BBQ Holdings, Inc.
Q1 2013 Earnings Call Transcript

Published: 25 Apr 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to your Famous Dave's First Quarter 2013 Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Diana Purcel. Ma'am, the floor is yours.

[Diana Garvis Purcel:]

Thank you, Rich. Good morning, everyone, and thank you for joining us for the Famous Dave's Fiscal 2013 First Quarter Conference Call. I'm Diana Purcel, Chief Financial Officer, and with me today is John Gilbert, our Chief Executive Officer. Before we begin, we'd like to remind those listening that certain matters discussed within 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 attained. Factors that could cause the actual results to differ materially from Famous Dave's expectations include financial performance, restaurant industry conditions, execution of our restaurant development and construction programs, franchisee performance, ability of our franchisees to meet their development commitments, changes in local or national economic conditions, 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 this morning, was issued yesterday afternoon after market closed and can be accessed by clicking on the Investor Relations link on our website at www.famousdaves.com. As a reminder, this call is being recorded and will be available for replay for 7 days. Now, I will call -- turn the call over to Famous Dave's CEO, John Gilbert.

[John F. Gilbert:]

Thanks, Diana. Hi everybody on the call. Thanks for calling in today and listening to us. Yes, it was a difficult quarter, and yes, we were disappointed with the results. So I'll just start off with that. But, a quarter does not a year make, and we have the advantage, at Famous Dave's, of seeing the daily impact of the work we are doing. So while it's not yet apparent, there's actually much good that's happening. As I mentioned at the last call, and certainly I've talked to some of you folks individually about, Famous Dave's is in the process of implementing pretty significant strategic and operational initiatives designed to increase sales and improve profitability. It is our goal to be considered one of the best restaurants across all measures by our shareholders, our customers and our employees. It will come as no surprise, as CEO, I have 3 areas of focus

[Diana Garvis Purcel:]

