BBQ Holdings, Inc.
Q2 2015 Earnings Call Transcript

Published: 5 Aug 2015

[Operator:]

Welcome to the Famous Dave’s Second Quarter 2015 Earnings Conference Call. [Operator Instructions]. At this time, it is my pleasure to turn the floor over to your host, Richard Pawlowski. Sir, the floor is yours.

[Richard Pawlowski:]

Thanks, Heathen. Good morning and thank you for joining us for the Famous Dave’s fiscal 2015 second quarter conference call. I am Richard Pawlowski, Chief Financial Officer and with me today is Adam Wright, Famous Dave’s CEO. Before we begin, we would like to remind those listening that certain matters discussed today are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Famous Dave’s believes that the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be achieved. Factors that could cause actual results to differ materially from Famous Dave’s expectations include the company’s financial performance, restaurant industry conditions, the execution of our restaurant development and construction programs, franchisee performance and the ability of our franchisees to meet their development commitments, changes in local or national economic conditions, the availability of financing and other risks detailed from time-to-time in the company’s SEC reports. Our earnings release, which contains the financial and other statistical information being discussed was issued this morning and can be accessed by clicking on the Investor Relations link on our website at famousdaves.com. As a reminder this call is being recorded and will be available for replay for 7 days. Now, I will turn the call over to Famous Dave’s Interim CEO, Adam Wright. Adam?

[Adam Wright:]

I would like to thank everyone for joining us this morning. My name is Adam Wright, I'm the Director and the Interim CEO of Famous Dave's. I’ve been a Board member for 18 months and own 6% of the outstanding shares and I care deeply about the company's. As born and raised in Minneapolis and known the Found Dave Anderson's family since the opening of the first store. I’ve been fan of Famous Dave's ever since and I know what makes this company special. I believe the excellent food, excellent people, quality franchise partners and with the right leadership in place a bright future. Later in the quarter I replaced the prior CEO as we were not satisfied with the direction of the company. On this call I will highlight several poor decisions prior management made that led to the poor results this past quarter and more importantly the actions we’re taking to move the business forward. Over the last several quarters prior management made multiple changes to the company restaurants throughout the corporate system. The changes included smaller portions, different plate ware and changes to iconic items such as Core Bread Muffins and other poor decisions, ultimately the significant changes made by prior management were not received well by our guest instead beyond the restaurants and led to this poor second quarter and my appointment as interim CEO with few days left in the quarter. Despite these challenges the company's long term growth prospects remain intact, the company possess high quality food which has led to remarkably resilient brand, dedicated people and a strong franchise leadership. In just a few weeks the new Board has taken significant action at the company. The changes that were implemented at the Board level include a new Chairman, new Directors and the filing of a vacant Board seat. The prior chairman was replaced by one of the founding partners of Wexford Capital, the company's largest shareholder with almost 20% of the shares. The Wexford partner also filled one of the other vacant board seats, the company brought in an independent board member to have the audit committee and finally another vacant board seat was filled by a [indiscernible] who is one of the company's strongest franchisees and is a successful restaurant entrepreneur. Following this change it should be noted that the Board members beneficially own approximately 45% of the company’s stock and all of the Board members with significant ownership in the company have agreed to waive their cash forward fees on an ongoing basis. Our sole focus is on maximizing long term shareholder value by correcting the prior mistakes and building on the company's strengths going forward. I'm also excited to announce that we have a hired a new Chief Operating Officer, Abelardo Ruiz who has extensive operational experience, has overseen Famous Dave's franchise units along with other franchise concepts and has intimate knowledge with the company's brand. Abe's experience will be important to driving efficiencies at the store level and help optimize unit economics as we continue to address our existing issues and grow the business longer term. This becoming CEO was large amount of time studying our guest feedback, talking with our restaurant employees and selling what our franchisees as well as our competitors do better than our company stores. This has led to the implementation of the series of changes to return guest experience to what it was just nine months ago and approve the brand further from there. The first eight restaurants to return to the original plateware, increased portion size, adds us back to the table and return iconic item such as our Corn Bread Muffin, we have already seen significant improvements in the guest feedback, specifically overall satisfaction increased 7%, atmosphere increased 9.5% and our value stores have increased to 11.8% all of which we think are important leading indicators for our business and as a result these changes have often made in most company restaurants. Some changes such as uniforms will take longer to implement due to product lead times and a desire to test product to ensure we’re changing for the better. Of course we need to do more than just simply change things back to more - some of our business forward and build sales and traffic. We have been testing a new brisket in select number of company stores as well as with one of our leading franchise partners. Specifically we’re testing a whole muscle brisket that is smoked until done right typically about 12 hours. This brisket is served fresh and has serious spark and moisture content. I'm excited to see the early positive feedback from our guest [ph] related to this change and we have recently rolled these changes out to all company on stores and most of our franchise partners who will be changing their brisket in September. Starting in September we will in marketing the brisket by focusing on our core barbeque item, we will highlight the quality of our award winning barbeque. We’re also not testing more affordable lunch items as well as rolling out happy hour. I will highlight that in May 2014 the company performed a happy hour test of four locations. These locations showed both 3.6% positive same store sales and a profit increase versus a controlled group as comp negative 1.8%. Unfortunately the company went with the [indiscernible] menu for these systems instead of the Happy Hour. We’re now making changes to the Happy Hour that showed very good results from the test and the Bar Bites [ph] have already been dropped all in core performance. We also are developing additional test run affordability in our restaurants, continue to focus on building our significant catering and alcohol opportunity, implementing a digital marketing plan for the first time while also focusing on our entire marketing strategy that needs to become more effective. Finally, I would like to thank and acknowledge our existing franchisees. We have a very good group of people who care deeply about our company and our future success. The past years has been difficult but I'm confident that as we continue to work together as partners the better days are in the future. Rebuilding our culture, our passions for serving our guest, award winning barbeque is a key element of our future success. With that I will now let Richard provide further detail on the quarter.

