BBQ Holdings, Inc.
Q3 2014 Earnings Call Transcript

Published: 5 Nov 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to your Famous Dave's Third Quarter 2014 Conference Call. All lines have been placed on a listen-only mode and the floor will be open for your comments or feedbacks 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:]

Thank you. Good morning and thank you for joining us for the Famous Dave's fiscal 2014 third quarter conference call. I am Richard Pawlowski, Chief Financial Officer, and with me today is Ed Rensi, Famous Dave's CEO. Before we start, we'd like to remind those listening that 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 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 filings. 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 seven days. Now I will turn the call over to Famous Dave's CEO, Ed Rensi.

[Edward Rensi:]

Thanks, Richard. Good morning everybody. I am excited to be with you all this morning. I was appointed as CEO of Famous Dave’s in May and in June; Richard joined the team as CFO. So we’ve been working together on this now for just about five months and we’ve had a lot of fire with the job but have made some strategic decisions that we believe are important for the long-term success of this company. Got the leach of which was our decision to stop relying on heavy discounting to drive sales. The quarter’s comparable sales were generally in line with our expectations for this transition period as we anniversary the previous discounting that focused – that was a focused approach that was implemented in 2013 and accelerated in the second half of that year. And I have to tell you in my 47 years in the restaurant business, relying on a strategic discounting program has not proven to be a long-term winning strategy. While a significant headwind in the near-term, we believe that we are setting the stage for healthy, profitable sales growth in the future. And Richard will speak to the data that we believe is already beginning to validate our strategy and our intentions. It is far too early to extrapolate or read too much into the data, but it is encouraging. Today, we are going to talk about four major areas of focus for us over the next 12 to 18 months and outline our plans related to those areas to you and with you. Starting with cost, specifically with restaurant level operating margins were four wall EBITDA. As evidenced by the progress we are making, we are pleased to report that four wall EBITDA margin remains largely flat at 12.0 versus 12.2 last year despite the decline in top-line sales. We will continue our focus on improving operating margins and reiterate our belief that 15% four wall operating margins are achievable in this company – in our company restaurants. And as a medium term goal, to be clear we remain rigidly focused on the continually improving the quality of our food and our overall guest experience. These are non-negotiable for us and our margin improvement efforts are focused elsewhere. The reduction in discounting has helped our margins as have the excellent work done by our purchasing department, particularly, Jeff Abramson and our operating teams under the leadership of Brett Rainwater. In addition, we have identified other savings throughout the P&L, in insurance, telecommunications and consumables to name just a few. Savings are coming from an increased focus on operating controls, as well as continually improving our purchasing practices. With these overlay improvements in sales and the incremental flow through on these sales, we believe will come from a new brand and marketing strategy that we are currently developing and we’ll rollout next year. Then we become more confident of achieving a 15% four wall EBITDA margins in the medium-term. Second, staying on cost, we will continue to focus on our efforts on achieving a G&A spend of 10% of company revenue. We believe that this targeted achievable as a medium term goal as well. We continue to identify opportunities to sensibly and prudently reduce our expenses in this area. For example, in Q2 of 2013, we will implement a new software package that will significantly reduce some of our HR management costs. Third, and probably most important, revenue. What are we going to do to drive sales? We know what is driving our comparable sales decline and that’s a discount strategy. We know that sales decline in 12 of our company restaurants are 24% of our comparable restaurant base is responsible for 50% of our overall comparable sales decline on both a quarter-to-date and year-to-date basis. We have plans in place to address these 12 restaurants specifically, as well as sales decline in the broader portfolio. In addition, we have analyzed the data on traffic and although too early to extrapolate during the quarter, we have seen encouraging comparable sales when we eliminate the impact of discounting. To drive sales, we are developing a new brand and marketing strategy that we will roll out next year. While this process moves along, we are implementing some short-term marketing initiatives that we expect to partially mitigate the impact of heavy discounting from last year. Our new brand strategy is being designed carefully and thoughtfully to drive high quality guest traffic, drive increased frequency of visits and promote loyalty among our guests. We look forward to sharing some more of these details in a future call. The combined impact of our work on the cost of revenues side is laying the foundation for Dave’s to drive significant operating leverage once our same-store sales returned to our growth trajectory. Improving our unit level economics and supporting this with a comprehensive brand and marketing strategy is also laying the foundation for future new unit growth. Growth we expect to be largely franchisee-driven. Our existing franchisees are some of the best in the business and to leverage their strengths we are evaluating re-franchising certain company-owned restaurants. We expect to pursue a more active re-franchising strategy for our company restaurants going forward. Working the right partners either from our existing franchisee base or identifying new franchisees is critical and it’s going to take a bit of time. We look forward to providing you details on this in the upcoming quarters as well. Finally, we are optimistic about the future of this company. We are actively taking steps to increase balance sheet flexibility in order to maximize shareholder value. We believe that the actions we have taken to-date and the strategies we are developing, along with some hard work will return this company to a more profitable growth trajectory and position us, our franchisees and our stakeholders for long-term success. Now I am going to turn the call back over to Richard, who will discuss the financial results in greater detail. Richard?