Thank you, John. To those who are on call, please refer to our press release issued yesterday as I summarize our results. Famous Dave's reported revenue of $36.6 million and net income of $62,000 or $0.01 per diluted share for the first quarter of 2013 compared to revenue of $37.5 million and net income of $817,000 or $0.11 per diluted share for the prior year. As a reminder, the results for the first quarter of the prior year included closure cost of $92,000 or approximately $0.01 per diluted share for our company-owned location that was sold during the quarter. We generated $3.9 million in cash from operations during the first 3 months of fiscal 2013, and this compared to a use of cash of $33,000 for the first 3 months of 2012. The year-over-year increase in cash generation reflects the improved cash flows due to the lack of a corporate bonus payout in fiscal 2013, as well as the strategic decision to make minor adjustments to vendor terms to allow the company to reduce its debt level. We used approximately $739,000 for capital expenditures, primarily reflecting continued investments in our existing restaurants. We affirm our previous guidance and still expect total CapEx for 2013 to be approximately $7 million, and this is going to reflect 2 new ground-up full service restaurant openings, continued investments in our existing restaurants, including a remodeling project, and investments in corporate infrastructure systems. As previously mentioned, our adjusted EBITDA declined during the quarter as a result of a number of factors to $1.9 million, and this compares to adjusted EBITDA of $3 million for the comparable quarter in fiscal 2012. During the first quarter, company-owned restaurant sales declined year-over-year by approximately 1.3%, and this primarily reflects the comparable sales decrease, again, stemming from adverse weather and macroeconomic conditions that negatively impacted consumers. Additionally, sales were unfavorably impacted by the shift of Easter from the second quarter of fiscal 2012 to the first quarter of fiscal 2013. These decreases were partially offset by a weighted average price increase of approximately 1.5%. On a weighted basis, dine-in sales decreased by 3.5%, and while the continued negative trend in dine-in was disappointing, we were pleased with the favorable trends in to-go and catering, which increased 1.3% and 0.4%, respectively, during the quarter. We saw an almost 10% increase year-over-year in the percentage of off-premise sales, which grew from 28.3% for the first quarter of 2012 to 31.1% for the first quarter of fiscal 2013. As a further breakdown, to-go represented 25.4% and catering representing 5.7%. Our dine-in per person average for the first quarter of fiscal 2013 was $16.08 compared to the $15.72 for the first quarter of 2012. This primarily reflects the weighted average price increase and continued challenges with dine-in guest count. The breakdown by day part was $14.23 for lunch and $14.75 for dinner. On the franchise side, royalties decreased year-over-year, reflecting the comparable sales decline of 6.1% that John spoke to, partially offset by 9 new franchise-operated restaurants that frankly opened since the first quarter of 2012 at a higher sales volume than the 7 restaurants that had closed during the same timeframe. We did not have any openings during the quarter, however, one franchise-operated restaurant closed in Burnsville, Minnesota under the laws of eminent domain, stemming from a reconfiguration of the area by the Minnesota Department of Transportation. Subsequent to quarter end, and earlier this week, our first restaurant opening of 2013 took place in Carolina, Puerto Rico, where our brand received an incredible reception. Please refer to our press release for a detailed breakdown of the number of restaurants at the end of each quarter. As of today, we have 53 company-owned restaurants and 135 franchise-operated restaurants for a systemwide total of 188 restaurants in 34 states, the Commonwealth of Puerto Rico and one Canadian province. Due to challenges associated with the timing of lease executions and permitting, complexities associated with international growth and concerns over franchise sales results, we're updating our previous guidance and now expect to open approximately 12 restaurants in fiscal 2013, including 2 company-owned locations. We continue to have strong interest in territory, however, and subsequent to year end, we increased our committed units to be developed by 6 restaurants due to the execution of 2 area development agreements. I will now take a few moments to review the cost and expenses for the quarter and to provide updated guidance as to what we expect to see for the remainder of fiscal 2013. Our food and beverage costs for the first quarter of fiscal 2013 were 30.8% of net restaurant sales, and this compared to 31.1% for the same period in fiscal 2012. And we were pleased with this progress. Food and beverage costs as a percentage declined during the quarter primarily due to a purposeful decline in discount. Also, we began to see the positive impact from some of the strategic initiatives that we've been working towards, such as our new house-smoked brisket. Our food contracts performed as expected for the first quarter. And it's important to note that embedded in our contracts are the effects of this historically high corn and soy prices of 2012, which are key ingredients in many of our products as well as livestock feed. We are beginning to see these prices soften and anticipate modest release in fiscal 2013 as it relates to the contracts that are still being negotiated for the remainder of the year. And as we begin to look beyond 2013, we are optimistic that we'll see greater savings in fiscal 2014. On a same-store basis for fiscal 2013, and based on what we have contracted to date, along with our continued strategy to optimize our distribution networks and freight costs, we still anticipate a 2% decline in our contracted food and beverage costs year-over-year. This decline does not include the purchasing volume of any new restaurant openings during 2013. As a reminder, we are under contract for the majority of our pork products