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DAVE > SEC Filings for DAVE > Form 10-Q on 10-Nov-2011All Recent SEC Filings

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Form 10-Q for FAMOUS DAVES OF AMERICA INC


10-Nov-2011

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Famous Dave's of America, Inc. was incorporated as a Minnesota corporation in March 1994 and opened its first restaurant in Minneapolis in June 1995. As of October 2, 2011, there were 184 Famous Dave's restaurants operating in 37 states, including 53 company-owned restaurants and 131 franchise-operated restaurants. An additional 71 franchise restaurants were in various stages of development as of October 2, 2011.

Fiscal Year

Our fiscal year ends on the Sunday closest to December 31st. Our fiscal year is generally 52 weeks; however, it periodically consists of 53 weeks. The fiscal years ending January 1, 2012 (fiscal 2011) and January 2, 2011 (fiscal 2010) are both 52 week fiscal years.

Revenue

Our revenue consists of restaurant sales, franchise-related revenue, and licensing and other revenue. Our franchise-related revenue is comprised of area development fees, initial franchise fees, and continuing royalty payments. Our area development fee consists of a one-time, non-refundable payment equal to $10,000 per restaurant in consideration for the services we perform in preparation of executing each area development agreement. Substantially all of these services, which include but are not limited to conducting market and trade area analysis, a meeting with Famous Dave's Executive Team, and performing potential franchise background investigation, are completed prior to our execution of the area development agreement and receipt of the corresponding area development fee. As a result, we recognize this fee in full upon receipt. Our initial, non-refundable, franchise fee typically ranges from $30,000 to $40,000 per restaurant, of which $5,000 is recognized immediately when a franchise agreement is signed, reflecting the commission earned and expenses incurred related to the sale. The remaining non-refundable fee of $25,000 to $35,000 is included in deferred franchise fees and is recognized as revenue when we have performed substantially all of our obligations, which generally occurs upon the franchise entering into a lease agreement for the restaurant(s). The franchise agreement represents a separate and distinct earnings process from the area development agreements. Franchisees are also required to pay us a monthly royalty equal to a percentage of their net sales, which has historically varied from 4% to 5%. In general, new franchises pay us a monthly royalty of 5% of their net sales.

Because of the continuing difficult economic environment and scarcity of capital for development, we offered a reduced royalty rate for twelve months from date of opening for franchisees that opened restaurants during 2010 and 2009. We have modified and extended this growth incentive program for fiscal 2011. The modification offers new and existing franchisees reduced levels of franchise royalties, based on a sliding scale, for new restaurants opened during 2011. All franchise restaurants opened in the first, second, and third quarters will pay a reduced royalty of 2.5%, 3%, and 4%, respectively, for the remainder of 2011. Any openings in the fourth quarter and beyond would be at the 5% royalty rate.

Costs and Expenses

Restaurant costs and expenses include food and beverage costs, labor and benefits costs, operating expenses which include occupancy costs, repair and maintenance costs, supplies, advertising and promotion, and restaurant depreciation and amortization. Certain of these costs and expenses are variable and will increase or decrease with sales volume. The primary fixed costs are corporate and restaurant management salaries and occupancy costs. Our experience is that when a new restaurant opens, it incurs higher than normal levels of labor and food costs until operations stabilize, usually during the first three to four months of operation. As restaurant management and staff gain experience following a restaurant's opening, labor scheduling, food cost management and operating expense control typically improve to levels similar to those at our more established restaurants.

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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES

General and Administrative Expenses

General and administrative expenses include all corporate and administrative functions that provide an infrastructure to support existing operations and support future growth. Salaries, bonuses, team member benefits, legal fees, accounting fees, consulting fees, travel, rent and general insurance are major items in this category. Additionally, we record expense for Managers In Training ("MIT's") in this category for approximately six weeks prior to a restaurant opening. We also provide franchise services for which the revenue is included in other revenue and the expenses are included in general and administrative expenses.

