BBQ Holdings, Inc.
Q4 2015 Earnings Call Transcript

Published: 25 Feb 2016

[Operator:]

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

[Richard Pawlowski:]

Good afternoon. Thank you for joining us for the Famous Dave’s fiscal 2015 fourth 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. Factors that could cause actual results to differ materially from Famous Dave's expectations, including 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 filings. Our earnings release, which contains the financial and other statistical information being discussed, was issued this afternoon after the market closed and can be accessed by clicking on the Investor Relation 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 Wright:]

Thank you, Richard. I'd like to thank everyone for joining us this morning. My name is Adam Wright, I'm the CEO of Famous Dave's and a Board member. Before discussing the quarter I'd like to discuss a few significant recent announcements. On February 2nd we opened our first restaurant outside of North America in Abu Dhabi. Our Founder, Dave Anderson and I attended the opening and it is a beautiful restaurant that opened with strong sales and guest reviews. Our UAE partner TABLEZ, has signed a four restaurant development deal with us and we anticipate them opening one or two additional restaurants later this year. We plan to continue to dedicate some resources to international expansion, as we believe there is demand overseas for our brand. Last week we announced that Alfredo Martel has joined us as our Chief Marketing Officer. Alfredo is a proven marketing leader and was instrumental in the turnaround of Caribou Coffee where he led a marketing team that delivered 28 quarters of positive same-store sales growth. While at Caribou, he also ran innovation and most recently served as COO of international overseeing international development. He is an experienced marketing leader who has also has worked in collaboration with franchisees from his time at Yum! Brands. He brings discipline, process and a guest centric focus to all decisions to our team. As you know we started reviewing our marketing department of spend last July to become more strategic effective with our marketing spend. And in the last quarter we exercised close managerial control of our marketing spend in anticipation and new leadership was led in over 50% reduction in Q4 corporate marketing spend. Finally, before talking about the quarter, I’d like to comment upon the agreement we signed to sell our Chicago market to an existing franchisee. The core tenet of our corporate strategy is to better serve our franchisees and refranchising this market allows us to have fewer restaurants under our control. Operating fewer restaurants allows us to improve our focus on serving franchisees and the entire system instead of another corporate market. Our franchise partner who is acquiring the restaurants posted mid single-digit positive same-store sales growth in his existing Famous Dave’s last year. As part of this transaction he has agreed to invest in the existing restaurants and has also signed a development agreement for the entire market. We anticipate that sales will grow under his leadership, both in the existing stores and from new unit growth and that over time the future royalties we will receive will grow as well. It is important to note, the large accounting impairment we recorded with respect to this transaction excludes the economic value of the future royalties we receive and that we will also add a deferred tax asset from the sale that will lower our future tax liabilities. Q4 results were disappointing, and the Company’s new Board and senior leadership team continues to dedicate significant attention to improving the performance of Famous Dave’s system. We are focused on improving our guest experience, improving food and labor cost management and 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 effect as we undue prior mistakes of order to win back guest while at the same time acquire new customers. There are signs of encouragement in the outlook for the Company and we continue to take action to benefit the business in the long-term including this January adding back additional guest favorites to our corporate restaurants including Drunkin’ Apples, Firecracker Green Beans, Brisket Burgers & Cajun Chicken sandwich. This follows the changes we made in July to reverse reductions and portion sizes to many menu items made by prior management, returned iconic item such as our Corn Bread Muffins and our sauces to our restaurants, implement new uniforms and addressed numerous other poor decisions. These additions in January effectively returned the menu and guest experience to the baseline that was in place before the drastic changes made by prior management at the