline came as a result of sales deleverage on fixed labor and operating cost, in addition to continued wage inflation pressure. These costs were partially offset by a year year-over-year decline in management labor. Food costs remained essentially flat year-over-year. This was the result of food contract deflation and focus from company-owned locations on our actual versus theoretical food waste initiative, offset by increased food costs due to investments in portion size to improve the guest experience and a shift in product mix given additional affordable menu options presented to our guests. As a reminder, the Company has not taken a formal price increase since October 2013. As it relates to G&A, expense for the fourth quarter of 2016 was $4.1 million compared to $5.1 million in the fourth quarter of 2015. This reduction reflects our continued successful initiative to reduce use, redesign services and restructure capabilities as we optimize the business model. These actions have us clarifying what support functions are expected to deliver, eliminating non-essential activities and scrutinizing the processes that deliver support services. Our overall goal remains to reduce and adjust the what and the how of activities performed, as we revitalize our brand and the related support center of excellence. Our effective tax rate for the fourth quarter and full-year of fiscal 2016 was 37% and 40.5%, respectively. Turning to our balance sheet. As of January 1, 2017, the company had $4.5 million in cash and cash equivalents, as well as $1.7 million in restricted cash, which was required to collateralize undrawn letters of credit during the quarter. During 2016, the Company generated approximately $1.3 million in cash from operating activities, compared to losing $1.9 million in the prior year. This year-over-year increase was primarily the result of the timing of working capital spend. We ended the fourth quarter with total net debt of approximately $7.9 million. This compares to $10.4 million of net debt as of January 3, 2016. Late in the fourth quarter, we finalized a new long-term credit agreement with our new bank partner, and at the end of the fourth quarter, we were in compliance with all covenants of our new credit agreement. Finally, last quarter we shared the review of our underperforming company-owned assets as part of a restaurant optimization plan. In connection with this plan, you'll recall that we incurred approximately $3.4 million of impairment charges in the third quarter associated with 11 locations. We continued to evaluate the company-owned portfolio with the goal to restructure leases, sublet properties, assigned leases, or subsequently close select locations at the end of their natural lease term. Subsequent to the close of the financial year, we've closed two company-owned restaurants under this plan. In summary, despite the industry environment, 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 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 the call up for questions. Operator?

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions]. And our first question comes from Alex Fuhrman. Please state your question.

[Alex Fuhrman:]

Great. Thank you for taking my question from Craig-Hallum Capital Group. Wanted to ask a couple of things. Particularly interested in your commentary about some of the guest satisfaction scores, if you can give us a little bit of a sense of how those have trended through Q1 and year-to-date, and specifically would be interested to get a sense of typically some of the classic items that you've added back, particularly the iconic cornbread that you used to have. How long does it typically take when you add something like that back to get a response in your guest satisfaction score? Is that something you typically see within a month or two, or does it take a little bit longer to build? I'd be curious just how some of those scores evolved as some of the older items were added back to the menu?

[Dexter Newman:]

Hi, Alex. Thanks for the question. It’s Dexter. With regard to the trend on the OSAT scores, the absolute numbers are figures that we have not disclosed historically. But what I can tell you is that since they started work at the Company about now 15, 18 months ago, these scores through Q1 last year as you referenced on both sides of the coin, either the franchise or company locations have definitely trended in a positive direction on both companies, to the extent that we have seen probably double digits increases in overall OSAT back from the time those changes that you were referencing in fact were made. So I would not say that we are - our scores are not at the moment out of step with what you would have perhaps be accustomed to from looking at peers across the industry or anything of that sort. But the answer to question with regard to the trend since Q1 or since those changes were made, it's definitely been very much still in an upward direction at both franchise and company locations. I'll let Mike talk to some of the changes that were made back then.

[Mike Lister:]

Sure. In regards to the iconic items, we obviously added back a number of things. The cornbread muffin, as you mentioned, we reestablished the portion sizes on certain items. The Cajun Chicken Sandwich was another iconic item that was added back. In terms of barbecues frequency is such that times can take significantly longer time to expose your changes to your core guests and we have certainly seen a great improvement and positive feedback, the negative commentary around some of those changes that took place a year and a half or two years ago have all but diminished. So now it’s - we are winning back guests slowly. It’s taking longer than we would have originally anticipated but the trends are moving in the right direction.