[Richard Pawlowski:]

Thanks Ed. For those on the call, please refer to our press release issued earlier this morning as I summarize our results. Famous Dave’s reported revenue of $37.7 million and net income of $2 million or $0.28 per diluted share for the third quarter of fiscal 2014. This is compared to revenue of $39.5 million and net income of $737,000 with $0.10 per diluted share for the comparable period of fiscal 2013. Net income for the third quarter included the net favorable impact of $166,000, or approximately $0.02 per diluted share as result of the recapture of severance costs related to an executive departure in the second quarter, partially offset by cost incurred for our previously closed restaurants. By way of comparison fiscal 2013 third quarter results included non-cash charges of approximately $0.12 per diluted share related to an impairment charge of a restaurant in Maryland which is closed in the first quarter of this year as well as lease restructuring fees associated with a restaurant in Virginia. Adjusted EBITDA in the third quarter was $4.4 million, compared to an adjusted EBITDA of $3.9 million for the third quarter of 2013. This is primarily reflecting lower G&A expenses and an improvement in food and beverage costs, partially offset by a decline in net restaurant sales. During the quarter, restaurant sales decreased approximately 4.7% year-over-year, reflecting a comparable sales decrease of 5.7%. This decrease was partially offset by a weighted average price increase of 1.4%. Menu prices were last increased in Q4 of 2013. We’ve analyzed our performance data and as Ed mentioned, 12 of our 50 comparable restaurants or 24% of our comparable restaurant base repressed a 50% of the total comparable sales declines. In addition to this, if you completely eliminate sales with marketing discounts associated with them then for the third quarter, on this basis, our comparable sales would have been positive. We are encouraged by this analysis of the quarter. We will continue to analyze our data this way to if a trend emerges, or this performance was isolated to the third quarter. Nonetheless, we will continue to face the headwinds related to the previous discounting strategies until at least the end of Q1 2015. As we further breakdown the comparable sales decline, on a weighted basis, we saw a 3.6% decline in dine-in sales, a 1.4% decline in to-go sales, and a 0.7% decline in catering sales. Catering sales was 13.8% of total sales compared to 13.3% in the third quarter of fiscal 2013. Our dine-in and to-go are both in average for the third quarter, while $17.13 compared to $16.76 for the third quarter of 2013. The breakdown by daypart for dine-in sales was $15.63 for lunch and $19.76 for dinner. We have not increased menu prices during 2014 and do not anticipate increasing prices for the remainder of the year. Turning to look at our franchise business. Royalties were essentially flat year-over-year of $4.4 million, primarily reflecting a contribution from four net new franchise restaurants that opened since the end of the third quarter of 2013, offset by comparable sales decline of 2.3% at existing franchise locations. During the third quarter, one franchisee-operated restaurant opened in Riverside, California. At the end of Q3 2014, we had 53 company-owned restaurants and 142 franchise-operated restaurants, for a system-wide total of 195 restaurants in 34 states, the Common Wealth of Puerto Rico and Canada. Subsequent to the end of the quarter, we had three low volume franchise-operated restaurants closed in Wichita, Kansas, Overland Park, Nebraska, and Beaverton, Oregon. And one that is in the process of being relocated in Lawrence Kansas. So as of today, we had 53 company-owned restaurants and 138 franchised-operated restaurants for a system-wide total of 191 restaurants. Turning now to look at company-owned restaurants. Overall, we saw a 20 basis point decline in restaurant level cash flow margin on a year-over-year basis. This is primarily driven by sales de-leverage from a decline in net restaurant sales. Food and beverage costs decreased to 29.5% of net restaurant sales, compared to 30.3% for the third quarter of 2013. Labor and benefits as a percent of net restaurant sales was 31.9%, 10 basis points favorable to the comparable period in 2013. The decrease was primarily due to a decline in employee benefit costs and lower group insurances costs, partially offset by sales deleverage on fixed and management labor costs. Operating expenses for Q3, as a percent of net restaurant sales was 26.6% or 110 basis points unfavorable to the comparable period in 2013. This increase was primarily related to sales deleverage on fixed operating costs as well as higher R&M and other operating costs. The increases were partially offset by lower supply and utility costs during the quarter. Advertising as a percent of net sales was 2%, which was essentially flat for the same period in 2013. In both years, there was a 0.75% marketing ad contribution. G&A expenses for the third quarter were 10.4% of total revenues. While $3.9 million or 200 basis points favorable to the comparable period for fiscal 2013. G&A reductions were a result of the executives and employee departures during the first nine months of 2014 and approximately $249,000 of recaptured severance costs that were recorded in the second quarter, offset by the impact of $260,000 charge related to obsolete inventory. Interest expense for the third quarter of fiscal 2014 was $209,000, essentially flat as a percentage of revenue compared to the comparable period in 2013. Our effective tax rate for the first nine months of this year was 32.1% reflecting the result of the first nine months of 2014, as compared to 28.1% during the first nine months of 2013. With regard to our balance sheet, our unrestricted cash and cash equivalents, balance at the end of the third quarter was approximately $1.6 million. We ended the quarter with a balance of $5 million in our revolving line of credit and we were in compliance with all of our debt covenants. As of today, we have about $6 million on the line of credit. We used approximately $1.9 million of cash for capital expenditures, primarily reflecting our continued investments in our existing restaurants, the re-image of Bolingbrook Illinois restaurant and investments in corporate infrastructure and systems. Lastly, during the first nine months of 2014, we used approximately $2.5 million to repurchase approximately 95,000 shares at an average price of $25.80 per share excluding commissions. We have approximately 200,000 shares left on our 1 million share repurchase authorizations. I would like to point out that our Board is highly focused on our capital allocation strategy. In the coming weeks, we’ve planned to modify our credit agreement with a broad purpose of allowing ourselves to maximum flexibility to allocate capital toward creating shareholder value at the time. From a growth perspective, we affirm our previous guidance and still anticipate opening four franchise operated locations during fiscal 2014. At this point, we would like to take your questions. Operator? Operator