[Richard Pawlowski:]

So those on the call please refer to our press release issued earlier today as I summarize our results. Famous Dave's reported revenue of $37.4 million and net income of $654,000 or $0.09 per diluted share for the second quarter of fiscal '15 compared to revenue of $41.9 million and net income of 2.9 million or $0.39 per diluted share of the comparable period of fiscal '14. The net income for the second quarter of this year included the impact of $881,000 of net charges related predominantly for the impairment of the Smithtown, New York restaurant as a result of the refranchising of this location, as well as causing to [ph] close down company and restaurant in Eden at Minnesota. Adjusted EBITDA for the second quarter of fiscal '15 was $3.4 million compared to an adjusted EBITDA of $6 million for the second quarter of fiscal '14 primarily reflecting an anticipated increase in food costs, operating deleverage from the declining comparable sales, expenses incurred for brand development and other discretionary expenses that are more one-time in nature. Approximately the cost of the total year-over-year dollar sales decrease was a result of the closure of the three company end restaurants in the Richmond market that was closed since the second quarter of 2014. In total company-end restaurants sales were also impacted by a 9.2% comparable sales decline. As we breakdown the comparable sales decline on a weighted basis we saw 7.3% decline in diner sales and a 2.2% decline in To Go partially offset by a 0.3% increase in catering sales. Our dine and To Go per person average for the second quarter was $16.86 this compares to $16.19 for the second quarter of fiscal '14. So to breakdown by the day for dine in sales was $16.24 for lunch and $19.76 for dinner. As of today we have no plans to increase menu prices this year and as a reminder we have not implemented a menu wide price increase at company-end restaurants since October 2013. Turning to our franchise business, royalties were essentially flat year-over-year at $4.6 million. At the end of the second quarter we had 14 high-end company-end restaurants and a 134 franchise operated restaurants for a system wide total of 183 restaurants in 34 states the Commonwealth of Puerto Rico and Canada. We ended the quarter a franchise operated restaurant opened in Irvine, California and three franchise operational restaurants in Topeka, Kansas; Rogers, Arkansas and Vista, California were closed. As of today we have 14 company-end restaurants and a 132 franchise restaurants for a system wide total of 181 restaurants in 33 states, Commonwealth of Puerto Rico and Canada. We’re not going to provide an forward-looking statements guidance for fiscal '15 we will however discuss our performance for the most recent quarter. Overall we saw 270 basis point decline in restaurant level cash flow margin, this was a result of anticipated increases in contracted food costs and sales deleverage on fixed restaurant operating expenses. Food and beverage cost increased at 38.4% of net restaurant sales compared to 28.9% for the second quarter of 2014. Labor and benefits as a percentage of net restaurant sales were 31.7%, 80 basis points unfavorable to the comparable period in fiscal '14 primarily due to sale deleverage on fixed restaurant labor costs. Operating expenses for the second quarter of fiscal '15 as of decided net sales were 27.8% or 140 basis points unfavorable to the comparable period in fiscal '14. This increase was primarily related to sale deleverage on fixed operating costs, particularly rent partially offset by the declines in the utility, R&M and advertising costs. Advertising as a percent of net sales was 3.4% compared to 3.7% for the comparable period of last year. In fiscal '15 the marketing ad fund contribution is 1%, it was 0.75% in fiscal '14. G&A expenses for the second quarter of fiscal '15 as a percentage of total revenue were 13.3% or $5 million which was 360 basis points unfavorable for the comparable period of fiscal '14. Core recurring cash G&A spend decreased by over 20% but this was offset by anticipated expenses incurred for brand development and some other discretionary expenses that are more onetime in nature and the year-over-year increase in stock based compensation $299,000. Just as reminder the second quarter of 2014 included stock based compensation recapture of 349,000 or 80 basis points. Interest expense in the second quarter of fiscal '15 was 227,000 it's actually flat in both dollars and a percent of revenue compared to the comparable period in the prior year. Our effective tax rate for the second quarter fiscal '15 was 30.2% compared to 32.8% in the first six months of 2014. Turning to our balance sheet, our unrestricted cash and cash equivalents balance at the end of the second quarter was approximately $1.8 million. As part of the amendment to our Wells Fargo credit agreement the new facility consolidates the prior revolver with the previously existing term loan. Consequently we ended the second quarter with a balance of $14.2 million on our revolving line of credit. On an apples to apples basis this compares to $11.4 million at the end of the second quarter of 2014. At the end of the second quarter of this year we were in compliance with all of our debt covenants. We used approximately $2.8 million of cash for CapEx capital expenditures primarily reflecting the purchase of the Eden Prairie location, investments in our existing restaurant portfolio and incorporate infrastructure systems. Lastly during the first six months of fiscal '15 we used approximately $5.7 million to repurchase a 195,899 shares at an average price of $28.92 excluding commissions. During the quarter we completed the May, 2012 1 million share repurchase authorization for approximately $18.6 million at an average share price of $18.57 excluding commissions. At this point we like to take your questions. Anthony?