start of last year. Of course, we are also continuing to test and identify ways to further enhance our guest experience. We are focused on rebuilding our culture and passion for serving the best barbecue, improving training and hospitality. We are rolling out, in the coming week to all Company-owned locations, fried chicken on Sunday nights. Fried Chicken drove significant traffic increases during its test. We are also introducing further value focused items into test in our East Coast restaurants in the coming weeks that remain our most challenged market. While significant actions taken have not yet translated into increased same-store sales, we are seeing positive feedback from our guests. Our guest's satisfaction scores have increased 16.6% for the period ending January versus the period immediately before the leadership change and our guest’s likelihood to return has increased 17.4% for the period ending January versus the period before the management change. We believe that these are very important metrics to measure our restaurants operations and leading indicators of improving sales. With the significant improvement in our guest feedback, combined with a new CMO and revised marketing strategy in place, we are now in position as we move into barbecue season this spring to invest back in marketing and to drawing guests back into our restaurants. The Famous Dave’s 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. I would like to thank and acknowledge our hard working team, franchisees and founder, who care deeply about our Company and future success, and work diligently 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 maximizing long-term shareholder value and the new leadership team has meaningful alignment with shareholders. We continue to work hard to fix mistakes and as importantly build on the Company’s strength's to move the Company 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. So those on the call please refer to our press release issued earlier today, as I summarize our results. Famous Dave’s reported revenue from continuing operations of $114.2 million, a net income from continuing operations of $1.1 million or $0.15 per diluted share for fiscal 2015, compared to revenue from continuing operations of $131.9 million, a net income of $2.3 million or $0.31 per diluted share for fiscal 2014. Net income from continuing operations for fiscal 2015 included the impact of approximately $817,000 of net gains related to the refranchising of the Cedar Falls, Iowa location, Florence, Kentucky; Greenville, Indiana; Lincoln, Nebraska and the associated real estate and Smithtown, New York restaurants as well as the sale of the real estate underlying one of the previously closed restaurants in Richmond, Virginia on the real estate underlying to close location in the Eden Prairie, Minnesota. These net gains were partially offset by expenses related to the cancellation of the previously defined relocation of our Chicago area restaurant and cost incurred for the closure of the Chicago field office. Net income from continuing operations for fiscal 2014 included the impact of $3.9 million or $0.39 per diluted share of one-time non-cash impairment and closure costs associated with three Richmond area restaurants. As well as the impairment charges and three additional restaurants all taken during the fourth quarter of 2014. Late in the fourth quarter of this year, the Company entered into an asset purchase agreement to refranchise the seven company-owned restaurants in Chicago, Illinois. As a result the Company is reflecting those restaurants of discontinued operations and removing that from its 2015 operating results. The net loss from discontinued operations net of taxes was $5.4 million or $0.78 per basic share and included an $8.8 million impairment charge. This compares to net income of approximately $642,000 or $0.09 per diluted share in fiscal 2014. Adjusted EBITDA from continuing operations for fiscal 2015 was $5.7 million compared to an adjusted EBITDA of $13.5 million for fiscal 2014 primarily reflecting a year-over-year decline of sales to closure or refranchising of nine Company-owned restaurants and anticipated increases in contracted food costs and an increase in general and administrative expenses. G&A increased as a result of professional and consulting fees related to brand development, legal costs related to refranchising and other franchisee relations matters and a year-over-year increase in stock-based compensation. 