BBQ Holdings, Inc.
Q3 2012 Earnings Call Transcript

Published: 26 Oct 2012

[Diana Purcel:]

Good morning everyone and thank you for joining us for the Famous Dave’s fiscal 2012 third quarter conference call. I’m Diana Purcel, Chief Financial Officer. With me today is John Gilbert, our newly appointed Chief Executive Officer.

[Before we begin:]

Our earnings release, which contains the financial and other statistical information being discussed this morning, was issued yesterday afternoon after market close 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 seven days. Now, I will turn the call over to John Gilbert, Famous Dave’s Chief Executive Officer. John?

[John Gilbert:]

Thank you, Diana. Good morning everyone, and thanks for taking the time to join us on this call. Let me quickly introduce myself and share a little bit of why I’m here. I’m not new to Famous Dave’s. I’ve been a board member for over a year and have been working closely with Christopher O’Donnell and the Famous Dave’s team on a number of initiatives currently in process. Many of these have been discussed on prior calls. The reason I came to Famous Dave’s as a board member is the same reason I came to Famous Dave’s as a CEO. I wanted to be a part of something special, something unique, a chain restaurant with a scratch kitchen producing award winning food and great service – I believe that this is a high growth brand waiting to happen. You can read my biography, including my experiences and qualifications, but it can be summed up simply - I have a strong track record of assembling and leading teams that have created restaurant shareholder value; from creating Jack Daniels Grill at TGI Friday’s to launching the America Runs on Dunkin’ campaign at Dunkin’ Donuts. What I see at Famous Dave’s, and what attracted me to the Board and now the CEO role, are the raw materials for brand greatness. The more I got to know Famous Dave’s as a board member, the more I loved the potential. Famous Dave’s is the real deal and we have the trophies to prove it. In fact, we’ve won exactly 646 awards for food, flavor and quality so far. Consumers do care about this stuff, but for them to act on it - to visit our restaurants and spend their money - they need to know about it. My job is to make sure they know, and while doing so, drive same store sales, revenue and profits. I’ve led growth efforts in some of America’s best restaurant brands. In some of those situations we’ve had to fix the food, fix the service, or fix both. At Famous Dave’s we don’t need to fix anything, just simplify the message and amplify the branding. What is clear to me is that this brand needs to get credit for the 17 years’ worth of details, discipline, artistry and science that goes into making award-winning BBQ. There are casual dining brands attempting to reinvent themselves to achieve the degree of differentiation we already own. At Famous Dave’s our emerging vision is to beat them all by simply being better at communicating what we do so well; make great food that serves three robust occasions; dine-in, to-go, and catering. The truth is, we have food so good people bring it home. Most mainstream restaurant brands wish they could say that. I should pause to recognize Christopher for his leadership as CEO during the last four years in stabilizing and reigniting growth. We have a solid balance sheet and are generating meaningful cash flow due to his leadership. I am excited to continue to partner with him to accelerate what he started. Together we are going to find growth and invest in it. As a board member, a shareholder and now as the CEO, I am disappointed in our third quarter results. We fell short of everybody’s expectations. Our focus going forward will be on delivering the value to our shareholders that they expect. We released our results after market close yesterday and reported revenue of $39.9 million and earnings of $0.11 per share for the third quarter. Comparable sales for the quarter were slightly positive for our company-owned restaurants. Our dine-in business was down 0.9 percent relative to last year, To-Go was up almost 4.4 percent and catering was down 0.7 percent. Our franchise comparable sales were down 2.8 percent during the quarter, and unfortunately, the decline was seen across the system, from East Coast to West Coast. When we compare ourselves to industry sales trends the evidence links overall performance to macro economic factors influencing consumer sentiment – and then behavior - like gas prices and unemployment levels. As we said last quarter, we believe that, open-ended discounting does not drive long-term customer acquisition, particularly without the media muscle to incent incremental visits. It only serves to erode the bottom line. We have found, however, that the consumer, in general, remains very value conscious and discount-driven. We did execute a modest direct mail discount program during the early part of the summer, and saw a positive lift, but as often happens, sales quickly softened in the latter part of the quarter when the promotion ended. Dine-in traffic was one of several challenges experienced during the quarter. The bottom line is that on a higher revenue base, we weren’t able to realize the flow through, primarily due to continued pressure on our margins. Diana will get to the specifics related to the quarter. As I mentioned, I’ve been working with the team on a number of initiatives, one of which is a complete menu re-engineering. A restaurant’s menu is the soul, and voice, of its brand, and we are analyzing every component of Famous Dave’s menu to ensure that it is delivering a message of quality, authenticity and BBQ expertise. We’re looking at size, design, readability, the number of items offered, which items are offered, and how they’re offered, including price point as well as the contribution that each of the items on our menu makes to overall traffic generation, sales and profitability. We’re also re-examining our current strategy with a critical eye regarding limited time offerings and new menu item introductions. In the coming weeks, we will be launching several critical menu tests throughout our system. Each of these tests will exploit our BBQ positioning in uniquely different ways, and our guests will tell us what resonates and what doesn’t. The research conducted over the past several months, along with an analysis of our previous direct mail campaigns and consumer response, has provided great information for us to reach our targeted customer segments.  In the fourth quarter, we will be utilizing this customer segmentation to drive incremental sales, by featuring a direct mail campaign, and coupling this with an in-store bounce back offer. This sales driving program proved effective last year. We’re also taking a fresh look at our guest feedback programs. While our guest satisfaction scores remain among the highest in the industry, they are not translating into growth. These are just some of the tools and initiatives that will help us grow the brand, but we’ll also be growing the system. During the third quarter, we had a successful new restaurant opening in Winnipeg, Canada, our first international location. Our experience in Canada reinforces our belief in international expansion. We will continue to focus on Canada and are investigating Mexico. Additionally, though not truly international, we expect to open in early 2013 our first restaurant in Puerto Rico. These new geographies, combined with our variety of restaurant formats, have helped invigorate our pipeline of both new and existing franchise partners. Also, during the quarter, we opened new restaurants in Noblesville, Indiana and Temecula, California, and are on track to open total of up to 13 restaurants — 11 franchise locations and 2 company locations— in 2012. We did have 3 franchise restaurants that closed during the quarter, and had another restaurant close after the end of the quarter, in LaHaina, Hawaii as well as anticipate a closure of a franchise-operated restaurant in Abilene, Texas at the end of October. The number of closures is concerning, and it’s something that we will investigate in order to identify trends. Also, we continue to look at opportunities to build franchise and company restaurants where it makes strategic sense. Along those lines, we anticipate issuing a press release, early next week, with some exciting growth opportunities. For 2013, we plan to open up to 15 locations, including two company-owned restaurants, consisting of one brand new location and a re-location of an existing restaurant in Maryland. The smaller footprint format is key to our growth initiatives. In April, a franchise-operated restaurant opened in Beaverton, Oregon, just outside of Portland and based on the results so far, the franchisee is extremely pleased. Next month we’ll be opening a counter-style, fast- casual, 3,600 square foot location in Evergreen Park, Illinois. This is an excellent location, an end-cap at a shopping center in an area of Chicago with excellent demographics and high retail traffic. We beat other restaurant companies to it and were awarded the spot because of the flexibility we’ve built into our restaurant formats. I’ll wrap my bit up by saying this. The American consumer, and perhaps the international consumer, is rewarding specialization today. Famous Dave’s is the expert in scratch-made BBQ. My job is to get for the credit we are due. My intent is to simplify in order to amplify. Simplify the menu, simplify the offering, simply the messaging, simplify everything that gets in the way in order to amplify the truth; scratch made award winning BBQ, is here. With that, I’ll turn the call over to Diana, who will take you through the details of our financial results. Diana?

