BBQ Holdings, Inc.
Q3 2010 Earnings Call Transcript

Published: 31 Oct 2010

[Diana Garvis Purcel:]

Good morning everyone and thank you for joining us for the Famous Dave's fiscal 2010 third quarter conference call. I'm Diana Purcel, Chief Financial Officer. Joining me is Christopher O'Donnell, 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 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 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 Christopher O'Donnell, Famous Dave's President and CEO. Christopher?

[Christopher O'Donnell:]

Thank you, Diana. Good morning everyone, and thank you for joining us. Famous Dave's of America reported its third quarter results yesterday. I'm pleased to report that during the quarter, we experienced growth in comparable sales - for both company and franchise restaurants. We opened, a new company-owned and a new franchise-operated restaurant. We held the line on expenses. And, we delivered an increase in earnings per share over prior year. Our company-owned comparable sales for the quarter were up 2.4% over last year, and improved on a sequential basis with positive improvements in all three of our sales levers

[Diana Garvis Purcel:]

Thank you, Christopher. Yesterday, Famous Dave's reported revenue of $38.7 million and net income of $1.5 million, or $0.17 cents per diluted share for the third quarter of 2010. This compares to revenue of $33.3 million and net income of $1.2 million or $0.13 cents per diluted share for the third quarter of 2009. Third quarter restaurant sales increased 19.3 percent year over year, primarily reflecting the sales from the seven New York and New Jersey restaurants acquired in the first quarter, sales from our new company-owned restaurant in Bel Air, Maryland which opened in August, and a comparable sales increase of 2.4 percent that included weighted average price of approximately 1.0 percent. Digging a little deeper into the comparable sales results, of the 2.4 percent comparable sales increase, on a weighted basis, dine-in represented 0.7 percent, To-Go accounted for 0.7 percent, and catering 1.0 percent. Off-premise sales were 32.1 percent of total sales for the third quarter of fiscal 2010, with catering representing 12.1 percent and To-Go representing 20.0 percent. This compares to off-premise sales of 32.8 percent for prior year's third quarter. During the third quarter of fiscal 2010, our per-person average was $14.74 compared with an average of $13.95 for the third quarter of fiscal 2009. The breakdown by daypart was $12.64 for lunch and $16.00 for dinner. The "Wing Wars" limited time offering during the quarter contributed to the increase in our average check year over year as we saw increased appetizer and liquor sales during the promotion. Additionally, the increase reflects a weighted average price increase of 1 percent year over year. On the franchise side, third quarter franchise royalty revenue was down 5.4 percent from the comparable period in 2009. This decline reflects a net decrease of five franchise restaurants year over year. Seven new franchise restaurants opened since the third quarter of 2009, five restaurants closed, and seven restaurants became company-owned locations. The decrease in franchise royalty revenue was partially offset by a comparable sales increase for franchise restaurants of 0.7 percent. We continue to see improvement in the sales environment, as approximately 55 percent of our franchise restaurants reported positive comparable sales during the third quarter. Please refer to our press release, issued yesterday, for a breakdown of other metrics such as average weekly sales for our company-owned and franchise-operated restaurants, post and pre-2005, in addition to operating weeks and number of restaurants in the comparable sales base. At the end of the third quarter, we had 53 company-owned restaurants and 126 franchise-operated restaurants for a system-wide total of 179 restaurants in 36 states. By comparison, at the end of the 2009 third quarter, we had 46 company-owned restaurants and 131 franchise-operated restaurants for a system-wide total of 177 restaurants in 38 states. As of today, we have 53 company-owned restaurants and 127 franchise-operated restaurants for a system-wide total of 180 restaurants in 36 states. As mentioned earlier, we anticipate opening three to four additional franchise-operated restaurants during the remainder of the fourth quarter. This will bring the total of new franchise-operated openings to eight to nine in fiscal 2010. Our food and beverage costs for the third quarter of 2010 were 29.7 percent of net restaurant sales compared to 30.5 percent for the third quarter of 2009. As discussed on previous calls, several factors contributed to this decrease, including strategic utilization of our supplier network, prudent commodity administration, and the continual focus, visibility and optimization that our food cost management system brings. We want to give you an update on our 2010 contracts and then will give you some visibility into 2011. As a reminder, our pork contract is locked in through December 2011. By locking in this pork contract, we were able to manage our largest commodity and successfully position ourselves favorably against the current pork markets. As a result, even though we blended in a higher cost in June of this year, we will still see approximately 2.0 percent favorability for fiscal 2010 compared to fiscal 2009's pricing. Our chicken pricing is locked through 2010 at an average cost increase of approximately 2.5 percent over fiscal 2009. Our current brisket contract is firm through December of 2010 at an average cost increase of 5.2 percent over 2009. Hamburger is locked through the end of the year and is essentially flat compared to 2009. Our seafood contracts are locked in through December of 2010, with the exception of our catfish contract which is locked in through April of 2011, at a blended cost increase of approximately 5.4 percent over fiscal 2009. Lastly, we will have an approximate 3.1 percent price decrease for our side items, including french fries, corn and beans to name a few, as compared to fiscal 2009, due to our strategic utilization of our