for all of fiscal 2013, which positions us well to capitalize on future savings, should we see further opportunities in 2013 to blend and extend our contract into fiscal 2014. With regard to our other key products, we anticipate a decrease for our brisket, which is contracted through yearend, as well as other items such as hamburgers, seafood and French fries. With regards to chicken, the feed and the processing components are now locked in through the end of the year, and we anticipate a slight increase in chicken costs year-over-year. Despite an anticipated decrease in contracted food costs from prior year, we will continue our efforts to further improve margin through key core item promotions as well as through opportunistic commodity purchases and strategic menu mix management. As John had previously mentioned, one of the strategies we will utilize this year is to take advantage of opportunistic commodity purchases. For example, we were able to secure, at favorable pricing terms, baby back ribs. Along with some promotional support from our vendors, we will feature them along with our St. Louis ribs in our summer rib promotion. Also, we just took a price increase of approximately 1.5% on selected menu items in April, concurrent with the new menu launch and in accordance with our RMS' recommendation. As we move through 2013, we will determine whether or not we will take additional price later in the year based on greater insight attained from our work with RMS. As you've already heard, during the quarter, we began selling our chicken wings by weight as opposed to by the piece. This has allowed us to standardize food cost by protecting us from the variability of size and weight, but most importantly, it did not change portion sizes or the value delivered to our guests. As previously mentioned, during 2013, we will continue to test and evaluate expanding the strategy to our ribs. Based on the results from our first 3 months, a year-over-year decline in contracted food costs and the strategy previously mentioned, we're updating our previous guidance and now anticipate food and beverage cost for fiscal 2013 as a percentage of net sales to be approximately 145 to 150 basis points lower than fiscal 2012's percentage. For the first quarter of fiscal 2013, labor and benefits as a percentage of net restaurant sales were 10 basis points unfavorable to the comparable period of fiscal 2012, primarily due to sales deleverage on fixed labor, partially offset by a decline in direct labor cost and lower-than-anticipated employee benefit costs due to our workers' compensation refund. We affirm our previous guidance and still anticipate labor and benefit costs as a percentage of sales to be 30 to 35 basis points favorable to fiscal 2012's percentage. Operating expenses for the first quarter as a percentage of net sales were 27.8% or 50 basis points unfavorable to the prior year due to sales deleverage, increased gas cost due to an elongated and frankly colder winter and increased advertising cost due to a shift in media spend. These increases were partially offset by lower cost associated with the timing of menu printing. For the remainder of 2013, we've made the purposeful decision to pull back on non-productive media. While we're not eliminating efforts entirely, we need to further evaluate whether they provide the intended results and a satisfactory return. As a result, we're updating our previous guidance and at this time, anticipate advertising expense will be approximately 2.85% of net sales for all of fiscal 2013, which includes a 0.75% contribution to the marketing fund. This compares to a 2012 spend of 3.4% in net sales, which included a 1% contribution to the marketing fund. Based predominantly on the change in our advertising spend, we're updating our previous guidance and now anticipate operating expenses as a percentage of net sales for fiscal 2013 to be approximately 115 to 120 basis points lower than the 2012's percentage. G&A expenses as a percentage of total revenue for the first quarter of fiscal 2013 was 13.7% compared to 11.9% for the comparable quarter of fiscal 2012. Approximately 130 basis points of the 180 basis point increase in G&A as a percentage of revenue reflects the previously mentioned reorganization of the CEO and COO positions, including bonus and stock-based compensation, as well as legal and professional fees incurred related to board activity. The remainder of the increase was primarily due to a decline in total revenue leverage. As John had mentioned, over the course of the year, we will be taking a hard look at reducing G&A in 2013. If we were to exclude stock-based compensation and achievement of full bonus, collectively equaling 170 basis points year-over-year, G&A expenses as a percentage of revenue would actually be 30 to 35 basis points favorable. Fiscal 2013's first quarter had $6,000 of preopening expenses compared to $18,000 in the first quarter of 2012. We're updating our previous guidance and now anticipate preopening costs for 2013 to be approximately $529,000 for the opening of 2 ground-up full-service company-owned restaurants later this year. Interest expense for the first quarter of fiscal 2013 was slightly unfavorable in dollars and as a percentage of revenue due to a year-over-year increase in weighted average interest rates and a higher average outstanding balance on our line of credit. For full fiscal 2013, we still expect interest expense to be essentially flat as a percentage of revenue to fiscal 2012, and we still expect an approximate 29% effective tax rate for 2013. With regard to our balance sheet, we typically maintained a cash and cash equivalent balance of around $2 million. We ended the quarter with a balance of $10.5 million on our revolving line of credit, reflecting over a 20% decline from yearend and a 12.5% decline from the prior year. As of today, we have a balance of $11 million on our line, and we were in compliance with all of our covenants during the quarter. Lastly, although we are still within the buyback authorization, we did not repurchase any shares during the quarter. At this point, we'd like to take your questions. Rich, if you could pool for the questions.

