BBQ Holdings, Inc.
Q4 2012 Earnings Call Transcript

Published: 15 Feb 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 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. Good morning, everyone, and thank you for joining us for the Famous Dave's Fiscal 2012 Fourth 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'd like to turn the call over to John Gilbert, Famous Dave's CEO. John?

[John F. Gilbert:]

Hi, everybody. Thanks for joining us this morning. Appreciate the time that you're taking out of your busy day to spend with us. Yesterday, after the market closed, Famous Dave reported revenue of $36.3 million and earning of $0.10 per diluted share for the fourth quarter. For the full year, revenue totaled $155 million and earnings were $0.57 per diluted share. Same-store sales in the fourth quarter, for company-owned restaurants were down 6% while our franchise restaurants were down 4%. For the full year, comparable sales at our company-owned restaurants were down 1.8% and comp sales at our franchise restaurants were down 2%. 2012 results fell well short of expectations, and it's really important to understand some of the primary factors that led to our results this year. Upfront would be that we entered 2012 on the heels of an interesting leading finish for fourth quarter 2011 where we had a 3.6% comp increase for that quarter for company-owned stores. So we were rolling over some pretty big numbers. Those sales, however, were driven primarily through heavy coupon discounting. They really had a negative impact on profits, and in my opinion, created a wrong impression for our business in the marketplace. So as such, we proactively pulled back on the level of consumer-focused discounting in 2012 for the fourth quarter in order to both preserve our pricing integrity and have some positive impact on growth -- gross margin. In essence, we're really not, at Famous Dave's, a broad scale discount-driven brand, I think you've heard me mention that before, nor should we be. Really, 2 reasons for that

[Diana Garvis Purcel:]

Thank you, John. To those on the call, please refer to our press release issued yesterday as I summarize our results. Famous Dave's reported revenue of $36.3 million and net income of $750,000 or $0.10 per diluted share for the fourth quarter of 2012 compared to a revenue of $37.5 million and net income of $414,000 or $0.05 per diluted share for the fourth quarter of 2011. For the full fiscal year 2012, revenue was $155 million, and net income was $4.4 million or $0.57 per diluted share, which include $0.04 of closure costs in a lease reserve for restaurants that closed during 2012. Additionally, there was a $0.07 favorable impact to earnings per share as a result of the cumulative effect of the recapture of prior year tax credits in the third and fourth quarters of 2012. This compares to revenue of $154.8 million and net income of $5.6 million or $0.68 per diluted share for 2011, which includes $0.05 noncash charges for the impairment of specific restaurant assets. Adjusted EBITDA for fiscal 2012 was $12.6 million and compared to adjusted EBITDA of $15.5 million for fiscal 2011, reflecting a decline in income from operations. The year-over-year decline in fourth quarter sales reflected a comparable sales decrease of 6% off a strong base of 3.6% for the prior year and a closure of 3 company-owned restaurants. These decreases were partially offset by the addition of 2 new company-owned restaurants since the end of the fourth quarter of 2011 and a weighted average price increase of approximately 2.5%. On a weighted basis, dine-in represented 5.5% of the sales declined and to-go represented 1.2% of the sales decline. These were partially offset by 0.7% increase in catering sales. For the fourth quarter of fiscal 2012, off-premise sales were 35.8% of total sales with to-go representing 24.1% and catering representing 11.7%. This compares to off-premise sales of 33.7% for the prior year. Our per-person average for the fourth quarter of fiscal 2012 was $15.83 and this compared to $15.49 for the fourth quarter of 2011, primarily reflecting the weighted average price increase. The breakdown by daypart was $13.98 for lunch and $17.03 for dinner. For the full year, total restaurant sales reflected a 1.8% comparable sales decrease and a closure of 3 company-owned restaurants. This was partially offset by the full year impact of 2 company-owned restaurants that opened in fiscal 2011 and the partial-year impact of company-owned restaurants that opened in fiscal 2012 as well as the weighted average price increase of approximately 2.85%. Of the 1.8% comparable sales decrease on a weighted basis, dine-in sales accounted for 2.1% of the decline while catering increased 0.3% and to-go remained flat. For the full fiscal year, off-premise sales were 33.4% of total sales with catering at 10.5% and to-go at 22.9%. This compares to 2011's off-premise sales of 32%. For fiscal 2012, our per-person average was $15.73, compared with an average of $15.38 for 2011. The breakdown by daypart for 2012 was $13.84 for lunch and $16.89 for dinner. On the franchise side, the year-over-year increase in fourth quarter and full year 2012 royalty revenue reflected 10 new franchise-operated restaurants that opened at higher sales volumes than the 8 restaurants that closed. Additionally, franchise royalties reflected a comparable sales decline of 4% and 2% for the fourth quarter and the full year, respectively. As previously mentioned, 4 new franchise-operated restaurants opened during the fourth quarter

[Operator:]

[Operator Instructions] Our first question comes from Conrad Lyon.