[Alex Fuhrman:]

Great. That's really helpful. And then just thinking about how long it's been since you last had a formal price increase, is that something that you're eyeing at some point over the next year or two, perhaps moving into more of a price increase? And I guess, if so, or if not, just thinking about some of the - what are the factors, I guess, that you're looking at as you weigh that decision? Is it more the same-store sales line? Is it feedback from your franchisees, or is it something in those guest satisfaction scores that will help to inform when you think the brand is ready for that?

[Dexter Newman:]

Alex, again it's something that we haven't gotten into historically, and just to remind everyone, the last time we done that increase, it was back in 2013. I would say that there had been opportunities on a couple of things within our portfolio that we’ve definitely looked that. We've looked specifically at things on the beverage side but on non-alcoholic piece of the equation. That's something that we'll continue to evaluate. We've looked opportunistically at the right things on our menu but it's not like a full-on price increase. Obviously we operate in different states across the country, and with that comes very different operating structures or costs that’s associated with operating in those environments, so our menus are very clearly tiered, and from time to time there is opportunities to address pricing from that standpoint. But specifically from an on-menu pricing standpoint, we haven't direct or menu pricing standpoint we haven't - direct on-menu standpoint, we haven't really done much since 2013 as a company. But that said, you’ve heard us talk about the portion changes that were made. I'll let Mike pick-up and go from there.

[Mike Lister:]

So that was certainly a great question. Philosophically when you are looking at traffic challenges and negative trends as the brand had experienced over the last couple of years, it's difficult to take price. We believe that the industry will certainly improve at. When you take price, you give some of that back in traffic, so folks - ultimately you lose someone every time you raise the price and so we are so focused on the traffic side of the business and reengaging with lost guests over the last couple of years that we are continuing to stand down on price increases. We've been fortunate to not have a lot of commodity headwinds over the last couple of years that’s allowed us to promote the values in our menu. But again we’ve stated on numerous occasion, this is really about sales and traffic. We got to fix those issues and so we don't want to complicate the traffic side by necessarily taking a pricing that's of significance in anyway.

[Alex Fuhrman:]

Great. That's really helpful. Thank you very much.

[Operator:]

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

[Mark Smith:]

Hi, good afternoon, guys. First one is fairly to the point. This is the first time that you guys had negative restaurant level margins and lost money at the restaurant level. Can you speak to how you turned that around? And secondly, can you speak to the franchisee profitability, and may be as to are there any fears [ph] that they are seeing that similar trend?

[Dexter Newman:]

Hi Mark, it’s Dexter. I'll start and then I will turn to Mike when it's appropriate. With regard to your thoughts around the middle of the P&L and our ability to reverse the changes there, I think in the commentary, one of the big things that we've talked about from a food cost standpoint, away from just the inflation or deflationary environment that comes because of commodities, our focus has very much still been on the actual results from a food cost standpoint and that variance basically to the theoretical construct associated with the plate that we put in front of a guest. So that has been a pretty material initiative for us over the past months or so, and that has made tremendous improvement to the outcome being flat on the quarter that you saw from us with regard to costs within the - cost of sales basically within the period. Working against that, and in addition to that, I would say from a labor standpoint, we are off to the same - after the raises, with very much some of the very similar work. You’ve heard us talk also historically about not just the wage rate pressure that one could experience, so that we've seen across the industry but we have gotten into the rollout of basically a very similar contract to actual versus theoretical on the labor side where we are basically having our label scheduled against an optimum number within a particular week or so. That's an initiative that I would say is sort of on the way, if not, full-blown. At the moment, it's been tested in our company restaurant specifically throughout the quarter. And as with the work on food cost side of things or cost of sales side of things in this work on the labor side, when coupled with the food cost side is all learnings and - learnings that we would look to export with those insights basically across our franchise system. We are always looking for ways to improve or simplify our operations. So those are two big items that I would say we are pursuing from a cost of sales and a labor cost standpoint that could most definitely - that will most definitely result, I think, in improvements yet still mid P&L from the company. So savings to get really specific, those are - for us, that's about reinvestment in the totality of the guest experience, right. So we are just not looking to always take dollars out to bank to the bottom line and we need to be very smart and institute about how we pursue these initiatives and you would see some of that being reinvested back into its total at the guest experience, which could come also with innovation. I'll pause and I’ll ask Mike if he has anything additional that he want to add to that?