[Operator:]

[Operator Instructions] And we have a question from Conrad Lyon of B. Riley & Co.

[Conrad Lyon:]

John, you said something earlier that I think kind of really hits the nail right on the head about sales and margins, and where sales were years ago and where margins were and where they are today. With -- to that end, can you provide any color of where you think margins can go? And I'll preface that by saying that, gosh, I think 8, 10 years ago, it used to be -- so you have a restaurant level profit of maybe 15%. I don't think we'll get back to that just given where food cost and labor are, but any sense of where you could take it over the next several years?

[John F. Gilbert:]

Boy, that is a terrific -- yes, a sense. And it's certainly a big part of our strategy. So there's a couple of things that I'll put out there and maybe try to avoid giving you a number other than what we talked about in the near term. But there is a number of features inherent to barbecue and the way that we do barbecue, and I've talked before about batch and hold cooked process and the type of products that we make. Barbecue is a food item that's highly fungible. You can make a lot of things with; for example, pulled pork, tacos, flatbread, salads. And so one of the things that we have to figure out how to do is take advantage of those assets that barbecue presents to us in terms of the manufacturing process rather than not taking advantage. And I guess the best way to answer that is through conversations in the 6 months I've been here with the team, R&D, restaurant operators, we've identified a number of places to look for restaurant-level P&L improvement that has to do with leveraging the advantage that barbecue presents to us directly based on some of the things I just mentioned. Some of that will be in, hopefully, long-term menu management. So what that means is maybe what I would call more of an urban barbecue menu in the future that has some of those barbecue-infused product ideas like tacos, for example, that we're testing in some markets right now. But some of that then ends up impacting food costs, obviously, in a positive way, because if you can take the protein down and take the other elements up, you end up -- and still satisfy the consumer, which is incredible here -- and critical, you end up with clearly an advantage of where you are today, which is heavy emphasis on bone and [ph] protein, which will still be part of our menu and it's still generates a huge amount of gross margin per item. We won't lose sight of that. But I think there are a number of initiatives, and I'm still talking within the P&L, that give us the opportunity to go beyond the 250, 300 basis points that we already believe we've identified to get something even more exciting out of this business. And I don't know what we get to, but certainly, we want to get significantly north of where we are. I don't think I would be -- fair for me to go too much further in answering that only because it's such a wide range of issues. Looking at different equipment is an example. I mean, we have heretofore held out a standard on equipment that we can only use certain smokers and certain pieces of equipment. And those have actually limited our ability from a lot of angles in terms of production time, hold time. And there's improvements to be had in both those areas. And you can imagine what might happen if you can decrease production time and increase hold time, for example. And so, while those are central and basic to operating restaurants, there are also a lot of basis points in P&L improvement there. I mentioned some of the things that we're doing as it relates to labor in restaurants with call center, for example and some of the other initiatives, we talked about packaging. And so you'll get a sense, I think, as we start to talk about these things that cumulatively, they amount to something substantial. And they may not be that we get back to 2007 numbers by doing 2007 stuff, and maybe we get back to 2007 numbers by leveraging current technology and taking advantage of what the market will bear or what the market presents to us in terms of equipment advantage and technology advantages and a whole bunch of different things that frankly, we're not a pioneer in many of these areas, we're a bit of a follower.

[Conrad Lyon:]

Got you. Maybe I can also ask about this one particular line item, specifically operating expenses in general have grown, call it, 300 basis points since that fiscal '06, '05, '07 timeframe. And the other -- I get food and beverage costs, labor, that you can probably do some tweaking to improve that, but is there -- I sort of view operating expenses, and it might be a misguided view, as something that is a little bit more easier to work with. Is that a safe assessment? I mean, might we see some improvement there?

[Diana Garvis Purcel:]

Yes, Conrad, I'll take this one. Several of the initiatives that John mentioned in his portion of the script will address operating expenses. One of them, obviously, being the supplies initiative. We really believe that there are real dollars there, and as he mentioned, also providing a more quality experience for our guests. And so certainly that's an area that we're looking into. We continue to look for opportunities in terms of utilities and leveraging those. And as he mentioned, we've also -- are looking really hard at our advertising spend and making sure that we are getting the most productivity out of that spend and it's delivering the results that we intend. And so that's a hard area of focus for us. The other thing I just want to mention and it's always difficult, we speak in terms of the percentage of sales, the percentage of revenue. One of the things that have changed, and it happened in the first quarter of 2010, that certainly does impact the percentages but has a positive impact on EBITDA, and that was our acquisition of the 7 restaurants in New York, New Jersey, which frankly have higher rent structures. So you go back to those restaurants and you look at as a percentage of sales, those 7 restaurants do, if you isolate them, have higher rent structures, frankly, than any of our restaurants in the base and predominantly as compared to our East Coast restaurants. However, those restaurants, collectively, deliver terrific EBITDA on the bottom line. So we certainly recognize that we have to do be able to deliver the operating income and have the strategies in place. If you look at the guidance we provided, you'll see that it gets us pretty darn close to 2000 level -- 2007 operating income level. But we just have to dissect it a little bit further.