[Operator:]

[Operator Instructions]. Our first question comes from Alex Christensen. You may ask your question.

[Alex Christensen:]

Couple of questions for you guys, first on the Eden Prairie store and the concept that that had been kind of more casual thing, are there plans on hold now to do something in that same vain testing other concepts and what are you going to be doing now you’ve purchased that location?

[Adam Wright:]

Thank you for the question. This is obviously - the fast casual opportunity, something the company is focused on, the way that restaurant was executed, the business model did not make sense, so the close our location with modified evergreen park and the three franchise partners that opened similar style locations, also at had similar success to prairie and have closed. So, with a business model that was developed by prior management and started in 2012 proved unsuccessful. That said, many other companies are having terrific operating as well format box, and doing in around the business case. So right now our time and attention is focused on improving our core business, but long term I suspect we will have a product that we can set our franchise ease a lot of money with in that area. Regarding the real estate, Richard can provide details but we acquired the property which allowed us at least - but also at the same time we have been approached by a buyer that would pay a premium for what we paid for the property, so we anticipate that sale to happen and close this September.

[Richard Pawlowski:]

Yes, I mean that Adam hit the high points what we thought might be even priority location was not performing as Adam articulated, not as well conceived that it could be, as we look at this format going forward, we wanted to find a clean way to exit the lease obligation and we were able to work with developed who isn't timing to do something different with the side, would acquire it and part selling it to him.

[Alex Christensen:]

Okay, great. And then I have one question and then one quick logistical clarifications. Richard I though you mentioned that you had - did you say that you had 123 or 132 franchise?

[Richard Pawlowski:]

[Cross talks] 132.

[Alex Christensen:]

132, okay. Thank you. And then, last question, so one of the pieces that had been of focus in the last couple of quarters was getting rid of promotions and less promotional activity driving in customers at full price. Now with the transition that's going on, where does that stand?