[Conrad Lyon:]

So a lot of information there. Let me first talk about just the performance in the fourth quarter, the same-store sales. Do you know what percent of that drop on the company's side was related to the lack of couponing, is that what I heard? Or lack of direct mail, is that what I heard correctly?

[John F. Gilbert:]

No, we did direct mail. We had 2 components, Conrad, in 2011 that were highly effective at driving traffic and sales, but not as effective in flow-through. There was a bounce-back, which is essentially a coupon that's handed out at the restaurant level and then there was direct mail. In 2012, we executed both of those tactics. We just pulled back dramatically on the discount level in the bounce-back, which was really the source of probably 2/3 of the, call it, wasted discount. So that's where the manifestation of the, let's say, noneffective or nonproductive discounting mostly showed up. Although it's fairly clear that even with a similar discount level in the direct mail piece in 2012 versus 2011, it was significantly more cannibalistic -- 2 elements to it, it was significantly more cannibalistic in 2012; and it was also redeemed at a lower rate. So there were multiple dynamics going on as it relates to the overall print strategy that kind of combined to create the negative impact.

[Conrad Lyon:]

Okay. Let me ask this then. So the reduction in the level of, say, discounting any sense what that cost or how much of that was reflected in the comp, like it was 1/2 of that? And really, the overriding question is this whenever I see a comp drop to that degree, I start to wonder, are costs -- is the brand becoming less relevant to consumers, and that's really the main question. And perhaps you can even talk about that. Do you feel that that's the case? Or is it just more just simply the structure of the way you tried to drive sales?

[John F. Gilbert:]

I think the answer to the relevancy question is I don't believe we're less relevant. I think, given the occasions we can satisfy and the success of some of the new prototypes, I think, if anything, we're more relevant. I do think there are issues with year-over-year comparisons as it relates to the discount strategy that are more, let's say, transient in impact. And I think that's what you're getting at. It's hard to quantify the actual -- the value of the, let's say, the impact of reducing the discount because redemption rates are influenced by a lot of things including how aggressive we are discounting. We certainly -- we didn't plan for a decline in the redemption rate. In fact, we did get one and so it could be a number of contributing factors to that. We would contend that at least one of the contributing factors is the less aggressive nature of the discount that we've put out there this year. But in terms of relevancy, I think that's why I'm here. I think that it is about consistently finding ways to surprise and delight consumers across what I would argue as a substantially wider range of occasions than most of our peers are useful for. And so I do feel there is a relevancy question associated with every brand. I've spent a long time working on those and I don't sense that's an issue here.

[Conrad Lyon:]

Okay, fair enough. Let me take sort of some of your thoughts earlier you said about driving sales. It sounded like you're pretty confident that you can drive sales in 2013, and I think, meaningfully. Can you provide some color about some of the aspects that you plan to do to drive sales? Is it just simply a better menu? Obviously, you talked about marketing and kind of keeping that as a percent of sales down, but allocating, I think, more resources to look differently, but...

[John F. Gilbert:]

Right. Yes, I can certainly talk about general strategies there. I have not, but we haven't kept those a secret. And I think the -- perhaps the most effective way to answer the question is to talk about the business by line of business. So we are a casual dining company and there are ways -- proven ways to drive casual dining -- dine-in traffic, and those clearly lever off of product news and menu mix management. One of those product news is more of a traffic-driving approach. We have had product news as part of our historical approach to our business. I would only say that the risk in that is that if you get it wrong, you've got a big problem. And I think, in 2012, we had a couple of examples where we didn't really click on product news. We were heavily reliant on product news and in discounting in 2012. We will have those elements in our calendar in 2013, but we will not rely on them as much as we have in the past. So we have a calendar this year that promises at least from sort of early indicators in terms of some of the traction we're getting with catfish, for example, or the enthusiasm and traction we're getting with -- and that catfish is at a national level now, Burnt Ends, at a test level, is performing very well. So we think that we have that first tier a better proposition from a product news calendar standpoint than we did in 2012. From a discount or value strategy, we are clearly backing away from the use of $10 Off of $30, which is a huge discount, face value of 33% discount. It ends up being a little bit less than that because people add a little more to the ticket. But that's still a monster discount and I think we can be effective with lower discounts that are better positioned in the markets, so we're actively looking at that right now. So those are the 2 tiers that are similar last year. Then I guess I would add, well we're doing things in addition to what we did last year. So this line-of-business approach allows us to now, let's just assume those were both dine-in focused areas. We have a whole to-go platform in our business right now that we haven't even addressed in the past. To-go, as a category, is growing organically at a match faster rate than dine-in across-the-board. Those aren't our numbers, although it's true for us as well. And so our marketing calendar this year has an added component where we'll actually have to go outreach using our huge e-mail database, but also more classic marketing outreach like broadcast, but that'll be directed specifically at to-go. And then catering has the same sort of incremental approach this year. So we're not as reliant in that case on having the big home run LTO. In fact, we don't have any LTOs on our calendar as we sit right now. All of our product news activities are permanent activities, which is also for a company with our low-frequency, a very strong proposition. And we're also adding 2 more things and then I can wrap it. But we have a layer of what I would call beverage initiatives this year that we simply haven't had in the past. Our beverage mix is low relative to our competition. Beer and barbecue go together as well as any 2 food products I'm aware of and yet we don't seem to have captured the current trends around beer growth. So that's going to be a big part of our calendar this year. You won't see that till summer when we're in peak barbecue season. And then lastly, this whole menu optimization. I mean, we've applied science and test markets to our menus, that we simply haven't done in the past. And that's an evolving "getting more from the customer in the restaurant" type strategy. But we believe there's upside there. And so if you kind of take this somewhat deconstructed calendar and add it all back together, it's more of a portfolio approach. It's less risky on the big bets. It's more nimble. It gives us more opportunities. Since we're not doing LTOs, we don't have to sink our system into a commitment for 2.5 months worth of inventory on something and then worry about it not working. So we feel like we have a much broader platform for growth than we have in the past. And I would also conclude with, that's not a 2013 thing, that's a permanent thing.