[John F. Gilbert:]

Let me jump back in too, just to talk a little about the advertising expenses. I don't want to send the wrong message here. We are not throwing in the towel as it relates to marketing spend. I would categorize my position on this as very straightforward. I've spent a long time, probably too long, 30-plus years running advertising and marketing functions. It's very difficult to tell me that some spend is working in the advertising world when I can see that it's not. And I know where those things are, I know where to look for them. And frankly, this also applies to discounts. And so what I said when I first got here 6 months ago was that we were not an LTO promotionally-driven brand. And the fundamental reason for that is we simply don't have the media clout to be that kind of thing. We don't have enough media efficiency. There are brands in the marketplace that are tremendously media efficient, and they can pull off for 3% or 4% of sales significant impact from a sales standpoint, sales growth standpoint, when they get it right with their LTO. We're not wired that way. And so we were acting that way, and we were spending that way. And I think that as I've gotten deeper into it, I've recognized that our path is much more based on a progressive and aggressive use of the digital space which we've been testing extensively over the last 6 months, which is more of a one-to-one type of approach. It's working for us. Concurrent to that -- and so if I can still grow the top line and eliminate or reallocate nonproductive marketing spend, it just makes the -- it makes the marketing dollars left over work that much harder. So we're really proud of the marketing initiatives that we're making, and the implication of those is that we've been able to effectively reduce both discounts and, let's call it, wasteful media spend in material ways, and we've just started that.

[Conrad Lyon:]

Yes, fair enough. Question on guidance. It's probably for you, Diana. If I look at your outline for expectations for this year relative to what happened in the first quarter, it looks like that to achieve the expectations that there's going to be some catch-up in the subsequent quarters, what quarters, if you can talk about this, should we expect to see a bulk of the pickup?

[Diana Garvis Purcel:]

I think you're going to see continuous momentum. Keep in mind, first quarters are lowest sales volume quarters, so any blip, one way or the other, gets magnified. We're moving into barbecue season and as John had indicated, off of the terrific period 3 and starting to see the results of a lot of the sales initiatives start to take fruition. So even from a cost perspective, you'll see continuous improvement throughout the quarter. So I'm not going to peg for you how that lays out quarter-by-quarter, but as we've contracted, certainly from a food cost, from a contract perspective, I would tell you that this is our most unfavorable quarter.

[Conrad Lyon:]

Okay. Labor. I may have missed it. Did you talk about what you expect to see in terms of unfavorability relative to what you had said last quarter?

[Diana Garvis Purcel:]

Yes, we affirmed our guidance. So we're still expecting 30 to 35 basis points year-over-year.

[Conrad Lyon:]

And the prior guidance included bonuses and accruals and things of that nature, correct?

[Diana Garvis Purcel:]

Well, not in labor. So our bonus accruals, that's in G&A.

[Conrad Lyon:]

Right. Exactly, exactly. Okay.

[Diana Garvis Purcel:]

So did you catch our guidance on G&A?

[Conrad Lyon:]

I did.

[Diana Garvis Purcel:]

Okay, perfect. And that reflects a similar bonus expectation to what we would have given guidance on at the end of the fourth quarter.

[Conrad Lyon:]

Okay. The other big variable which I know you, as a policy, don't talk about, but I'll ask this anyways, but obviously same-store sales, is there -- can you talk about a range perhaps of what is expected that goes into the line item guidance?

[Diana Garvis Purcel:]

Well, you started off the conversation by saying I know it's a policy, you don't really talk about it. We really can't. We just can't go there. So I know that's probably disappointing.