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 fiscal 2014. In addition, sales were adversely impacted by a 9.3% comparable sales decline. As we further breakdown the comparable sales decline, we saw a 7.7% decline in Dine-In sales and a 2% decline in To Go sales during the quarter partially offset by a 0.4% increase in catering sales. Our Dine-In and To Go per person average for fiscal 2015 was $17.02 compared to $16.64 for fiscal 2014. The breakdown by daypart for Dine-In sales was $16.13 for lunch and $19.91 for dinner. As of today, we have no plan to increase menu prices. As a remainder, the Company-owned restaurants have not seen a formal menu wide price increase since October 2013. Turning to our franchise business, as a result of the 53 operating week royalties increased year-over-year to $17,500,000 compared to $17,200,000 in fiscal 2014. During the quarter, one franchise operated restaurant opened in Guaynabo, Puerto Rico and one franchise operated restaurant closed in Wisconsin. At the end of fiscal 2015, 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, we opened a franchise-operated restaurant in the United Arab Emirates and two franchise operated restaurants closed one in Simi Valley, California and one in Independence Missouri. So as of today, we have 44 Company-owned restaurants and 134 franchise-operated restaurants, for a system-wide total of 178 restaurants in 33 states, the Commonwealth of Puerto Rico, Canada and the United Arab Emirates. We will now provide any forward-looking guidance for fiscal 2016, as we continue to make progress on our refranchising of the strategies. We will however discuss our performance of fiscal 2015. Please note, operating results exclude the Chicago restaurants. Overall, we saw a 390 basis point decline in restaurant level cash flow margin on a year-over-year basis. This is a result of an increasing contracted food costs, labor and efficiencies and sales deleverage as a result of a decline in net restaurant sales. Food and beverage costs increased to 30.5% of net restaurant sales compared to 29.5% for fiscal 2014. This year-over-year increase with the results of the anticipated food cost inflation partially offset by the settlement of a class action lawsuit. Labor and benefits as a percentage of net restaurant sales were 34.1%, 160 basis points unfavorable to the comparable period in fiscal 2014. This was primarily due to sales deleverage on fixed labor and management labor costs and inefficiencies and direct labor costs over the year. Operating expenses for fiscal 2015 as a percent of net sales were 29.1% or 130 basis points unfavorable to the comparable period in 2014. This increase was primarily related to sales deleverage on fixed operating and occupancy costs, and year-over-year increase in repair and maintenance. Advertising as a percent of net sales was 2.6% compared to 2.7% for the comparable period of 2014. In fiscal 2015, the marketing fund contribution was 1% and it was 0.75% in fiscal 2014. G&A expenses for fiscal 2015 as a percentage of total revenue was 16.7% or $19 million, 460 basis points unfavorable to the comparable period of fiscal 2014. However core recurring cash G&A spend decreased, but this was offset by expenses incurred for professional and consulting fees related to brand development. Legal fees our reserve for absolute playback and severance cost incurred for the closure of the Chicago office compounded by revenue deleverage. Interest expense for 2015 was $1 million compared to $867,000 in fiscal 2014. This year-over-year increase was the result of right off of deferred financial costs related to the December credit facility amendment. Our effective tax rate for fiscal 2015 was 4.3%, reflecting a year-over-year decline in pretax income. This compares to 24.5% during fiscal 2014. With regard to our balance sheet our unrestricted cash and cash equivalents balance at the end of fiscal 2015 was approximately $5.3 million. Late in the fourth quarter the company amended its agreement with Wells Fargo. The credit agreement amendment reduce the revolving line of credit to $3 million and established $12 million term loan that has 15% annual amortization. We ended fiscal 2015 with no outstanding balance on the line of credit compared to $5 million at the end of fiscal 2014. Additionally at the end of the year there was an outstanding balance on the term loan of $12 million compared to $3.5 million at the end of fiscal 2014. At year end we were in compliance with all of our debt covenants. We generated approximately $7.5 million in the refranchising of five Company-owned restaurants including the real estate underlying one of these locations and the sale of the real estate of a previously closed restaurant. Additionally, during the year, the Company used approximately $3.2 million of cash, the capital expenditures primarily reflecting the purchase of the property under one of our now closed restaurants that has since been sold, continued investments in our existing locations and investments in corporate infrastructure systems. At this point, we'd like to open the floor to your questions. Operator?

