BBQ Holdings, Inc.
Q3 2015 Earnings Call Transcript

Published: 4 Nov 2015

[Operator:]

Good day, Ladies and gentlemen and welcome to the Famous Dave’s Third Quarter 2015 Earnings Release Conference Call. All lines have been placed on 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, Mr. Richard Pawlowski. Sir, the floor is yours.

[Richard Pawlowski:]

Thanks, Woolley. Good morning and thank you for joining us for the Famous Dave’s fiscal 2015 third quarter conference call. I'm Richard Pawlowski, Chief Financial Officer and with me today is Adam Wright, Famous Dave's CEO. Certain matters discussed during this call 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 expectation will be achieved. There are many factors that could cause actual results to differ materially from Famous Dave's expectation, including the company’s financial performance, restaurant industry conditions, the execution of 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, we issued this morning and can be accessed by clicking on the Investor Relations link on our website at famousdaves.com. 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 CEO, Adam Wright. Adam?

[Adam Wright:]

I'd like to thank everyone for joining us this morning. My name is Adam Wright, I'm the Interim CEO of Famous Dave's and a Board member. Before discussing the quarter I'd like to discuss a significant announcement we recently made that our founder Dave Andersen has returned to the company. On behalf of the board, management and all team members I'm very excited to welcome Dave back. I’ve know Dave since he founded the company and he has a tremendous assets for us, as we rebuild the company for the long-term. Dave, will apply his passion and barbeque expertise to make sure our menu items are relevant today as they ever were. Dave, will help us to rebuild our company culture, restart our competition barbeque team, innovate our menu and market our restaurants. The entire organization, from employees and franchisees, to Board members is thrilled about his return. As a remainder, late in the second quarter there is significant change in senior leadership, as the board was not satisfied with the direction in the company and its results. The new Board and senior leadership team has dedicated significant attention to improving the performance of the Famous Dave’s system, from a keen focus on customer experience, improving food and labor cost management, to improving the effectiveness and impact of our marketing efforts. While we are confident in the new direction of the company, the changes will take time to affect as we undue the mistakes of the prior management team and attempt to win back customers, we disappointed, while at the same time acquiring new customers. We expect to see an improvement on our financial performance in the next few quarters, after we implement our changes. As indicated, our poor Q3 results reflect the continued outcome of prior management's decisions, which we are working hard to fix. Before discussing the significant actions, the new management team has taken during the quarter to move the business forward, I'd like to an highlight an example of these poor decisions that led to our unacceptable labor costs, so you have some perspective. Put simply, during the second quarter revenues were down partially due to bad menu changes made by the previous management team and at the same time, the group made a change to the Company’s labor management system that did not allow our team managers to effectively adjust labor in line with changes in sales. Needless to say, the new management team reversed the labor system as quickly as possible; however as with many changes it took time to implement. We’re happy to announce as a Monday, the previous and effective labor management system has been restored in all of our corporate stores. More on operations, our new COO, Abe Ruiz started in September and his top priority is fixing our labor and food costs followed by a focus on improving our guest experience. Our labor cost should be better going forward, driven by improvements to our system and our realignment of manager incentives. While we have many great general managers who care passionately about the company, the prior bonus program in place wasn’t property designed to incentive the focus on cost. After the years of instability and uncertainty at the top of this organization, the