[Conrad Lyon:]

Maybe I can ask this. I know that things look encouraging from a March perspective. I'm not sure -- obviously, we'll see how April is. But do you guys have a sense that you're seeing some more of a stabilization less volatility with consumer spending versus the earlier part of the year?

[Diana Garvis Purcel:]

Yes, I would say that, that is fair. And I think even as -- I don't if you follow Black Box Intelligence or if you follow Knapp-Track or what you use to sort of gauge the industry, but I think the industry, in general, has seen that. And so we feel good about the momentum we saw in period 3, and we feel good about going into what's our, we deem, our season. I mean this is where we make haste, so we feel really good about the second quarter.

[John F. Gilbert:]

Conrad, I will say, and you will need to bring your credit card, but please, go out to the restaurant this weekend and you'll be able to see something exciting going on. So I think it is, without talking about same-store sales, you can certainly get in and see the energy around the new menu and the new products.

[Conrad Lyon:]

Let me ask you this. I'm glad you brought it up. I haven't seen the menu yet. Is there a greater section dedicated to sort of value offerings?

[John F. Gilbert:]

Actually, there's not. We've gone to a more barbecue-authentic menu. We were very parsimonious in price increases and really stayed very conservative, so we didn't take a lot. We do have what I would call a good price value offering in the new menu. But we did not -- for sure, we determined that we did not need a national, based on our testing in Q1, we did not need a national menu price value adjustment. We do have reasons in the country where there's clearly a lingering effect as it relates to consumer unemployment and stuff like that, where we do have fairly aggressive value initiatives underway that are providing very encouraging results, but our strategy is pretty basic, where we don't need to be in the value game, we're not going to -- let me say it differently, where we don't need to be in the reduced price game or the loss of revenue game, we're not going to be. We're seeing significant improvement in performance without having to resort to either discounts or value menus but we do deploy both in areas where we deem it necessary.

[Conrad Lyon:]

Final question. With a kind of counter service kind of fast, casual format, any evolving there, or how is that, if you will, that initiative looking? Are there plans to perhaps be more aggressive with the rollout in the future, redesign, things of that nature?

[John F. Gilbert:]

I think there -- our plans, for us, is to continue to evolve it. It is a very promising part of our business. Diana mentioned in her part that our mix attributable to to-go continues to grow and grow meaningfully. And part of that is because of the energy we're putting behind it, we believe that we will invest appropriately into proving that concept out. Again, our capital strategy is invest where we prove -- in order to prove, so that we're able to incent interest from franchisees to develop out that part of the portfolio. So at some point, the responsibility or the opportunity for growth is going to come from franchisees in that space, and we're working with several franchisees right now who have different versions of the shack to help them improve profitability and to get this thing to where it needs to be.

[Operator:]

We have another questioner, Mark Smith from Feltl Inc.

[Shannon Richter:]

This is Shannon, on for Mark Smith. Just a couple of questions here. First, what was behind the reduction of franchise unit growth guidance?

[John F. Gilbert:]

I'll start, and then Diana can jump in. I think the biggest issue for franchisees is not inconsistent with consumers, is confidence based upon current performance. So as they came off of Q4, late Q4 and into Q3, I mean -- excuse me, Q1 2013, there were several projects that were on the table that, based on their performance, they slid back slightly. So the biggest issue with domestic franchisees was when they're showing a minus 6% for Q1, there's a confidence issue, we believe that based on the deployment of the stuff that we attested in Q1, that confidence is bouncing back.

[Shannon Richter:]

And then second, what's the cadence of openings through the year?

[Diana Garvis Purcel:]

So if you want to [ph] model it out, 2 in the second quarter, 1 of which we indicated that we opened this past Monday, 5 in the third quarter and 5 in the fourth quarter.

[Operator:]

There are no further questions at this time.

[John F. Gilbert:]

Okay. Thanks, everybody, for listening in. We certainly appreciate the interest and the time. Please all go out and enjoy our Famous Dave's meal this weekend. I think you'll be very pleased. Bye-bye.

[Operator:]

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