BBQ Holdings, Inc.
Q4 2014 Earnings Call Transcript

Published: 19 Feb 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Famous Dave's Fourth Quarter 2014 Earnings Conference Call. All lines have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host 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 fourth quarter earnings call. I am Richard Pawlowski, Chief Financial Officer, and with me today is Ed Rensi, Famous Dave's CEO. Before we begin, 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 reports. Our earnings release, which contains the financial and other statistical information being discussed was issued this morning and can be accessed by clicking on the Investor Relations tab on our website at famousdaves.com. As a reminder, this call is being recorded and will be available for replay for seven days. I will turn the call over to Famous Dave's CEO, Ed Rensi. Ed?

[Ed Rensi:]

Thanks, Richard. The company's sales performed in line with our expectations for both the fourth quarter and fiscal 2014. As we’ve indicated before, we will continue to face sales headwinds through the second quarter of 2015. We are confident that our decision to eliminate the heavy discounting strategy that was in place for 2013 and early 2014 is the right decision. During the fourth quarter we made important strategic investments along with some tough portfolio decisions that masked the underlying progress that we are making. In addition, we spent time putting the right team in place to move our business forward. We still have work to do but I am pleased to see our team from hourly [ph] to the restaurant managers, corporate managers and executive team display the behaviors and attitudes that we need to make our business a success. We’re early in the turnaround but our priorities are clear. We are focused on improving profitability at both the restaurant and company level, refranchising company restaurants and improving our ability to make capital allocation decisions while simultaneously working to return to positive same-store sales growth. We have set ambitious goals -- goals that we are confident we can achieve. We're pleased with the progress we've made to date and we’ll relentlessly push forward this year. Now I am going to turn the call 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 this morning as I summarize our results. Famous Dave’s reported revenue of $149.4 million and net income of $2.9 million or $0.40 per diluted share compared to revenue of $155.4 million and net income of $4.8 million or $0.62 per diluted share for fiscal ’13. Net income for fiscal ’14 includes the impact of $3.8 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 impairment charge on three additional restaurants, all these charges taken during the fourth quarter. In the first half of the year, there were charges of $1.1 million or $0.10 per diluted share recorded for the sale, impairment, lease termination and closure costs of the décor warehouse, as well as costs incurred for the closure of the Salisbury, Maryland restaurant. By way of comparison fiscal 2013 results included non-cash charges of approximately $1.2 million or $0.11 per diluted share related to the impairment of Salisbury. Salisbury was closed in the first quarter of ’14, as well as lease restructuring fees associated with a restaurant in Virginia. 2013’s results included $1.4 million or $0.13 per diluted share favorable impact from bonus recapture in the fourth quarter of that year. Adjusted EBITDA for fiscal 2014 was $15.4 million compared to $15.2 million in fiscal 2013, primarily reflecting lower G&A expenses and an improvement in food and beverage and labor costs, partially offset by sales de-leverage from a decline in net restaurant sales. During the quarter, restaurant sales decreased approximately 5.1% year over year, primarily reflecting the comparable sales decrease of 4%. For the full year, total restaurant sales decreased approximately 4.3%, reflecting 4.9% comparable sales decline, which includes the impact of the three now closed Richmond area restaurants. Without Richmond, our comparable sales would improve by approximately 50 basis points. As a reminder, comparable sales decline in both the quarter and year-to-date was significantly impacted by our decision to discount – is to discontinue the heavy discounting strategy. As we further break down the annual comparable sales decline on a weighted basis, we saw a 3.2% decline in dine-in sales, a 1.3% decline in to-go sales and 0.5 point decline in catering sales. Our dine-in and to-go per person average for fiscal 2014 was $16.49 compared to $16.36 for fiscal ’13. For breakdown by daypart, the dine-in sales was $15.48 for lunch and $18.91 for dinner. We don’t anticipate increasing prices during 2015. Turning to our franchise business. Our royalties were $17.2 million, which increased slightly over the prior year, reflecting 5 franchise operated new restaurant openings and the annualized impact of the net 5 new franchise openings in fiscal 2013. These increases were partially offset by the closure of six lower sales volume restaurants in 2014, a comparable sales decline of 2.5% year over year. During the fourth quarter, one franchisee operated restaurant opened and four of the six total closures -- lower volume franchise operated restaurants closed. While this being relocation, we expect to open again some point in ‘15. At the end of fiscal 2014, we had 50 company-owned restaurants, 139 franchise operated restaurants for a system wide total of 189 restaurants in 34 states, the Common Wealth of Puerto Rico and Canada. Subsequent to the end of the quarter, we had two low volume franchise-operated restaurants closed. As of today, we now have 50 company-owned restaurants and 137 franchise operated for a system-wide total of 187 restaurants. For now [indiscernible] performance in more detail for fiscal ’14. Overall we saw a 130 basis point decline in restaurant level cash flow margin, primarily driven by sales de-leverage from a decline in net restaurant sales, on a year-over-year increase in operating expenses. Food and beverage costs decreased to 29.5% of net restaurant sales compared to 30.3% in 2013. The improvement was largely driven by more favorable pricing on some of our big contracts. Labor and benefits as a percent of net restaurant sales was 32.5%, 10 basis points unfavorable to comparable period in fiscal 2013. This increase was primarily due to sales de-leverage on fixed and management labor costs, partially offset by decline in employee benefit costs. Operating expenses for fiscal 2014, as a percentage of net restaurant sales, were 27.5%, or 190 basis point unfavorable to comparable period in fiscal 2013. This increase was driven by a combination of factors