[Conrad Lyon:]

Got you, okay. This might be too early to ask, but Diana does a very thorough job detailing how the P&L is going to look, but -- I know historically the company doesn't talk about top line, but is there something you can help us, at least guide us given the dynamic in the fourth quarter? Are we seeing something similar moving forward here, or do you expect to see more of a gradual improvement deeper into the year from a top line perspective?

[Diana Garvis Purcel:]

Well, I think, as John had indicated -- I'll take this, Conrad. I think, as John has indicated, a lot of the initiatives are starting to ramp up. So I would envision that we would start seeing a more pronounced level of improvement, still within a difficult environment as we move through the year and start moving through barbecue season. A lot of the initiatives including the menu optimization and all the work we're doing on pricing, I think, they are going on now. And so we're midway through the first quarter, so I'm not quite sure we're going to see a lot of improvement in the first quarter, but we should start seeing traction as we start moving certainly into early in the second quarter. And we compare ourselves to the industry. It's not lost on us that a lot of our competitors are reporting sluggish results and we have the benefit of seeing some of them report them on a monthly basis. And it's a tough environment out there. I think people are somewhat underestimating the impact of the 2% Social Security tax impact on people's paychecks and we have to figure out, to your point, to use your word, relevant, we have to make sure that if our consumers are going to be really scrutinizing the occasions that they are going to use casual dining, we want to make sure that we're relevant and that we capture one of those occasions. And as John indicated, we have a great variety through our lines of business to be able to capture them in a variety of ways. So that's what we're aiming for.

[Conrad Lyon:]

Okay. The April menu, did you guys discuss how much price is going to be coming out on that?

[Diana Garvis Purcel:]

Right now -- yes, we did. So right now we said we're anticipating 1.5%, but that is going to be validated based on the work that we get from RMS as we're just starting to get that data and digging through it. So right now, that's what we're expecting. And then based on further insights gained from them, we'll make a better determination on what price looks later in the year.

[Conrad Lyon:]

Okay. Let me just talk about some of the indicators you provided with the P&L, COGS, labor, OpEx, all very encouraging. How -- if you were to put a confidence indicator on that, do you feel pretty comfortable that you'll be able to achieve that, especially at the COGS line? Because historically, it seems like there's always been things that kind of sneak up and cause some variability there.

[Diana Garvis Purcel:]

Yes. Well, as we had indicated, we're still contracting some of our major proteins. As I indicated, brisket and chicken are only locked through the first quarter. But our purchasing team does a really phenomenal job working with our vendors and really gaining insights from the market. And so, their predictions are based on what we see the balance of the -- through the balance of the year. One of the keys, too, as we guided, just to give you a feel for order of magnitude, so when we guided for cost of goods sold of 120 to 125 basis points down, right now contracting is expected to be 50 to 60 basis points of that. The remainder is really as a result of initiatives frankly that internally we control. And these are initiatives we believed in. John talked at length about our fresh in-house brisket and while we would have loved to capture those savings in 2012, frankly it was the right decision to delay the rollout so that we can actually capture the product in the right way from a guest feedback perspective, make sure that we have the correct yield, make sure that the recipes were right. And by the way, a terrific byproduct was, as he has mentioned, these Burnt Ends. So that's just one of the initiatives that were started in 2012 that we'll see the results from in 2013.