[Operator:]

Yes sir.

[Richard Pawlowski:]

I would like to open the floor for questions please.

[Operator:]

Absolutely. Thank you. The floor is now open for questions. (Operator Instructions) And our first question comes from Greg McKinley from the company Dougherty. Greg, state your question.

[Gregory McKinley:]

Thank you. And I wonder if you can start off by – I mean, I’ve been some of your stores during the course of the quarter. But I wonder if you could summarize, maybe if it’s Bolingbrook or elsewhere in the system, what are the biggest changes from a consumer experience standpoint you are doing, I don’t know if you would say it’s a combination of menu, perhaps labor, what’s the consumer seeing differently from the concept today than it was through six months ago?

[Ed Rensi:]

We have just concluded a major retraining program on the front of the house hospitality side in all of our company stores and we are encouraging all of our franchisees to go through the same process. Our field operating organization is emphasizing line checks in our production area. So, as we begin to look at our product presentation, it’s proper on the plate, it looks good, that the times, temperatures and quality of where they need to be, so we are re-emphasizing food quality and presentation in the restaurants and we are going through that exercise today and it will be ongoing. Additionally, we are in our company stores rolling out new plateware to all of our restaurants. It is a brand new design that we tested in Bolingbrook and we will conclude with the implementation of that in our company stores by the end of November and we should be completed in our franchise stores February, March sometime in that timeframe. In addition to that, the company stores we are rolling out all of our bar food after 4 ‘O’ clock menu items that tacos, the flat breads, a specialty barbeque, rib that treated almost like a buffalo chicken wing. So we got some new product, new news that way. We are putting forward some Black Friday, a major initiative in our company stores to amounts gift cards for the holiday season. So we are pushing that very, very hard. In addition, our franchisees on a case-by-case basis in our company stores are adding large screen TVs to our bars to enhance the entertainment possibilities in our restaurants as well as some restaurants are starting to put buzz time into the restaurants which are gaming devices for things like Trivia and sports of different kinds. So, we are trying to make the consumer experience much more entertaining. We are trying to improve and will improve the quality of our product and its presentation. We are becoming more rigid in our portion control and management in the kitchen as to the quality and the appearance of the food. I think we are making good progress on that, but as you all know, changing the perspective in restaurants is a time consuming laborious training process and we are just five months into it, but I think by this time next year, you are going to see much improved customer satisfaction rating. Just one last thing, we are going to become very, very aggressive in consumer measurement, SMG and Mystery Shoppers will be implemented across all of our company stores and the franchisees will be engaging in this as well. So we want to test how well we are doing what we should be doing.

