Muscle Maker, Inc.
Q3 2008 Earnings Call Transcript

Published: 12 Nov 2008

[Operator:]

At this time, I would like to welcome everyone to the Grill Concepts, Inc. 2008 third quarter earnings conference call. (Operator Instructions) Now, I would like to turn the call over to Angie Yang, Investor Relations for Grill Concepts. Ma’am, go ahead.

[Angie Yang:]

Thank you, Ken. Welcome everyone to Grill Concepts 2008 third quarter investors’ conference call. Before we begin, please recognize that certain statements in this conference call are not historical fact. They may be deemed therefore to be forward-looking statements under the Private Securities Litigation Reform Act of 1995. In particular, statements about future results expected to be obtained from the company’s current strategic initiatives are forward-looking statements. Many important factors may cause the company’s actual results to differ materially from those discussed in any such forward-looking statements. These risks and uncertainties are described in further detail in the company’s filings with the Securities and Exchange Commission. You are directed to these files for more detailed information. Grill Concepts undertakes no obligation to publically update or revise its forward-looking statements. Please also note that we will be discussing non-GAAP financial measures within the meaning of the SEC rules. The company believes that earnings or loss before interest, taxes, depreciation, and amortization before pre-opening costs, minority interests, restructuring costs and litigation resettlement costs provide greater comparability regarding its ongoing operating performance. This information is not intended to be considered an alternative or as a substitute for net income or loss calculated in accordance with U.S. GAAP. A reconciliation of the company’s U.S. GAAP information to EBITDA before pre-opening costs, minority interests, restructuring costs, and litigation claims settlement costs is provided in the tables attached to the company’s 2008 fiscal third quarter earnings news release distributed earlier today and available in the Investor Relations section of the company’s website, www.dailygrill.com. We have allotted one hour for today’s call. President and CEO Philip Gay will begin with a brief overview on operating trends before passing it over to Chief Financial Officer Wayne Lipschitz who will review the financial results in more detail. Philip will then provide some closing comments before we open up the call for a question and answer session. Now, I will turn the call over to Philip.

[Philip Gay:]

Thank you, Angie and thank you everyone for joining us today on our quarterly conference call. On our last call back in August, we talked to some degree about the increasingly difficult economic environment that was pressuring discretionary consumer spending. But, little did we realize what an eventful September the nation would face. Needless to say, these events heightened consumer fears for a deeper and more prolonged recessionary-like period. Consequently, we, like our peers, saw a reduced number of guests dining out in our restaurants during the 2008 third quarter. In addition to the challenges of the macro-environment, our comps were up against a number of other headwinds that are particular to Grill Concepts. First, you may recall that we delivered very strong comparable restaurant sales throughout 2007. In the third quarter a year ago, consolidated comps were up by 9.1% with The Grill on the Alley restaurant posting 15.7% gains in comparable restaurant sales and our Daily Grills reporting 5.1% increases. These strong results in the year-ago quarter certainly make it a difficult act to follow much less being in the current environment. As noted in our news release, comparable restaurant sales for the fiscal 2008 third quarter declined 8% company-wide, 4.5% at The Grill on the Alley restaurants and 10.7% for the Daily Grills. Secondly, while a large part of our expansion efforts have focused on diversifying our presence to geographic markets outside of California, the majority of our restaurants today are still located in and around southern California which has been one of the areas most affected by the economy. With the growing uncertainty about the state of the nation’s economy, we are putting greater emphasis on capital conservation as part of our growth strategy. As such, we took a hard look at the capital investments required to complete development of the new units planned through 2009. Based on this review and analysis, we determined it was in the company’s best interest to try to terminate or hold back on certain new lease commitments for company-owned restaurants in commercial complexes that have yet to be well-established. As a result of these anticipated changes, our 2008 third quarter results include restructuring costs of $1.7 million which lowered our per-share results by $0.19 per share. This is not to say we are walking away from growth. In fact, the challenging environment, quite possibly could prevent some new opportunities that may not have been available yesterday. But given the difficult macro-issues, we will be looking even more cautiously at opportunities as they arrive. As mentioned in the news release, we anticipated the grand opening of our seventh The Grill on the Alley-branded restaurant in the current fourth quarter. The construction for this restaurant is nearly completed and the Aventura Mall is ranked #1 among shopping destinations for international visitors. It is also one of the top five highest-grossing malls in the country in sales per square foot. For 2009, we have currently kept our plans to open a Daily Grill restaurant in the Westin Hotel just outside LAX Airport. At the lease location, with significant contributions by way of tenant improvement allowances, the Westin LAX Daily Grill opening will not require significant capital expenditures. In addition to serving breakfast, lunch and dinner, the 7,000 square foot restaurant will provide room service to the guests of the 740-room hotel. We believe the prospect for Aventura and Westin LAX restaurants remain strong despite the difficult operating environment and we look forward to their respective openings later this quarter and in the third part of 2009. With that, I will pass it on to Wayne who will give more detail on our financial results. Wayne?