[Operator:]

[Operator Instructions] Our first question comes from Mark Smith. You may ask your question.

[Mark Smith:]

Hi guys. Can you walk us through your expectations for commodities in 2015 and kind of what your contracts look like right now?

[Richard Pawlowski:]

Yes, absolutely. So let’s just recap where we are in terms of our target in terms of our purchases. So about 32% of what we purchase is pork. On the last call, we said in Q4 we expect an 89% increase in pork prices and through ’15, we would expect to see about another 5% increase in these costs throughout the year. Absent us doing anything and absent any changes in the market. Now we’ve actually seen some improvement in the pork market. So we don’t think we’re going to hit that 5% ceiling overall and over the course of the year on pork, we probably expect to see no more than an addition of about 4% increase in prices. The next thing that we can talk about is beef, which really for us is brisket. We all know what’s going on in the beef market in general, and in barbeque and brisket in particular. So we are expecting season food cost inflation in beef. Beef is about 13% of our purchases. We are contracted in beef out through June. We are bringing on another supplier to give us some additional coverage on the second half of the year. We are expecting to see an increase in line with what we talked about last year absent us doing anything else. The next thing we can talk about is chicken. Chicken is about 12% of what we purchase. We’re seeing some pressure on the wing side, on the chicken basket. We don’t buy a huge amount of wings relative to some of our competitors but there is pressure on that side. Offsetting that, we’re seeing some benefit in breast and [hearts]. So overall we are expecting to see a little bit of price inflation in chicken but nothing that caused us any meaningful concern. All of this really being driven by wings. Right now we are contracted through the third quarter and we feel pretty good about where we are in that regard. Condiments and other purchases are about 12% of our basket. We actually expect to see a little bit of price relief throughout the course of the year, which will offset some of the increases elsewhere, which is french fries, corn, beans, things of that nature, about 14% of the basket. We don’t expect any price inflation there but we might see a little bit of benefit. And then the other two areas that we buy a little bit are produce, less than 3% of what we buy, we’re actually seeing some relief in produce, and sea food, just a couple of points, 2% of what we buy, we’d expect to see some increase just because there has been a lot of demand in the catfish market and we’re expecting to see a little bit of price inflation in catfish but again it’s such a small part of what we buy. It doesn’t move the needle very much. So on the last call, we said we’d expect to see basically a 100 and 150 basis points of food cost inflation through the course of the year absent us doing anything to mitigate that. We still think that as guidance is realistic through the year, and we’re confident that those will come in that range.

[Mark Smith:]

And if we look at the restaurant operating expenses and look at labor, what kind of a comp would it take to be able to leverage and even just keep restaurant operating margins flat in 2015, especially given the fact that, I think you said that you’re not planning on taking price in, in 2015?

[Richard Pawlowski:]

Could you just repeat the question, Mark. You are asking what comp increase it would take to keep labor as a percent of sales flat?