[Gregory McKinley:]

Thank you. Is there anything you can share to this point or quantify some of the impacts you are seeing from these initiatives at Bolingbrook in particular?

[Ed Rensi:]

I would say, in very early results, our consumers are telling us, they like the changes we’ve made and Bolingbrook trajectory is slightly better than the overall market. It’s early to see this. But I am very encouraged, because I think the expanded patio which is no longer of an importance since the weather has changed and it’s gotten darker earlier. But the patio has made a big change, the big screen TVs. So I think that the changes in Bolingbrook, I am very confident about it and I think we are seeing consumer acceptance at a level that I had hoped for.

[Gregory McKinley:]

Thank you. And then, we talked about a dozen of your – do you have 50 stores in the comp base I think you said, so a dozen of those, you said, are responsible for half of the same-store sales decline? And then Richard, I think you said, if you excluded those, as well as your estimate of the impact from discounting changes, the system – or is the company starts actually comp positively. What is it about those dozen stores that’s problematic and how much of that is fixable in your mind?

[Richard Pawlowski:]

So, correct, the two pieces analysis was discrete. So the 12 stores and the part of the 50 in the comp base did represent 50% of our total year-to-date and quarter-to-date sales declines. Now, we’ve analyzed the performance of those stores individually and the range of reasons for why those stores are performing the way they are, there is no common theme across all of them. So, we understand that the management was going on. We think it’s a manageable problem, but the solution to each location is customized and it’s different.

[Gregory McKinley:]

Okay.

[Ed Rensi:]

And just to add a little texture to that, it’s a combination of all the things you see in restaurants. A couple of them are just bad real estate that we are going to have to deal with that, with the unique marketing or perhaps even close the restaurants eventually. Some of it – just poor operations we sent in the one area, operations, what I call, swat team to do the bottoms-up evaluation of what’s going on and we are putting a particular emphasis on improving the customer experience in those stores. So, it’s a range of things some of them are solvable and some of them aren’t.

[Gregory McKinley:]

Okay.

[Richard Pawlowski:]

And to come back to you on the second question, the analysis we did when we looked at all of the sales and traffic with discounts associated with it, if you subtract the net sales associated with that group, the remaining underlying – sort of undiscounted sales if you like and for the quarter, our comparable sales on that basis would have been positive. Now this is in contrast to the second quarter of that where our comparable sales would have been negative on the same basis. So, we are very encouraged by the performance we saw within the quarter, just want to remind everyone, we are going to continue to see this discount headwind through to the end of Q1 of 2015, but directionally, we are very encouraged to see a return to a positive comp on that basis.

[Gregory McKinley:]

Okay, great. And then, so you are doing a lot in the stores around, Ed, you said food presentation; we’ve obviously changed the regular menu. There has been significant changes to the bar menu. How is that being marketed or communicated to the customer today? Foregoing away from discounts where no longer promoting these things frequently. So how are people becoming aware of the changes? Is it more word of mouth or what’s the marketing strategy?

[Ed Rensi:]

Because of our limited marketing budgets, most of our efforts to-date have been local store marketing where individual franchisees or company stores are doing a lot of local marketing. For example, Bolingbrook store will have four remote radio broadcast featuring Chicago Bears and Bears Football games. We’ve put in place Bloody Mary bars at a very nice attractive price. We have purchased the food. So it’s mostly local store marketing. In fact, we recently held a local store marketing symposium in Chicago. We are hosting another on the West Coast where we are bringing in our franchisees, our company store managers, supervisors, et cetera and putting them through additional training on local store marketing. In addition to that, we – our marketing department has put together an 18 months marketing calendar which will be launched aggressively at the beginning of the year and it’s what I call a green, yellow, red calendar. The green calendars are six months says, this is what we are absolutely going to do, how we are going to do it. The components involve advertising marketing, PR, family-driven promotions that are around the lifestyles of our customers in those periods that we engage with them and we will also have a PR component to that. And we want to then have a yellow next six months program which is stuff we’re probably going to do, programs we are probably going to do, but we haven’t nailed down all the details and then the last six months or the end of the 18 months calendar, we have a red zone which says these are the kinds of things we think we’d like to do where we’ll be evaluating the green and yellow calendars see what works, what doesn’t works and we will amend that last six months of the 18 months. We believe that an 18 month calendar is essential, because these restaurants don’t run from January to December, they run continually and we need to be out in front of that, our people need to plan for it. The franchisees need to plan and we think by doing that, we will get much more coherent advertising and marketing from our franchise community coast to coast and border to border.