[Mike Lister:]

Yes, there is a couple of things. Good to hear from you today, Mark, by the way. As we move through the year in 2016, early on there was just some transition in management team, so we had a little bit of turnover issues earlier in the year. I'm proud to say that here in the last four or five months, turnover has greatly reduced, both at the management level and the hourly employee level. Certainly better trained teams produce better results. And so I’m stopping that merry-go-round, if you would, of management turnover over was very important to - as I was on-boarding here at the beginning of the fourth quarter. Another thing that we've been very focused on is teaching our management team how to be great planners. Plan is only - results are only as good as the plan. And so our teams are better prepared to write great plans today and then execute. As they start to believe in the plans and see positive results, we tend to get better results. And then even on the IVA [ph] and the food cost stuff, there is always some questions around system integrity as you're building these things out and improving them and we've put a couple of teams together to really focus on the - looking under the hood on these processes that we use to make sure that we've got the best metrics in place so that we can, again, execute a great plan. And so the good news is while we've seen continued reduction in waste around our food and our labor, we continue to see - as Dexter mentioned earlier, we continue to see improvements on our guest metrics. So the good news there is the things that we're working on to focus on eliminating waste is - because of that focus, is in fact having a positive impact on the guest experience.

[Dexter Newman:]

Yes. And to add, Mark, just one or two more things. Obviously you heard me reference in fact that we've closed - that we're working. We have the restaurant optimization plan and we have closed two restaurants subsequent to the completion of the financial year. Obviously with the closure of those restaurants also comes the potential ability to have improvements mid structure on the P&L because they could perhaps be the laggards in many ways shape or form. So that's something that also that we most definitely cannot ignore. I don't want to overlook your question with regard to the franchise side of the equation. Obviously the comp sales pressure that we see there - that we see on the franchise side is something that we've seen on the company side. Look, with that said, I think we feel that one of the things with the company’s rate of decline that had occurred historically that gave us an opportunity to jump out in front of the situation and have identified things to essentially test. So testing updates for a menu is something we've looked at. You’ve heard us talk about the brand refresh that we've had going on up in Maple Grove that you’ve seen or been a part of, that you see also has to do also in Bloomington, and you heard Mike reference the work that we also have going on with online ordering and our position of investing around even the delivery aspect of that. So those - some of these our initiatives that gives us confidence in our ability to return, more importantly, our franchise and our company’s portfolio to - on the path towards more positive sales growth.

[Mark Smith:]

And you guys - I’m not sure if you can quantify or can you talk about, excluding the 11 restaurants that are under evaluation and two of them closed through the end of the year, maybe what that profitability would have looked like at the quarter excluding those 11 or even the two that were closed?

[Dexter Newman:]

Yes, I appreciate the question. It's something that again we haven't - I haven't got into specifically given I haven't provided guidance around 2017. I would like to perhaps refrain from doing so here, but I know we connect at some point to it.

[Mark Smith:]

Okay. And then I'm not sure, I might have missed it. But did you get to the To-Go and catering mix either for the quarter or for the full-year? Is that seems like a big opportunity and something that you guys do well?

[Dexter Newman:]

No. It's probably in the press. It should be out there in the press release, if it isn't, I will tell you that I think our To-Go business on the year was right around 30% and I think our catering was probably about 13% or so. So it’s obviously a sizeable component of the business on trend basically versus what we have done - what you’ve seen from us I think historically.

[Mark Smith:]

Great. Thank you.

[Operator:]

And there appear to be no further questions at this time.

[Dexter Newman:]

Okay, thank you for that operator. Thanks ladies and gentlemen. I think that concludes basically our Famous Dave’s fourth quarter 2016’s earnings conference call for today. Thank you all for your participation.

[Operator:]

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