[Mark Smith:]

Yes.

[Richard Pawlowski:]

Yes, I mean it’s a good question. If you compare us year over year, our labor percent remains flat despite the top line sales decrease. So a comp of zero would allow us absent us doing anything with respect to scheduling or with respect to how we operate our business to keep it flat. So unless we choose to make some investments in service and hospitality which might take some more labor out, a comp of zero would allow us to keep labor at the same percent of sales.

[Mark Smith:]

And then can you walk through your expectation for openings and closings in 2015 on the franchise side and then if you have any expected changes on the company side?

[Richard Pawlowski:]

On the franchise side, on the last call we said 4 to 6 franchise new restaurant openings on the franchise side and we still think that is a realistic target for the year. In terms of closings, we had a couple of low volume stores closed at the beginning of the year. As we assess the franchisee portfolio, there are – a couple of them are on our watchlist but we don’t expect any meaningful change in the franchisee store count.

[Mark Smith:]

And then anything on the company side, any leases on right now?

[Richard Pawlowski:]

We don’t have any new leases signed, beyond the relocation of the North Riverside location that we talked about previously. We do have a number in the pipeline that we are assessing for new company openings.

[Mark Smith:]

And maybe an update, I know that re-franchising is a big goal as you move forward. Any update on where you stand today and kind of what maybe a goal would be for re-franchising as we look out to next 12 to 24 months?

[Richard Pawlowski:]

We talked about targeting a company-owned to franchisee-owned mix of 10% to 15% company owned, 85% to 90% franchisee-owned. But we expect to be able to achieve that target within the next two years. We are making progress on re-franchising a number of stores so that we have nothing to announce publicly today.

[Mark Smith:]

And then just last question, just looking at modelling, should we continue to expect this kind of high 20% tax rate or is it likely that you start to move closer to kind of a federal average 30% plus?

[Richard Pawlowski:]

We expect us to move closer to a federal average at the time.

[Operator:]

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

[Gregory McKinley:]

Yes, thank you. Can you provide us some observations on your test in Bolingbrook, give us some specifics around what you think your biggest tests were, how you are measuring response and what you think at this point that means for expanding that into other units?

[Ed Rensi:]

We are seeing continuous progress – progress is being made. Bolingbrook has been a very special test bed. I think the new play where we put in that really pops our food and makes it very attractive, it’s worked very well. The increase of craft beers associated with craft food, because we are a legendary barbecue that’s ham made. I think all of those customer benefits are paying off. The orientation of putting televisions in our bar expanding the patio, those physical attributes for the benefit of our consumers are being well received by them and progress continues to be made. Richard, any thoughts?

[Richard Pawlowski:]

Hey good morning, Greg. So for the company, on a comp store sales basis, we were down 4%. Chicago significantly out-performed the company as a market and Bolingbrook significantly out-performed Chicago.

[Gregory McKinley:]

And where are we in the process of – we’ve tested craft beer, bigger patio, I think, Ed, you said, I missed this, something about a plate presentation. Where are we in the process of evaluating whether some of those initiatives make sense to deploy into other locations?

[Ed Rensi:]

We are having a meeting, February 26 with all of our franchisees in Chicago at the Hyatt Hotel and we intend to go through some of the things we’ve done in Bolingbrook what some of the costs are, talk about some of the results. We also have a very robust customer survey system through SMG that’s proving to be helpful in us understanding better what the customers are looking for in our restaurants and we’re improving those up in all the Chicago market. So I think they are going to give – the franchisees are going to get their first look at this on the 26th. We are also involved in a design process with a number of three different companies to give us a complete review of our design for buildings and layout and consumer attributes and that will be coming to a conclusion at the end of May, June. We are already getting some preliminary results which we will offer to the franchisees to incorporate in the new stores if they wish and any remodelings they might do.

[Gregory McKinley:]

And you said you are meeting with them on the 26th, what month of that, I missed?

[Ed Rensi:]

This month. End of Q&A

[Operator:]

[Operator Instructions] It appears we don’t have any further questions at this time.

[Ed Rensi:]

Well, thank you all very much for joining the call today and we look forward to continuing progress of Famous Dave's. Thank you.

[Operator:]

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