[Gregory McKinley:]

Thank you.

[Operator:]

That completes your question sir?

[Gregory McKinley:]

Yes, I can hop back in queue. Thank you.

[Operator:]

All right, thank you very much. And our next question comes from Justin Ruiss from Sidoti. Justin, please state you question.

[Justin Ruiss:]

Hi, Ed, hi, Richard. How are you?

[Richard Pawlowski:]

Good morning.

[Justin Ruiss:]

I just wanted to talk about alcohols portion of sales and what do you plan on doing with the bar business going forward? Should we see more, I guess choices when it comes like beer that’s currently be implemented?

[Ed Rensi:]

As you well know, alcohol consumption tends to follow different kinds of trends at different times. We are encouraging our franchisees, in fact, some of them have taken great leadership to put in craft beers in great numbers. We’ve put 16 craft beers on tap and Bolingbrook plus another 16 as a pilot. The Kansas family out in the Pacific Northwest put up as much 30 to 50 craft beers tapped and bottles. Young folks today really enjoy the idea of craft authentic beers and craft authentic food and there is nothing more wonderful than slow roasted proteins and our wonderful menu at Famous Dave’s for handcrafted food. Our kitchens are about 86% scratch. We need to tell that story. We think craft beer helps do that. Additionally, we see that Bourbon is rising as a drink that Millennials are starting to enjoy and discover, typically flavored bourbon. So we are piloting some different bourbons, looking at some different things with Jack Daniels, they have a new product called Fire, we think there is some opportunity to do a fire and ice kind of a promotion. So, we are going to focus on trying to serve to our customers the things they want as opposed to what’s traditionally been done. And I think we have to be flexible with our bar menu relative to what kind of foods are paired with what kind of craft beers and it’s one of the reasons why we have put in flat breads. We are just getting started with the idea of bar food. The flat bread is the sliders, the tacos and things of that nature give us rate flexibility because we can do a how much base flat bread using our wonderful slow roasted proteins, our brisket, our pool chicken on those flat breads. We can create infinite varieties of menu presentations. So, it’s going to be food, fun, beverage, wait staff, hospitality focused and we think we can start to lift our bar sales by doing that.

[Richard Pawlowski:]

And to give you the numbers, alcohol as a percent of dine-in sales of 10% for the quarter versus 9.3% for the same quarter prior year. On a year-to-date basis, alcohol is 10.1% of dine-in sales versus 9.3% for the year-to-date 2014.

[Justin Ruiss:]

Okay, and then, just lastly, can you just speak on, just food cost heading into 2015, it seems like from what I am hearing going to be since some rising food cost going into the next year, could you just speak to that at all?

[Ed Rensi:]

Yes, we are really fortunate in having Jeff Abrams, who is the Vice President, I broadly call at the Purchasing Department. He is an execute that does much, much more than that. And we have hedged our – some of our proteins by forward buying recently as we look the commodity projections, Jeff made the brilliant decision to give up a little bit in a short-term, so we can get a much bigger benefit in a long-term. So, he re-negotiated some of the contracts with some of our key suppliers. So we have taken a little bit of a hit now. So we can take less of a hit in the future. We think through management of portion control the implementation of gram scales in our restaurants to manage portion control, that we can largely offset any major increases in commodities. We – it’s yet to be seen whether we can do it or not. But we believe that we can hold the line on prices, I hope through next year, continue to find efficiencies on what we are doing in the restaurant itself and other line items and absorb whatever may happen commodity-wise. So Richard, do you have any additional?