[Adam Wright:]

Hi, this is Adam. Look, we - the company relied on a heavy discounting strategy to drive traffic in same-store sales. That strategy led to a value perception as you for the company, and it's not something we're going to repeat. That strategy, you look at the cash deback and the studies that we have, people believe our food is, we don't offer enough affordable options and that's a tremendous opportunity for us to layer in at a lower price point. Items that will drive traffic every day, that are still strong margins. Going forward, we also have opportunity to add more expensive items to our menu, we introduced some iconic items from our LTO such as our bone and short rab that may have a higher food cost but also have a higher gross profit dollar contribution.

[Alex Christensen:]

Wonderful, great. Thank you, guys.

[Adam Wright:]

Thank you.

[Operator:]

Our next question comes from Douglas Cooper. You may ask your question.

[Douglas Cooper:]

Good morning guys.

[Adam Wright:]

Hi, Doug.

[Douglas Cooper:]

I guess if you could talk a little bit about - just to surf a back on the comp question, you've lapped the promotional activity of a year ago in the second quarter. Just could you give us a sense of how the comp is performing now since you fully lapped out, I guess in the third quarter here, how are comps performing?

[Adam Wright:]

Yes, we generally have report on the current quarter on the call, obviously the second quarter numbers were disappointing but I think we replied back to some of the commentary we talked about on the prior quarter. The drive on comp is concentrated predominantly in one region and we have a plan to address the performance for that area.

[Douglas Cooper:]

Can you sketch out, how many restaurants might be involved like you've done in previous quarters? How many restaurants might have contributed to the weaker comp?

[Adam Wright:]

So about nine, as outlined, actually nine restaurants represent 50% of the decline in that sales for the quarter.

[Douglas Cooper:]

Thank you. And then just one other question in terms of some of the changes that I guess, former CEO had put into the restaurants, looks like you've reversed some of those, can you talk a little bit about the genesis behind that and what's the strategic intent going forward I guess?

[Adam Wright:]

Yes, I mean, I think the chances behind it is actually looking at the feedback we received from our guest. For example, portion size, in 2014, 1.6% of our negative comments were regarding portion size; year-to-date, 8.6% of our negative comments were regulatory portion size. And then we're not going to get into the details but if you look at our overall satisfaction of our corporate stores at our franchise, prior to the changes of the company stores, we were essentially even, the gap was significant following these changes. And that ultimately led to - myself becoming the interim-CEO, and it's clearly contributing to our negative comps. And as we've looked at the data, it was clear we had to make these changes back and changes should never even made.

[Douglas Cooper:]

Alright, thank you.

[Operator:]

Our next question comes from Mark Smith. You may ask your question.

[Mark Smith:]

Hi, good morning guys. First, just looking at - you've talked about marketing, what is your plan for marketing, the new Brisket and some of the initiatives that you have in, is the going to be mostly digital of what we see or some return to TV, how do you plan on getting the word out?

[Adam Wright:]

Hi Mark, great question. We are - one of the things that I have been looking at heavily is how we can spend our marketing dollars in the past and, contribute to generate a return. It's the tremendous transition depending on the who the leader of this company is around marketing. We're going to start emphasizing additional strategy, a PR strategy, we've formed the committee with their franchisees that they have appointed their top people that they see from marketing their restaurants that will help us form a go-forward strategy. Brisket is terrific opportunity in the past when we've advertised our core barbeque specifically, our spare, we've had terrific success. And this new Brisket product is as good as any and I've had almost all of the best in the country. And we're going to - because a lot of thesis reported in place before I became CEO, we're going to continue with the point of sale of purchase, other in-store marketing, reaching out to our EClub, etcetera but we're not going to TV because the return on investment for our prior TV advertisement isn't there while we've generated significant sales, it isn't a profitable Lipton sales but I'm hopeful as we get closer to September, the plan will be much more efficient than what's been done in the past and I think as customers go in and try the product, the word of mouth, which I believe will be the best advertising for this, and a segment our employees after the product will help drive sales.

[Mark Smith:]

And can you give any more insight into restaurant openings and closures on your outlook here, at least through the remainder of the year?

[Adam Wright:]

Throughout the year we expect another two franchisee restaurant opening. We have no company openings planned for 2015. We have a number of opportunities in the franchise side for 2016 and we're just trying to finalize the calendar to give you a sense of how that's looking but we feel pretty good about it.