smartest and most talented to ever deal with the company are now on the job. After a deep strategic review over multiple months, there are many glimmers of hope in the outlook for the company. While the quarter results are disappointing, the company has taken significant action and is making progress that benefits the business in the long-term including the following items. Early in Q3, the company put in place a new board that has taken significant action at the company. In addition the company brought in independent board member to head the audit committee and finally another vacant board seat was filled by Anand Gala, who's one of the company's strongest franchisees and a successful restaurant entrepreneur. Following these changes, it should be noted that that board members beneficially own approximately 45% of the company’s stock and all the board members of significant ownership in the company have agreed to waive their cash board fees on an ongoing basis. In addition to board changes, as mentioned earlier, we welcome back our founder, Dave Andersen to the Company. We hired COO, Abe Ruiz, who bring significant knowledge of our business from his time with the franchisees of the company. We spent significant time with our franchised partners focusing on improving franchisee relations and collaboration. We reversed changes that led to poor guest experience under prior management specifically. We reversed reductions in portion size as to many menu items made by prior management, returned iconic item such as Corn Bread Muffins and our sauces to our restaurants, implemented new uniforms and addressed numerous other poor decisions. We have focused on improving our guest experience or revamp in employee training and kitchen execution. We are focused on rebuilding our culture and passion for serving the best barbecue. We have implemented a happy hour menu and are testing lunch value offerings, as well as limited time offers like beef short rib and fried chicken. While the significant actions we have taken have yet to increase our same-store sales, we are seeing positive feedback from our guests. Our guest's satisfaction scores are up 8.3% for the period ending October versus the period immediately before the leadership change. In order to address the same-store sales decline, we have dedicated resources of developing an effective marketing plan and have reallocated marketing dollars in order to communicate more effectively with our existing customers to win back lost customers and to attract new audiences to the Famous Dave’s brand. We also announced a partnership with TABLEZ in the United Arab Emirates, who's first of four restaurants are scheduled to open in the coming months. We plan to continue to dedicate some resources to international expansion, as we believe there is demand overseas for our brand. Due in large part to the incurrence of various one-time charges, resulting from management and strategic changes, we were no longer in compliance with the adjusted leverage and cash flow ratios under our Wells Fargo credit agreement at the end of the third fiscal quarter. Company is currently in discussions with Wells Fargo to addressed the non-compliance and anticipate resolution with the waiver, amendment or standstill prior to the filing of the Company's third quarter Form 10-Q. While it is always darkest before dawn, we believe the organization is getting excited about the long-term prospects for Famous Dave’s as a concept. Not only to the return of positive same-store sales, but long-term highly profitable growth; it will just take some time. I'm confident as next year progresses, we'll see the benefits of these actions to better position the business for the long-term. I'd like to thank and acknowledge our team and franchisees, who care deeply about our company and future success, and work extremely hard to move the business forward. 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 shareholder value and the new leadership team has meaningful alignment with shareholders. We are working hard to crack the mistakes of prior management and as importantly building on the company’s strength's going forward. With the high quality of our corporate team, our franchise partners and our food, I remain confident of our company’s long-term growth prospects remain intact. With that I'll now let Richard provide further details on the quarter.