[Richard Pawlowski:]

Yes, let me just give some color to what Ed said. Right now, we are modeling COGS to increase by the 1% and 1.5%. So if you look at the basket of purchases that we make and start with pork, pork represents about 32% of what we purchase and we are contracted through the year end of 2015. We have a ceiling on our purchases but not a floor. So our expectation is through the end of the year, we’ll probably see some of between 8% to 9% increase in pork prices with the downside possibility of an additional 5% increase before we hit our contract ceiling. To be clear, we don’t necessarily expect it to get there and we do expect some relief on pork in the second half of next year and to reiterate, we had no floor in our contract. So if the market moves in our favor, we will see some potential benefit from that. Looking at beef, and particular brisket, and beef represents approximately 12% of our purchases. We planned and extended our pricing contracts through June 2015 to give up some protection into next year. Right now, we purchase at about a 10% discount to the prevailing market price. To further enhance the security of our supply, we are evaluating four new domestic suppliers of briskets and quality of that product. So that we can have some ultimate supply. Chicken, which is about 12% of our sales as well. We expect that to be broadly flat year-over-year. Our side items which is French Fries, soda, things of that nature, condiments about 13% of sales, most of those are contracted, we’ll cover on that size. The couple of wild cards produced which is only 2.4% of sales if – with the drowning California continues that we may see a little pressure on that side and sea food, we are seeing a little pressure. Sea food, just represents 2% of our basket. We see low pressure on the cat fish side. We are seeing some potential improvement on the – side. So, we are expecting, maybe a little bit price increase there, but nothing particularly meaningful. So, for next year, we are modeling between 1% and 1.5% increase if we did nothing to menu as Ed talked about some of the initiatives that we are taking with respect to portion control and new menu items that we think will help mitigate that.

[Justin Ruiss:]

Right, perfect. Thank you very much.

[Operator:]

Our next question comes from Mark Smith. Mark, state your question.

[Mark Smith:]

Hi, guys. Bunch of questions here. First off, I think you confirmed your opening guidance for four franchisees this year are we not going to see that relocation opened?

[Richard Pawlowski:]

It’s not going to be ready to open in 2014.

[Mark Smith:]

Okay. And then, in that same, any leases signed on the company side right now?

[Richard Pawlowski:]

In Chicago, we have looked at a number of locations to expand there. We do not – we have one lease that’s in active negotiations right now. I am hopeful that we will be able to get that store. We’ve got work to do on the overall brand design going forward. In fact, to give you little bit of deeper texture, we just went through a major review of four major design companies in New York. Those four companies are presenting proposals to us as to how they would go forward to create the Famous Dave’s look for the future and what our brand enhancement is going to look like. We are going to be evaluating those now. We have actually given an assignment to two of those companies to give us one store look company markets out in New York is looking our Westbury store and got to give us particular design elements, physical design elements for that store that we might be able to use to remodel other stores on the East Coast. We have a firm in Cincinnati that’s going to be working us to put together the fundamental look of the store, the relocation in North Riverside. So, we are really pointed toward getting our design right, getting the branding right, getting our building to be more contemporary and more customer-friendly and that work is being done now. Some of our franchisees have already picked up on some of the design work we have done in Bolingbrook and have started to incorporate those into their existing stores. So, we are starting to gain momentum in that arena and I think that probably by the end of the first quarter we’ll have a pretty good look on what we are going look like in the future and we can turn our franchisees lose on looking for real estate locations. I think we got some growth in front of us. And it’s one of the major desires and goals that we have. We got to re-franchise some of our stores. We are a franchise organization. We are not going to run a lot of company stores, just enough company stores that develop people, experiment, and test things. But we want our franchisees have a business model and a brand model that they can grow with and once we present that, then I think they’ll get very aggressive in growth.

[Mark Smith:]

Maybe follow-up on that. Looking at re-franchise, is it likely that you would go through with the remodel, on some of these restaurants before re-franchising or would you look to move them to franchisees and let them do the work on it?

[Ed Rensi:]

I think it’s going to be all the above depend on which stores we re-franchise and when. We want to make sure that we keep moving the brand forward and we are going to – in Chicago, we are going to do our company stores. In fact, we’ve already started dong the second store, the North Riverside store will reflect the new brand. Out in the East we are going to do some work on some of the stores. So, it’s going to be a combination of all the above. The last store that goes may ahead be completely remodeled by those out in the franchisee, and the first store may not be.

[Mark Smith:]

And then, maybe the one relocation, but any insight into 2015 on franchise openings?