[Diana Purcel:]

Thank you, John. To those on the call, please refer to our press release issued yesterday. Famous Dave’s reported revenue of $39.9 million and net income of $845,000, or $0.11 cents per diluted share for the third quarter of 2012 compared to revenue of $38.9 million and net income of $1.6 million or $0.19 cents per diluted share for the third quarter of 2011. We’ll speak to the specifics in more detail later, but in summary, earnings for the third quarter of 2012 were negatively impacted by the timing of the spend for media and direct-mail marketing initiatives, that shifted from the fourth quarter of 2011 to the third quarter of 2012, as well as an increase in direct marketing costs, equating to a total impact of $0.09 per diluted share. Earnings were also negatively impacted by continued margin pressure from increased commodity costs and labor and benefit costs. The decline in third quarter earnings was partially offset by an approximate $0.07 per diluted share cumulative impact from a favorable tax rate adjustment for employment tax credits for the current year, as well as two years for which we can amend the returns. The favorable impact for the remaining two open tax years is expected to be realized during the fourth quarter of 2012. The year-over-year increase in third quarter sales reflected a comparable sales increase of 0.2 percent, the addition of two new-company owned restaurants since the third quarter of 2011 and a weighted average price increase of approximately 2.2 percent. These increases were partially offset by the closure of the Vernon Hills, Illinois and Tulsa, Oklahoma restaurants. John gave you the absolute percentages, but on a weighted basis, To-Go represented 0.9 percent of the comparable sales increase, and was partially offset by a 0.6 percent decline in dine-in sales and a 0.1 percent decline in catering sales. For the third quarter of fiscal 2012, off-premise sales were 35.2 percent of total sales, with To-Go representing 21.9 percent and catering representing 13.3 percent. This compares to off-premise sales of 34.1 percent for the prior year. For the third quarter of fiscal 2012, our per-person average was $15.66 compared to $15.39 for the third quarter of 2011 primarily reflecting the weighted average price increase. The breakdown by day part was $13.72 for lunch and $16.80 for dinner. On the franchise side, the year over year increase in franchise royalties reflects a net increase of three franchise restaurants since the third quarter of 2011 partially offset by a 2.8 percent decline in comparable sales. As previously mentioned, three new franchise-operated restaurants opened during the third quarter; Winnipeg, Manitoba, Canada, Noblesville, Indiana, and Temecula, California and three franchise-operated restaurants closed in New York City, Mankato, Minnesota, and Springfield, Massachusetts. Subsequent to the end of the third quarter, a franchise-operated restaurant closed in Lahaina, Hawaii. At the end of the third quarter of 2012, we had 53, company-owned restaurants and 134 franchise-operated restaurants for a system-wide total of 187 restaurants in 34 states and 1 Canadian province. By comparison, at the end of the third quarter of 2011, we had 53 company-owned restaurants and 131 franchise-operated restaurants for a system-wide total of 184 restaurants in 37 states. As of today, we have 53 company-owned restaurants and 133 franchise-operated restaurants for a system-wide total of 186 restaurants in 33 states and 1 Canadian province. I will now take a few moments to review the expenses for the quarter and provide updated guidance with regard to fiscal 2012

[John Gilbert:]

Let me wrap-up by tying this story together. Our research has told us consumers get it. They understand the details and nature of BBQ. They know how BBQ "works" and BBQ works for them due to advantages inherent to the product. Two examples

[John Gilbert:]

Thanks for listening in on our call this morning. Question-And-Answers 14