[Richard Pawlowski:]

Thanks, Adam. Please refer to our press release, issued earlier this morning, as I summarize our results. Famous Dave’s reported revenue of $31.8 million, a net income of $708,000 or $0.10 per diluted share for the third quarter of fiscal '15, compared to revenue of $37.7 million, a net income of $2 million or $0.28 per diluted share for the comparable period of fiscal '14. Net income for the third quarter of '15 included the impact of $1.8 million of net gains related to refranchising of five restaurants, the sale of the real estate at one of these locations as well as the sale of the real estate for a previously closed restaurant. These gains were partially offset by charges incurred for the closure of the Chicago field office as well as a lease reserve and other charges incurred. So we decided not – decided to extend the lease at our North Riverside, Illinois restaurant rather than relocate to a new site. As a reminder, net income for the third quarter of fiscal '14 included a favorable impact of $249,000 or approximately $0.02 per diluted share, resulting form the recapture of severance costs related to an executive departure in the second quarter. Partially offset by costs incurred for our previously closed restaurant. Adjusted EBITDA for the third quarter of fiscal '15 was $1.1 million compared to an adjusted EBITDA of $4.7 million for the third quarter of fiscal '14. Primarily reflecting operating deleverage from a year-on-year sales decrease, anticipated increases in contracted food costs and increased labor costs during a transition to a new labor management and payroll platform. Approximately half of the year-over-year dollar sales decrease was a result of the closure of the four company restaurants and the refranchising of five additional Company-owned restaurants, since the end of the third quarter of '14. Furthermore sales were adversely impacted by 9.8% comparable sales decline during the quarter. As we further breakdown the comparable sales decline, we saw a 7.8% decline in dine-in sales and a 2.4% decline in To Go sales partially offset by a 0.4% increase in catering sales. Our Dine-in and To Go per person average for the third quarter was $16.83 compared to $17.13 for the third quarter of fiscal '14. A breakdown by the daypart for dine-in sales was $15.09 for lunch and $19.61 for dinner. As a remainder, the Company-owned restaurants have not seen a formal menu wide price increase since October 2013. Turning to our franchise business, royalties were essentially flat year-over-year at $4.3 million compared to $4.4 million in the third quarter of '14. During the quarter, one franchise operated restaurant opened in Irvine, California and five generally lower volume franchise operated restaurant closed. At the end of the third quarter of fiscal '15, we had 44 Company-owned restaurants and 135 franchise-operated restaurants, for a system-wide total of 179 restaurants in 33 states, the Commonwealth of Puerto Rico and Canada. So sequence at the end of the quarter, a franchisee operated restaurant opened in Puerto Rica. So as of today, we have 44 company-owned restaurants and 136 franchise-operated restaurants, for a system-wide total of 180 restaurants in 33 states, the Commonwealth of Puerto Rico and Canada. We will now be proving any forward-looking guidance for fiscal 2015, as we continue to make progress in our refranchising strategy. However, we will now discuss the performance for the most recent quarter. Overall, we saw a 910 basis points decline in restaurant level cash flow margins on a year-over-year basis. Last year's results of sales deleverage as a result of decline in restaurant sales and anticipated increase in contracted food costs and one-time labor and efficiencies associated with the implementation of a new labor management and payroll platform. Food and beverage costs increased to 31.1% of net restaurant sales compared to 29.5% from the third quarter of '14. Labor and benefits as a percent of net restaurant sales were 35.9%, 400 basis points unfavorable to the comparable period in '14. Primarily due to sale deleverage on fixed labor and management labor costs and one-time inefficiencies in transitioning to a new labor management and payroll platform. Operating expenses for the third quarter of fiscal '15 as a percent of net sales were 30.1% or 350 basis points unfavorable to the comparable period in '14. This increase was primarily related to higher repair and maintenance and advertising costs and saw a deleverage on fixed operating and occupancy expenses. Advertising as a percent of net sales was 2.9% compared to 2% for the comparable period of '14. In fiscal '15, the marketing ad fund contribution was increased to 1% from 0.75% in '14. G&A expenses for the third quarter of fiscal '15 as a percentage of total revenue were 13.2% or $4.2 million, which was 280 basis points unfavorable to the comparable period for fiscal '14. However it is important to point out that core cash, recurring G&A spend decreased. This decrease was offset by various one-time expenses largely related to management changes and strategic decisions made during the quarter. As a reminder, the third quarter of fiscal '14 included the favorable impact of $249,000 as a result of the recapture of severance costs related to an executive departure in the second quarter of 2014. Interest expense for the third quarter of '15 was $224,000, it's actually flat in both dollar terms and - its actually flat in dollar terms compared to the comparable period in the prior year. Our effective tax rate for the first nine months of fiscal '15 was 22.9%, this compares to 32.1% in the first nine months of '14. Our unrestricted cash and cash equivalents balance at the end of the third quarter of fiscal '15 was approximately $2 million. We ended the third quarter with a balance of $10.1 million on a revolving line of credit this compares to $9 million in 2014. As previously mentioned that the debt, also we're out in compliance with some of our debt covenants. During the quarter, we collected $5.3 million of cash proceeds from the refranchising of five Company-owned restaurants. The sale of the real estate associated, one of these locations and the sale of the real estate from a previously closed restaurant. Additionally, during the first nine months, the company used approximately $3.1 million of cash for capital expenditures, reflecting the purchase of the real estate of one of our properties, continued investment in our existing restaurants and investments in corporate infrastructure systems. At this point, we'd like to take your questions. Woolley?