[Ed Rensi:]

Franchise openings, at this stage, it’s early to give solid guidance, but between four and six units, we feel pretty good about the next year.

[Mark Smith:]

Four to six, okay. Perfect. And then, just going back to your contracts on commodities, I just want to confirm that I heard, your cap rate of 5% increase at the most on pork, was that correct?

[Richard Pawlowski:]

No, that’s not correct.

[Mark Smith:]

Okay.

[Richard Pawlowski:]

Pork represents 32% of our purchases, between now and year end, we expect to see pork prices increase on us by between 8% and 9%. Going into 2015, we see the possibility of an additional 5% increase in pork prices. At that point, we’d hit our contract ceiling price. And that’s where we would be capped out in terms of pork pricing. In the second half of the year, we hope as the pork industry recovers from the piglet virus, we would see some relief as we head into the second half of the year.

[Mark Smith:]

Okay.

[Ed Rensi:]

In addition to that, the corn crop is pretty abundant. So, food prices for animals, all animals, chicken, pork, what have you, even cat fish, believe it or not, corn is the primary for cat fish, we think that with that corn crop being what it is and with the price of gasoline dropping like it is, we will be putting more corn into protein as opposed to gas tanks. So we may see some relief there. But that’s very speculative. I wouldn’t go to the bank on that thought.

[Mark Smith:]

What was the delta on the beef contract as you change that and kind of blend it through June. What was the delta in beef?

[Richard Pawlowski:]

I’ll do with that on a composition with you offline. We can just walk through the price changes and what we did from Q2, so to get to June of 2015.

[Mark Smith:]

Okay, and I guess big picture, I am just trying to get to the 1% to 1.5% increase in COGS next year with kind of the pork and maybe beef increases that we’ve seen there you are getting close to half of your commodities?

[Richard Pawlowski:]

Yes, I’ll walk you through the math on that. It’s fairly straightforward, but it would be a long explanation on the phone. I am happy to do that as a side bar conversation with you.

[Mark Smith:]

Okay, no problem. And then, I just want to confirm, Ed, you said the kind of the goal of 10% on G&A.

[Ed Rensi:]

Yes, we think, as the company re-franchises the ratio of company stores to employee versus franchise stores to employee changes, I have a shorthand that I use around Famous Dave’s to talk about what our priorities are. It’s people, sales and profit. Top quality people, well positioned, well led, yield sales which were well managed yield profit. And we’ve got some very talented people at Famous Dave’s and they are working their tails off right now and people drive cost. And the smarter we are about the quality of people we have, outsourcing certain work to outside contractors, things of that nature will keep the people cost under control and then we are taking cost out everywhere we can throughout G&A and Richard talked about little bit about insurance and some of those kinds of things. We think 10% is very achievable.

[Mark Smith:]

And then, I think my last question, can you talk to yet what you seen in average ticket, maybe average alcohol mix at Bolingbrook or any other restaurants where you’ve started to make some of these changes?

[Ed Rensi:]

Yes, at Bolingbrook, specifically, we have seen – let me just pause – just one second, well while they are looking for the specifics, we’ve seen a lift in alcohol sales in the stores probably maybe 1.5 to 2 points. But one of the – that – this is that the people really enjoy being in the bars or a food sales in the bar going up as well. People want to – even in the Evergreen Park store where we put a bar on to a counter served restaurant. People now want to sit in a bar and eat. So it’s kind of changing the flow of activity within a restaurant and I think we are headed the right direction. It takes a long time to change consumer behavior in a restaurant, but I think the trajectory is the right way and I think the numbers will yet to be fully determined probably, we won’t really know what’s happened for at least another year in detail. Richard?

[Richard Pawlowski:]

So, at Bolingbrook and at the Green Park the two stores that we have implemented more broadly the adult beverage program and we have implemented the change in design. Bolingbrook has been open, I think this is week 17 of the remodel including this week and what we are seeing is a consistent gap between Bolingbrook and the rest of the system with respect to same-store sales. So, we look at this on a daily and a weekly basis and in general that’s between the two or plus two and plus 12% comp outperformance versus the rest of the Chicago market.

[Ed Rensi:]

But that moves around a lot depending on what happened last with discounting. We had just as a granular thought, we had one Monday about a month six weeks ago, we are – the previous year we had a 58% increase in sales and this year we had a 58% decrease in sales in that store on a Monday because of the yield management discounting that we did. So, it moves around quite a bit depending on what the discount was on what day.