[Operator:]

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

[Alex Fuhrman:]

Great. Thank you very much for taking my question. Adam congratulations on the new job. I really wanted to ask a couple of things about number one I know you're not giving guidance, but given I guess that this is the fourth quarter report and you’re at least a little bit of the ways, little bit more than a half of the way done with the first quarter. If you could kind of give us an update on what your kind of trends have looked like over the last couple of months and then thinking as your comparison start to get a lot easier in Q2 and Q3, when would it be realistic to think that things could start to turnaround on the topline in terms of same-store sales?

[Adam Wright:]

Alex, as you rightly pointed out, we are not going to give guidance. So we are not going to speak about the current closures performance on this call.

[Alex Fuhrman:]

Okay, fair enough. And I’d love to get a little bit more color on the store in Abu Dhabi, I'm just curious to how that relationship came about, is that a franchisee who’s been active with Famous Dave's in the past or is that a new relationship?

[Adam Wright:]

No, I think if you were to look at the press releases that they put out and we put out, you can learn a lot about the Company. It’s a fabulous organization, they actually are one of the – one of it’s not the largest hypermarket operator in the region owns dozens of malls and have been growing their food and beverage business and are very sophisticated, very well-financed and very good operators and we’re very lucky to have them as a partners. We have used relationships that we have to put that led to the introduction to them.

[Alex Fuhrman:]

Is that going to be most of the new unit growth than globally for the whole system is that likely to be international for the next couple of years? Is there still a thought to getting more big franchisees here in the states or should we’ll be thinking about new units as maybe being a little bit more balanced domestically and internationally over the next few years?

[Adam Wright:]

Alex, couple of things on that. One, we anticipate as we’ve said earlier more unit development by this partner of this year, one or two additional unit is part of our four unit development opportunity, that region remains very attractive for us as far as international pipeline goes. As you look at our competitors with other strong U.S. brands international has been extremely attractive opportunity for them to grow and it’s something that were certainly focused on. Right now, our primary focus remains sales and traffic and sharing our existing stores and as I indicated we’ve seen significant improvements in our guest satisfaction, significant improvements in the likelihood to return to our restaurants by our existing guests and focus on our Company's cash flow and generating cash and serving our franchisees better. Near-term I would say we’ll be putting together additional plans to further expand internationally. And then well I don’t have anything to say domestically right now, we do anticipate new store openings this year and we’re optimistic that we may have some additional new franchisees joining the system and some franchisees who have not opened restaurants in years actually opened restaurants this year. So we’re excited about what we’re seeing and certainly isn’t going to be – if you look historically I think kind of where we topped out and grow from the franchise side, we won’t be there, but we will have pretty balanced new store growth between international and the U.S. this year.

[Alex Fuhrman:]

Great. That’s really helpful. Thank you.

[Operator:]

And our next question comes from Mark Smith. Mark, please state your question.

[Mark Smith:]

Good afternoon guys. First off can you guys talk a little bit about G&A, you called out $0.5 million it looks like it was one-time in nature with plate ware? Can you quantify the other kind of franchise legal costs?

[Richard Pawlowski:]

We spent in the quarter about $400,000 on cost that were characterizes one-time legal costs.

[Mark Smith:]

I guess that’s excluding that 502 or little bit less on the plate ware?

[Richard Pawlowski:]

502, yes it’s unrelated to legal, it was plate ware reserve for - when we trialed the white plate ware last year it didn’t work and so we’ve taken a reserve charge against the amount that’s in the system while we look to dispose a bit.

[Mark Smith:]

Okay. So I mean if you back that out, it’s fair to say you’re looking at really much more of a breakeven quarter. Is that safe to say?

[Richard Pawlowski:]

From a G&A perspective?

[Mark Smith:]

Yes, if you back out that 500 on plate ware reserve in the 400 on kind of one-time legal you know bottom line you’re looking at kind of a breakeven number?

[Richard Pawlowski:]

Yes.

[Mark Smith:]

Okay. Perfect.

[Richard Pawlowski:]

And Mark I’ll just – as we – this business is going to be run much more efficiently going forward and it’s been run in the past and we’ve made a lot of progress in making the business more efficient and I anticipated some of these one-time items are not in our numbers going forward as we get further into this year you will see that efficiency in our G&A.

[Adam Wright:]

And as you look at the year keep in mind we did spend some money on brand development work throughout the year and that a total just $1.2 million on various initiatives, so that’s great work there, but expenditure of that level is not going to incurred again in 2016.

[Mark Smith:]

Okay. Safe to say there is still a long-term goal would be to get that G&A closer to 10% or at least to low double-digit number?