[Operator:]

I apologies for that, had a little mute issue there. So thank you, everyone. The floor is now open for questions. [Operator Instructions] And our first question comes from Doug Cooper of Sidoti and Company. Doug, state your question.

[Doug Cooper:]

Yes. Good morning, Adam and Richard.

[Adam Wright:]

Good morning, Doug.

[Doug Cooper:]

My first question is with regard to last year you had announced on this call that you had contracted work pricing through year-end 2015. And I was just wondering if you could provide an update on where you sit for your work in food contracting for 2016. Any preliminary view on aggregate food cost inflation or deflation?

[Richard Pawlowski:]

Okay. So let's talk about food cost in inflation, deflation for the rest of the year. Throughout the year, we talked about 150 basis point increase over '14 as our estimate for year end. We still think that’s a reasonable target for '15. There are a couple of things that are playing against this. One is we are seeing some release across some aspects of our basket, while starting as some other changes to the portion size that we implement that Adam referenced. So we still think that 150 basis points is - could be about on target. '16 is looking favorable. Our basket of goods is slightly different. So when you look at pork as sort, the pork market, you really have to dig under the surface and look at the ribs markets as it relates to us because that's a significant portion of our spend. In aggregate, our outlook for '16 is favorable and we think we may see some moderation in our food costs. We haven't got a firm number yet, but you know the sort of 2% decline. So going from 100% to 98%, if you like is where we see things coming out right now.

[Doug Cooper:]

Okay. And then it's good to have Famous Dave Andersen back. I know you provided a little additional color on today's call in terms of in what capacity you'd be coming back. But just do you have a official title or a role with the company?

[Adam Wright:]

Dave, feels strongly that his title is founder and his role – we highlighted in the call and then in the transcript and the earnings release what specifically he's helping with, but it's a much broader than that. But the first thing he’s doing is, helping us innovate and focus on our food quality and our menu. Second, he’s spending a lot of time helping us reenergize our passion and our culture of the Company. He also is involved – and for those of you that know Dave, he has tremendous energy and passion for the details. He's helping us with marketing, he's helping us with food photography, he's helping us with a number of things that we believe will better position us on a go-forward basis. So, his role is broad, but the specific list of what he’s going to deliver to us is focused on the food quality and menu, focus on our strategy around our competition barbecue team, our focus on training and guest experience. And then finally, how do we think about the future and innovate and move the ramp forward.

[Doug Cooper:]

Okay. Well, will be hoping at all with a rollout of fast casual concept like you own currently?

[Adam Wright:]

Our organization's focus right now is on our existing 180 restaurants and how do we improve that profitability. Long-term, we see tremendous opportunities within our own concept in alternative formats. And certainly Dave is very passionate about how do we evolve our concept and move forward with success and that obviously means how fast casual concept is something that we are exploring.

[Doug Cooper:]

Okay. And final question just in terms of marketing spend, the new plan is that just reallocation of the market dollars that you currently have planned or is it expecting the increase there.

[Adam Wright:]

Yes. This is a reallocation of the dollars that we already spend. I think if you look at organization, we're probably light in marketing from - our headcount has gone from 12 to 5 and within that 5, it's a number of contractors. We've made very difficult decisions around personnel through the quarter. But it is one area where we could end up seeing a small increase over time, it would be within marketing on the G&A side. That's being offset by other difficult decisions we made. But within the actual add dollar fund it's a transition to more digital, social channels that are much more effective than some of the traditional media the company historically use.

[Doug Cooper:]

Okay, thank you.

[Operator:]

And our next question it comes from Alex Fuhrman of Craig-Hallum Group. Alex, state your question.