[Mark Smith:]

So, are you pleased with or are you seeing any problems with where you are seeing the ticket maybe mix on the bar food initiative?

[Ed Rensi:]

Not at all, I think it’s entirely within our thoughts and projections and I think it’s when we enhance the overall value of what we are doing and the average check in the overall mix is always going to be in a state of flux but we haven’t seen any significant impact because of what we did in the bar.

[Mark Smith:]

Excellent. Thank you.

[Ed Rensi:]

Next question.

[Operator:]

Greg, are you available.

[Operator:]

Hello Mr. McKinley

[Gregory McKinley:]

Oh, yes, hello.

[Ed Rensi:]

Who is this please?

[Gregory McKinley:]

This is Greg McKinley again with Dougherty.

[Ed Rensi:]

Okay, thanks, Greg. We didn’t hear who it was, go ahead.

[Gregory McKinley:]

So, Richard, in this quarter you indicated that if we adjust it for the discounting we were positive, that wasn’t the case in Q2. Well, you quantify that first, I am just – I’d like to be able to articulate what kind of sequential traction was gained excluding that issue?

[Richard Pawlowski:]

Yes, what we were trying to do with that data was be helpful around the health of our underlying organic business. So, just want to reiterate that in Q2, the sales trend even ads and discounts was still negative. In Q3 we saw the comparable sales to unfold the two. Now, it is too early to talk about a trend or to extrapolate, but it was a very encouraging – it was very encouraging data to see that our comp sales would have been negative ads and discounts in Q2. In Q3, they would have been positive.

[Gregory McKinley:]

Yes.

[Ed Rensi:]

Greg, I just have one other thought, we are very much a data-driven organization today and we are doing some mining of data to try to learn more about what happened last year because frankly, we didn’t have the infinite detail we should had organized in a way that it was usable. And with Richard’s initiatives and with Jack Beckman’s help, we are starting to mine out more and more intelligent data that we can react to and get to the point where we can make decisions based on that data that are more strategic and less tactical. And I’ve been in this business 47 years and I have a lot of emotional feeling about what’s going on and lot of hope and wishes, but we need the data to prove it out. And just my observation of what’s going on in Bolingbrook, we are doing absolutely the right thing. I just got to get the data to prove it and that’s what Richard and Jack and others are working on very diligently. So, we will be a fact-based company.

[Gregory McKinley:]

Yes, yes, thank you and then, Richard, just, make sure I understood that response correctly, when you say, when positive in Q3 excluding discounts, that does not also exclude the 12 problem stores, that’s just taking only discount side of the equation?

[Richard Pawlowski:]

That’s the full 50 comparable restaurants excluding discounts on a year-over-year basis, sales would have been positive.

[Ed Rensi:]

And there is other texture to this too. We do a comparison of year-to-date versus quarter, week, month, and compare company stores to franchise stores. The franchisees did not do as much discounting as the company stores did and the consequence the franchisees, decline in sales about half of what the company stores are, and as we look at the data we start to see that the gap is closing and it says to me unequivocally that a large part of our problem of sales really does had to do with how much discounting we did. It’s a very dangerous game to give your heavy user both loyal customers a discount. Because at some point, they decide the only the reason to come is for the discount, because they are going to come there anyway. So they wait for the discount and that makes a way impulse visits and things of that nature where you get your upside.

[Gregory McKinley:]

All right, thank you.

[Richard Pawlowski:]

To add another layer of details of that, if you look at the franchisee comparable sales base which has a 123 restaurants in the current year, 15 of those restaurants represents 50% of the decline in the comparable sales for the franchisee system. So, in the same way that we believe our current portfolio issues are understandable and manageable in those 12 stores, 15 stores on the franchisee side represent the bulk or 50% of the decline in comparable sales on that side other than.

[Gregory McKinley:]

Interesting. Okay, thank you.

[Operator:]

Thank you Greg. (Operator Instructions)

[Ed Rensi:]

Operator, if there is no more questions, we will terminate the call and look forward to talking to people individually as they need.

[Operator:]

Yes sir. There are no questions at this time.

[Ed Rensi:]

Well, everybody, thank you very much for joining us. We look forward to continue success at Famous Dave’s and thanks for being such great supporters. Have a good day.

[Operator:]

Thank you. This does conclude today’s webinar. We thank you for your participation, please you may disconnect your lines and have a great day.