[Mark Smith:]

Okay. And when you say two more franchise opening, remember you had one that has opened since the quarter ended, so you're seeing two additional ones?

[Adam Wright:]

Correct.

[Mark Smith:]

Okay. And then looking at refranchising a few at Smith Town, New York, is that still a big emphasis going forward on refranchising restaurants, any thoughts or insight you can give us and kind of the plans or outlook for that over the next six months or so?

[Adam Wright:]

Yes, it still remains one of the tenants of our restaurant going forward, putting our restaurants into the hands of - some of our fantastic franchise partners. We've been looking at a number of different opportunities and veiling out stuff as they get across to finish line.

[Mark Smith:]

Excellent, thank you.

[Operator:]

Our next question comes from Greg McKinley. You may ask your question.

[Greg McKinley:]

Thank you. We talked about rebranding expenses incurred in the quarter, I know that was a regular topic of discussion, their predecessor management team around evaluating what today's version of the same stays concepts look and feel like to customers. Is that still an initiative that the company is pursuing and maybe you can just fill us in on why you've made the decision around that either to pursue it or not pursue it going forward?

[Adam Wright:]

Yes, thanks. Just to make sure I'm clear on the question, is the question are we continuing to evolve the brand or is it are we continuing to spend money on consults?

[Greg McKinley:]

Yes, I mean it's a little bit of the latter and are you actively evaluating next generation story models with these consulting groups and when will we see those being tested out in the field?

[Adam Wright:]

Okay, now that's a great question. So, of the bulk of the brand evolution work with the consultants we had on staff has been completed. We're evaluating the output of that work and as we pull through the threads from our history and to the new brand design, we'd expect to see some elements of the new design being reflected in franchise and company stores. In the future, brand evolution is an ongoing process for us as we could play catch up. But we do not want to lose the heritage, and looking that the feel of our existing restaurants, that was important for us to pull those threads through and incorporate them into the work that's been done.

[Greg McKinley:]

Okay. And - so there is a lot of initiatives that were undertaken over the last year, operationally within the stores, also a corporate. Just to help us understand what's the cost structure is of the company right now, how should we think about that from a G&A standpoint?

[Adam Wright:]

That's another great question. So as I may, made although in my prepared remarks, as sort of cash core recurring G&A is down - it's actually down 22% year-over-year. Layering on top of that, we did have some brand development costs, we did had some discretionary expenditure that I characterized as more onetime in nature, we invested in some more of guest feedback, some incremental mystery shops, things of that nature, so that we can learn more about the impact to some of the changes that the company was undertaking. So as you think about G&A, we talked about the target of getting to a 10% of sales run rate, there is obviously going to be some noise as we go through the transition and have reinvested in developing the brand and learning more about our guests. But overtime we would expect to see those types of expenditures decrease and our G&A cost continue to moderate.

[Greg McKinley:]

Okay. As you go back to - try to recreate the guest experience from a menu standpoint, even you talked about plate wherein food presentation, how does that impact variable cost at the store? From a cost standpoint, I don't know if it means making any changes with your labor model but how should we think about variable cost in relation of revenues going back to what you used to do?

[Adam Wright:]

So, I guess there the two points to that. In terms of the labor model, it doesn't impact the labor model at all. These are really relatively straightforward changes. In terms of food costs, we do anticipate some modest impact in terms of food cost but this is really modest and you need to look back at what we were doing 18 months ago, we had the same amount of food on the plate and we've gone back to those levels. We've actually got our VP of first thing [ph] here to give the food cost outlook going forward but we don't expect a meaningfully change in the food cost product changes that are being put into place.

[Richard Pawlowski:]

And more importantly, this is again - the changes have actually - we've seen a significant increase in our overall satisfaction of our guests and the data that we have and studies that have been performed, when people look for barbeque restaurants, a portion size of the major - one of the top attributes in their decision making process. And from my own analysis of our internal data, these changes would have may helped is have a lower food cost, were major contributor to our declining traffic.

[Greg McKinley:]

Okay. Thank you.

[Adam Wright:]

Thanks, Greg.

[Operator:]

It appears there aren't any further questions at this time.

[Adam Wright:]

Okay. In that case we thank everyone on the line for their questions and we will wrap the call up.

[Operator:]

Okay. Thank you very much. At this time, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.