[Alex Fuhrman:]

Great. Thanks very much. Wondering if we could get a sense of when there might be a new CEO coming into your organization on a full time basis and how that search process has been going. And then thinking about some of the poor decisions that were made. I mean where do you stand on. I mean you mentioned you brought back the Core Muffins and got rid of the older, the one that have been brought in earlier this year. I mean, what other changes still need to be reversed on the menu and how long is it going to take until we've fully worked through those changes. And was there anything that was being tested that was working that will be kept.

[Adam Wright:]

Yeah. Thanks, Alex. At this point in time, we're not providing an update on the CEOs search. I'm sure we'll have more to share with you guys in the future on that. With respect to we turn the back to the future program and the changes to the restaurants. If you go spend at our restaurants today, you'll notice the plate ware has changed, the sauces are back on the tour where it's giving sauce. What we call the sauce tour, which is, it's a very interactive experience where the server explains all of our six varieties of sauces that are on the table to our guest. We've returned uniforms, we've returned portion sizes. And we've also beyond that gone into really focusing like kind of training and culture of the things that made Famous Dave's unique from the beginning. It's a combination of all those things that is driving the overall satisfaction of our guest higher. If you dive into the detail beyond that we're seeing better value scores, we're seeing better order accuracy, we're seeing better friendliness of staff, better timeliness to go ordering, better pace of experience. Overall cleanliness was up, server menu knowledge was up. So all the metrics that we're measuring through our SMG [ph] guest feedback system are moving in the right direction and the biggest changes that are yet to happen, maybe a couple reintroductions of the portion sizes that were significantly change by Ed in last November. Most of those portions that changes have been already brought back and are noticeable to our guests. A few others, we're waiting for the next menu cycle and we're going to test whether there is a meaningful difference in those. And then, as we do the next menu cycle, some of the iconic items that were taken away, such as our Cajun Chicken Sandwich, our Firecracker Green Beans will also be reintroduced to the menu.

[Alex Fuhrman:]

That's great. Thanks a lot and looking forward to seeing more of those changes. Thanks.

[Adam Wright:]

Yes, and I think the only other thing I would say Alex, I think we got a little side-tracked just on our innovation, as to what it means to be a barbecue concept and what we're putting in front of our guests, as far as limited time offerings. I know you're based in Minneapolis right now, we're doing a test of Maple Grove, Bloomington, locations of the beef short rib. This test has been such a popular menu item, that we're going to run out of supply this week. So we ran through the test period very quickly and so it's something we're going to obviously introduce to the system over the next year. And we're also taking a very popular fried chicken recipe, that's Dave's recipe that it only been available on the Hayward, Wisconsin location that was run by Dave and then our Calhoun Square location. And we're going to start testing now on a Sunday night only, just due to some of the operational challenges that the product requires on our existing equipment. And I think that that is a product that is, it's very popular with consumers right now and could drive some incremental traffic. So I think the innovation pipeline focused on core barbecue is something that we're getting back on track too.

[Operator:]

Thank you again very much Alex. Our next caller is Mark Smith of Feltl and Company. Mark, state your question.

[Mark Smith:]

Hey, Good morning, guys. First off just to look at G&A a little bit. Richard you said that the core G&A is down. Can you give us maybe any insight into kind of where you expect? You think you can still keep that down over the coming quarters? Or will maybe see some pressure on that line?

[Adam Wright:]

So we're not providing forward guidance and we haven't historical on specific line items. But our corporate, we've spent some time restructuring our corporate office, as Adam mentioned, resulted us making some tough headcount decisions or some tough personnel decisions. So what we're looking at internally is core cash salaries and they are down and the core cash recurring costs things like occupancy cost for the corporate office and some of the operating expenses, they're down. As we go through a transition, we have seen a lot of one-time expenses. We expect those to cycle off and we expect to continue trending down to vote that long-term goal that we did talk about over the past few quarters of about 10% G&A.