[Conrad Lyon:]

Okay. Question about LTOs. I like what John had said as it relates to COGS. I think he said that there's going to be no LTOs in '13 and that lessens the need to stock inventory, and from my perspective, less waste. Is that part of the theory there that perhaps maybe waste in 2012 was greater than expected and it's going to be much less and baked into your COGS assumption?

[Diana Garvis Purcel:]

Certainly, we have -- I will tell you that we have some LTOs that didn't perform to expectations. And I think the strategy that John is putting in place clearly is creating news on our menu with core items that we have that can be easily absorbed or used elsewhere so that we aren't making those commitments and then having to figure out how to deplete them. And it's less of a distraction for the organization.

[Conrad Lyon:]

Yes, so -- or let me say it differently. Was waste much worse than you had anticipated in '12 and you think it can do much better in '13?

[Diana Garvis Purcel:]

I think, there's always that lens on reducing waste as much as possible. So I would they that, yes, that is part of the strategy.

[Conrad Lyon:]

Okay. G&A, is this the big delta there? It's something going to be the accrual on the bonus side?

[Diana Garvis Purcel:]

Yes, so of the -- we guided 150 to 155 basis point increase and 145 basis points of that was an expected bonus accrual for the organization at 100% attainment.

[Conrad Lyon:]

And that's based on a new plan that I think you filed just recently, correct?

[Diana Garvis Purcel:]

That's -- it's not necessarily based on a new plan. It's based on our annual incentive plan that we've had in place. Clearly, we have some new additions that will participate in that and so that's where the uptick comes in.

[Conrad Lyon:]

Okay. Last question here and it has to do with the filing of, I think, it was -- let me just make sure here I get the name right, PW Partners Fund. The fund has an interesting history. Has there been any communication with that fund and the company yet, or is there anything that you can talk about related to that?

[John F. Gilbert:]

Well, there's really nothing we can talk about. I can say that our Chairman, Dean Riesen, has had active in various conversation with Patrick Walsh. But at this point, there's really nothing to talk about.

[Operator:]

Our next question comes from Mark Smith.

[Shannon Richter:]

This is Shannon Richter in for Mark Smith. I just have a couple of questions for you, guys. First, your operating -- your restaurant operating expenses were lower than expected. Can you go through why that was?

[Diana Garvis Purcel:]

Yes, and that was predominantly -- and I wouldn't say materially, so I think it was a 20 basis point decrease from our prior guidance. And really, it just had to do with the lower percentage of advertising expense in the fourth quarter. Even though it was -- even through the year, if you recall, at 3.4%, we had that shift in third and fourth quarter. So fourth quarter just came in a tick lower than anticipated.

[Shannon Richter:]

Okay. And then the second question is your unit growth expectations for 2013? Can you go over which -- are the both of these store-owned and which it will be franchises as well as the cadence of the opening?

[Diana Garvis Purcel:]

Yes. So we're expecting 17 units in 2013. Two of those will be company-owned, and the company-owned ones right now are slotted 1 in third quarter and 1 in fourth quarter. The remainder of the 15 are slotted with 1 in first quarter, 2 in second quarter, 3 in third quarter and the remainder in fourth quarter. So it certainly is more back end loaded than we would like to see. But as we've seen through the year, many of these restaurants can move in, move up, and frankly, move out. So that's the best information that we have today.

[Operator:]

[Operator Instructions] And there appear to be no questions coming from the phone lines at this time.

[John F. Gilbert:]

Thank you so much, guys, for taking the time out to visit with us today. I would just close by saying, and I think Conrad sort of tipped it off here and certainly got my juices flowing, this brand is still very relevant. The promise is probably more relevant now than ever. There aren't a lot of places in the market where you can get the combination of benefits that we offer, which is really high-quality food. In fact, one of the most awarded foods in the industry in terms of sort of competition, and that's relevant to a degree. The food that goes where consumers want it to go -- now, we love our dining guests, make no mistake, but we also fully recognize and are excited by the opportunity to serve customers wherever they are. That's an incredibly relevant proposition right now. And the third point and last point about relevancy is it's ready when they want it. So this is a batch-and-hold process where food is ready when they want it whether it's a dine-in or a to-go occasion. And I think that's incredibly important in the market today. And if you guys do this -- all do this, but you watch the market and watch for trends, it's no secret that food stuff that works well across a wide range of consumer occasions, off premise, those brands are doing very well. So really going forward, the difference would be in our strategy and how we leverage all these good stuff to create shareholder value. I hope you take it from this call while we hate delivering bad news, the work is already underway with a new leadership team, a new organizational structure, new analytical tools and a growing and engaged franchise and company-operating community that really have our sites set on driving sales and profitability. I would encourage you to get out and visit our restaurants. We'd love to have you. I know most of you do. But again, thanks very much for taking the time, and I guess, this wraps it up for us. Thanks.