supplier network. While, not final, we wanted to provide you a glimpse of what we're seeing on the horizon with regards to food costs for 2011. Pork prices will be approximately 2.3 percent higher on an annualized basis, than fiscal 2010's pricing. We are watching the chicken markets closely to determine our best strategy for 2011; however, we are anticipating large price increases as we look into next year. In addition to our current brisket contract, we recently locked in a new brisket contract from January of 2011 to April 2011 at a price increase of 9.5 percent over fiscal 2010 pricing. While this is a significant increase, we believe we will be able to obtain a higher yield on a new raw brisket product which should completely offset this price increase. The brisket market is expected to continue to rise in 2011, so in the meantime, we will watch this market closely to determine our best timing to lock in pricing for the remainder of 2011. We are currently preparing to contract hamburger for fiscal 2011 with the expectation of a moderate price increase for 2011. We will continue to watch the seafood markets closely for the signs of their direction in early 2011. For the fiscal 2010 timeframe, we affirm our previous guidance of a 60 - 70 basis point decrease in food and beverage costs as a percent of sales year over year. For the third quarter, labor and benefits as a percentage of net restaurant sales were flat to the prior year. This was primarily due to increased employee benefit costs and the normalizing of the New York, New Jersey, and Bel Air restaurants, which were offset by savings from operating below our full manager matrix and sales leverage obtained. We are updating our guidance regarding labor and benefit costs, and now expect that for 2010, labor and benefits costs as a percentage of sales, will be approximately 30 - 40 basis points higher than fiscal 2009's percentage primarily due to higher than anticipated employee benefit costs. Operating expenses as a percentage of sales for the third quarter of 2010 were 60 basis points higher than the prior year. As discussed on the previous call and as expected, we continue to see increased occupancy, supply, repair and maintenance and utility costs associated with the addition of the New York and New Jersey restaurants. Also, we are experiencing higher operating costs with our new company-owned restaurant in Bel Air as it continues to normalize after its opening. These increases were partially offset by lower advertising costs year over year. For fiscal 2010, we still expect that, advertising expense will be approximately 3.3 percent of net sales, including a 0.5 percent contribution to the National Ad Fund. We are updating our guidance regarding operating expenses as a percentage of net sales for fiscal 2010, and now expect them to be approximately 100 - 110 basis points higher than 2009's percentage due to higher than anticipated utility, repair and maintenance, and other direct operating costs. Depreciation and amortization expense, as a percent of total revenue, decreased year over year due to sales leverage from the addition of the New York, New Jersey, and Bel Air restaurants. For the remainder of 2010, we still expect depreciation as a percent of total revenue to be flat to 10 basis points lower, as compared to 2009 due to increased capital spending offset by revenue leverage. Our G&A expenses for the third quarter as a percentage of total revenue were 10.4 percent compared with 11.1 percent for the third quarter of 2009. This decrease is due to leverage on higher revenue year over year and our continued focus on managing G&A costs. Excluding corporate bonus, stock-based compensation, and board cash compensation, our G&A expense as a percentage of total revenue was 8.4 percent for the third quarter of fiscal 2010 compared with 9.2 percent for the comparable period in 2009. For the third quarter, stock-based compensation and board of director cash compensation expense, was $325,000 compared to $236,000 for the third quarter of 2009. As mentioned on previous calls, the year over year change reflects a higher stock price in 2010. For 2010, we still anticipate stock-based compensation and board of director cash compensation in total, to be approximately $1.3 million compared with $832,000 in fiscal 2009. We are updating our guidance regarding G&A. G&A expenses as a percentage of revenue, will be approximately 100 - 110 basis points favorable to 2009's percentage due to increased leverage and a continued focus on controlling administrative costs. As a reminder, in the fourth quarter of 2009, there was a positive 20 basis point impact from the 53rd week. We have run lean the last two years, and have prudently cut expenses as far away from the guests in our restaurants as well as our franchise partners. As we look into 2011, we have had to reinvest for our growth in these two areas, particularly with regards to our franchise system. We don't have full visibility or guidance at this time, but expect that our G&A for 2011 will be higher than 2010. We had $219,000 of pre-opening expenses in the third quarter related to the Bel Air, Maryland restaurant opening. We did not open any company owned restaurants in 2009, and thus did not have any pre-opening expenses. As mentioned earlier, we expect to open at least one company-owned restaurant in 2011. Interest expense in the third quarter decreased over 14.0 percent, year over year, due to the early retirement of one high interest rate note in the fourth quarter of 2009 and a lower average balance on our line of credit during the third quarter of 2010 compared to 2009. These savings were partially offset by the addition of the seven-year term loan during the first quarter of 2010. We are updating our guidance and expect interest expense for 2010 to be approximately 20 - 30 basis points lower as a percentage of revenue due to leverage, favorable interest rates, and the pay off of the high interest rate notes in 2009. Lastly, we expect a 34.4 percent effective tax rate for 2010. Now to our balance sheet

[Christopher O'Donnell (Closing comments):]

I'm proud of our organization. During the quarter we executed well on numerous fronts