[Mark Smith:]

Perfect. And then, let's just look big picture at the delta between company operated comps and franchise comps. Your franchisees has been more aggressive on taking price than corporate stores. And does help beat their comp a little stronger then corporate stores or is there something else that's going on there?

[Richard Pawlowski:]

I mean it's a good question. I think, we have a really talented and effective group of franchisees who run that business aggressively like owners and we are adopting that mindset going forward. We don't dictate pricing to our franchisees, they make their pricing decisions on their own. We don't audit what they charge for their goods. Some have taken price and some have taken less. I think those are number of factors playing into this. And if you look at our portfolio, there are specific regions where we are seeing challenges over and above the other region. And then if you strip out the impact from specific stores our performance is a lot better.

[Adam Wright:]

Yes, and Mark I would add, we have a number of franchisees, that are just excellent operators, so that stay true to the concept over the years and have had very good long-term success with our brand. The huge divergence between the company and franchisees really started November when the company implemented a number of changes that we've discussed and abort to reverse. These changes were not followed by the franchise community and that was a significant divergence between the sales of - at company stores versus the franchisees. We saw a tremendous dispersion between our guest satisfaction, which from our value perception et cetera. And we have been making progress back, and as of last week, on a weekly basis, not a monthly basis, we're now back to the point where our overall satisfaction is equal to our franchisees. Obviously though we still need to win back the customers that were so disappointed with the change they experienced in Q1 and Q2, before we start to get our sales going back to the level of our franchisees and ultimately positive. But if you study turnarounds or restaurants, I mean a lot of, how you actually get to positive same-store sales is done by better kitchen execution, better service and guest satisfaction because as you have satisfied guests, they tell others and may comeback more often.

[Mark Smith:]

Then if we look at, guest satisfaction scores being up, can you give us insight into maybe sequential comps during the quarter. Any insight into what you've kind of seen in October. We know there has been some macro issues out there perhaps with customers, but have yours maybe held in better. Have you seen any signs positive traffic yet since the changes that you made.

[Adam Wright:]

Yeah, Mark, we're seeing the positive that we've talked about on the guest satisfaction, we’re not going to comment on how comps are in the quarter.

[Mark Smith:]

And then any insight on early results from happy hour testing or is that just too early?

[Adam Wright:]

You know when we did the tests over a year ago, the results were very positive, we're getting good feedback right now. But we don't have anything to do, quantify for your right now. It's too early.

[Mark Smith:]

Okay. And then if you guys have it handy, can you tell us what you've got left kind of in the portfolio for real estate today.

[Adam Wright:]

In terms of the number of locations?

[Mark Smith:]

Yeah, number of locations or maybe what you're carrying that on the book.

[Richard Pawlowski:]

Yeah, I mean, that's in the queue, so you'll be able to see the details there. So we closed three Richmond locations at the end of last year, we sold one of those. We had a location in Lincoln that was sold as part of the refranchising. We have one location is Chicago and then the stores remaining in Minneapolis.

[Adam Wright:]

Yeah, So Mark at the end of the quarter we owned five restaurants in Minneapolis, one of which was Eden Prairie that we've bought and we resold subsequent to the quarter for a nice gain. We owned four other properties in Minneapolis, one in Chicago and then the two that are held for sale in Richmond, one of which we have under contract to close at the end of the year. But it could so easily just – we're working hard to get done this quarter.

[Mark Smith:]

Okay. So you've already sold one during this quarter subsequent to the end and hope to sell one more during fourth quarter.

[Richard Pawlowski:]

No. We sold one in the third quarter, we saw Eden Prairie close in the fourth quarter and then we have one more that we have closed this quarter.

[Mark Smith:]

Excellent. Thank you.

[Operator:]

Thank you very much Mr. Smith. Sir, at this point, there are no further questions.

[Adam Wright:]

Well, thank you everyone. We look forward to updating you on our Q4 earnings call early next year.