[Richard Pawlowski:]

Yes. Mark, look we’re going to – I think the 10% number was prior teams; we’re going to get this business as efficient as possible. I think you have to remember as we refranchise restaurants, we then collect 5% of sales instead of 100%. So I think the 10% as we refranchise may not be the right number to be looking at That said as part of a refranchising strategy, the absolute dollars of G&A will fall significantly as we don’t support the Company restaurants. And we are a business where we have a call centers supporting those restaurants. We have area directors that will end up leading the Company and joining the refranchise restaurants and go out of our G&A with the classified here.

[Mark Smith:]

Can you guys say when and if you closed on that refranchising transaction now?

[Richard Pawlowski:]

We anticipate closing next week.

[Mark Smith:]

Okay. I guess from a modeling perspective should look at those as full quarter and kind of a franchise base or did those sit outside just get you know this color month of time within that franchise base that you’ve been collecting royalty?

[Richard Pawlowski:]

We are going to start collecting - plenty of stock, collecting the royalty when the transaction closes.

[Mark Smith:]

Okay. I guess is it safe to say that you would keep them out than as discontinued operations until that transaction is consummated?

[Richard Pawlowski:]

Yes, it’s in our accounting that is correct and as I mentioned earlier the accounting rules, we don’t, when you look at the impairment it doesn’t factor into fact the economic benefit that we get from the ongoing royalty.

[Adam Wright:]

And keep in mind that we have some deferred rent that will recapture once the transaction closes about $1.2 million. That will get reflected in the next quarters earnings, but you can’t capture that until the transaction actually closes.

[Mark Smith:]

Perfect. And then Richard, can you just walk us sorry that I missed some, just walk us through the balance sheet again kind of what you’ve got for total debt today?

[Richard Pawlowski:]

Total debt today or the end of the quarter?

[Mark Smith:]

Both it would be great.

[Richard Pawlowski:]

Okay. Let me just get the page up so I can walk you through each of the result. We ended the quarter with $12 million on our term loan and then we have a capital lease underwriting under these three locations. That’s reflected on the balance sheet at $3.15 million and then the [head on] plate ware if you want to cash growth that reserve for 500,000, offsetting that we had $5.3 million of cash available.

[Mark Smith:]

Perfect. And then you guys just talked about a little bit, but I know you are not giving guidance anything that you can call out on openings or closures are there any leases signed today or anything that you can call out near-term for us to look at from franchisees or the Company?

[Richard Pawlowski:]

As Adam pointed out we are expecting our partner in the UAE to open up an additional unit and then there are – I think between we’d expect somewhere between four and six new units to open primarily within the franchisee community.

[Mark Smith:]

And you say if you have any corporate leases signed today?

[Richard Pawlowski:]

We don’t have any signed today.

[Mark Smith:]

Okay. And then happy hour initiatives, any feedback on that. I know it’s still early, but anything that you are seeing today and whether you think the opportunity is there?

[Adam Wright:]

Yes. I mean look that was something we put into the system late in Q3, it continues similar to when it was tested in 2014, it has been a favorable addition for the system. We did I mentioned in my talk we tested a Sunday night fried chicken in the number of restaurants that drove probably the highest amount of traffic and contribution margin of what I’ve been told any test that we’ve done historically and so that is growing system-wide in the coming weeks. And then we’ll also in our East Coast restaurants try more affordability value everyday kind of specials on the menu to address what really is from looking at customer feedback. One of our biggest issues is that we don't have enough everyday affordability on our menu and provide attractive price points for those customers.

[Mark Smith:]

And then the last question I don’t know if you guys could give us kind of what the annual sales level was for those seven restaurants in Chicago?

[Richard Pawlowski:]

I don’t think it would be appropriate for us to [break that] market out.

[Mark Smith:]

Okay. That’s fair. Perfect. Thank you, guys.

[Richard Pawlowski:]

Thank you.

[Adam Wright:]

Thank you Mark. End of Q&A

[Operator:]

That’s all the questions I have in the queue at this time.

[Adam Wright:]

Thanks very much everyone for joining us today. And we look forward to speaking to you again soon.

[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.