[Wayne Lipschitz:]

Thank you, Philip. Let’s begin with a top-line review of our revenues. Total revenues for the fiscal 2008 third quarter increased 14.5% over the prior year period. Consolidated restaurant sales rose 4.7% over the 2007 third quarter benefitting from the Boston and Fresno Daily Grill openings while management and license fees grew 29% reflecting the additions of the Tulsa Daily Grill and increased sales at the Seattle Daily Grill. On the operating expense side, we continue to work hard to contain our costs. I am pleased to report that our cost of sales has remained relatively stable compared with what many of our peers have experienced and have increased primarily as a result of new restaurant expansions with only a minimum of increased operator pricing. The same holds true for labor, restaurant operating and occupancy costs with the bulk of the increases primarily due to new restaurant operations. Since the third quarter of 2007, we have opened five new restaurants, four company-owned and one managed. The Fresno and Boston Daily Grills opened in November 2007 and May 2008 respectively. In Short Order-Daily Grill was launched in Seattle in February 2008. The Grill in the Alley in Westlake opened towards the end of September in 2008 and the new managed location, the Tulsa Daily Grill, opened in August 2008. In fact, if you take out these newer restaurants which are taking a lot longer to mature in the current environment, our core restaurant operating cost structure would have been 300 to 400 basis points lower, but more importantly, consistent with past levels. So while comparable restaurant sales are lower, we have been very successful in managing our cost structure through these challenging times. The increase in general and administrative expenses over the prior year third quarter was due to four main factors; one, cost of living and salary increases in new or created positions compared with a year-ago; two, the relocation of our corporate offices; three, a reduction in corporate bonus accrual posted in the prior year third quarter; and four, employer 401K contributions in the current third quarter. As previously announced earlier this year and each quarter throughout the year, we’ve continued to make adjustments to our organization as needed to manage our operations and cost structure as economically as possible given the environment and in-line with our outlook. As difficult as it has been, we have continued to rationalize the corporate and restaurant headcount in line with current business operations. Since the third quarter, we have fully reduced our staff by four managers on the restaurant operations side and six full-time equivalents at the corporate level which we expect will result in additional annual savings in excess of $700,000. A couple of weeks ago, we also announced an executive salary reduction plan which the management team from the VP level and up and our entire Board agreed to temporary reductions in compensation of 10% and 100% respectively. In lieu of the temporary reductions in compensation, the participants will be receiving restricted stock. We expect this voluntary reduction will reduce our near-term expense by approximately $75,000-$100,000 per quarter. We have announced non-recurring expenses. Last quarter, you may recall, that we posted a litigation claims settlement expense of $780,000 following non-binding mediation that resulted in an agreement in principle to settle a long-standing class action lawsuit elected to employee meal breaks. As previously noted, the terms contained are not to exceed the amount. The memorandum of understanding has now been executed and we are currently waiting for the judge’s approval to make the settlement binding. Through the third quarter of 2008, we incurred additional legal and economic costs of $268,000 which reduced our earnings before taxes by $0.03 per share. Now, the net loss posted in the current third quarter includes true non-recurring expenses, the litigation settlement costs of $268,000 and the restructuring charge of $1.7 million that Philip mentioned earlier. In addition, the loss reflects a significant income tax provision of $6.3 million for the 2008 third quarter which refutes the loss per share by the tune of $0.90 per share. The tax provision reflects the reversal of the full valuation allowance in the amount of $7.9 million of our net-deferred tax assets in accordance with 748. As management believes that it is more likely than not that the deferred tax assets will not be fully realized in the foreseeable future, the asset was expensed to the tax provision in the current quarter. With that, I’ll pass it back to Philip.

[Philip Gay:]

Thanks, Wayne. To summarize, the 2008 third quarter has been one of the most difficult quarters in the 24-year history of our company. In addition to the challenging operating environment, our financial results were clouded further by a restructuring charge, litigation settlement costs and a considerable tax provision that heavily impacted our bottom line. Although, we have always strayed away from giving guidance, we believe it’s only fair to say that the unprecedented events this past September created an even more challenging beginning to the fourth quarter with comparable sales in October trickling downward slightly from the third quarter levels. Subsequent to the close of the third quarter, we announced the engagement of a financial advisor to evaluate strategic alternatives that could enhance or support the company’s long-term goals. Considering the extraordinary circumstances of today, we need to be sure we are well-positioned to take advantage of strategic opportunities or alternatives that may enhance our ability to maximize the return for all of our stakeholders. While we have not begun to see the light at the end of the tunnel, we are sure that our country’s economy will eventually begin to recover. We’re also gratified that we have two strong affordable restaurant brands in The Grill on the Alley and Daily Grill and a promising new quick casual concept, both supported by a committed senior management team and board and further backed by a solid base of investors. From the beginning, our restaurant concept was one of quality food with best-in-class service, combined with a focus on providing our customers and shareholders with a value proposition along with a proven track record of cautious approach to growth and a greater focus on capital conservation. We are confident in our ability to weather this economic crisis and return to delivering strong financial performance. With that, let’s move on to the Q&A session. Operator, if you will please explain the technical elements of the Q&A session.

[Operator:]

(Operator Instructions) The queue remains clear.

[Philip Gay:]

At this point, since there are no more questions, we would like to thank all of you for participating in our call. On behalf of everyone at Grill Concepts, we appreciate your continued interest and thank you for your ongoing support.