The following table presents items in our unaudited consolidated statements of operations as a percentage of net restaurant sales or total revenue, as indicated, for the following periods:

                                             Three Months Ended                             Nine Months Ended
                                  October 2,            October 3,               October 2,           October 3,
                                     2011                  2010                     2011                 2010
Food and beverage costs (1)              30.0 %                29.7 %                   29.5 %               29.4 %
Labor and benefits (1)                   31.6 %                31.9 %                   31.3 %               31.6 %
Operating expenses (1)                   27.8 %                27.6 %                   27.6 %               27.0 %
Depreciation & amortization
(restaurant level) (1)                    3.6 %                 3.7 %                    3.6 %                3.7 %
Depreciation & amortization
(corporate level) (2)                     0.4 %                 0.4 %                    0.4 %                0.4 %
General and administrative (2)           10.3 %                10.4 %                   10.7 %               10.5 %
Asset impairment and estimated
lease termination and other
closing costs (1)                        (0.1 )%                 -                       0.2 %               (0.1 )%
Pre-opening expenses and net
loss on disposal of equipment
(1)                                       0.7 %                 0.7 %                    0.3 %                0.3 %
Gain on acquisition, net of
acquisition costs (1)                      -                     -                        -                  (2.1 )%

Total costs and expenses (2)             93.2 %                93.7 %                   92.7 %               90.2 %
Income from operations (2)                6.8 %                 6.3 %                    7.3 %                9.8 %

(1) As a percentage of restaurant sales, net

(2) As a percentage of total revenue

(3) Data regarding our restaurant operations as presented in the table, includes sales, costs and expenses associated with our Rib Team, which realized net income of $10,000 and $29,000 for the three months ended October 2, 2011 and October 3, 2010, respectively. The Rib Team netted a loss of $19,000 and $6,000 for the nine months ended October 2, 2011 and October 3, 2010, respectively. Our Rib Team travels around the country introducing people to our brand of barbeque, and building brand awareness.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated financial statements and notes, and the audited consolidated financial statements and notes included in our Form 10-K for the fiscal year ended January 2, 2011.

Results of Operations - Three and Nine months ended October 2, 2011 compared to Three and Nine months ended October 3, 2010.

Total Revenue

Total revenue of approximately $38.9 million for the third quarter of fiscal 2011 increased approximately $224,000, or 0.6%, from total revenue of $38.7 million in the comparable quarter in fiscal 2010. For the nine months ended October 2, 2011, total revenue of approximately $117.3 million increased approximately $5.3 million, or 4.7% over revenue of approximately $112.1 million, for the nine months ended October 3, 2010.

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Restaurant Sales, net

Restaurant sales were approximately $34.3 million for the third quarters of fiscal 2011 and 2010. Our restaurant sales reflect the addition of two new-company owned restaurants in Bel Air, Maryland and Falls Church, Virginia, which opened August of 2010 and 2011, respectively. These increases were offset by the comparable sales decrease of 0.1%. Comparable sales for the quarter reflected the negative impact from weather-related events on the East coast equal to approximately 70 basis points, and also included a weighted average price increase of approximately 3.4%. As a breakdown of the third quarter comparable sales, on a weighted basis, dine-in represented a decline of 1.9%, almost completely offset by increased off-premise sales of 1.8%. For the third quarter of fiscal 2011, off-premise sales were 34.1% of total net sales, with catering representing 13.2% and To-Go representing 20.9%. This compares to off-premise sales of 32.1% for the prior year's third quarter.

Restaurant sales for the nine months ended October 2, 2011 were approximately $103.6 million compared to approximately $98.9 million for the nine months ended October 3, 2010, reflecting a 4.7% increase.

Franchise-Related Revenue

Franchise-related revenue consists of royalty revenue and franchise fees, which include initial franchise fees and area development fees. Franchise-related revenue was approximately $4.4 million for the third quarter of fiscal 2011, compared to $4.2 million for the third quarter of fiscal 2010. This increase was predominantly due to an increase of approximately $220,000 in royalty revenue during the third quarter of 2011 compared the prior year period, which reflects a net five additional franchise restaurants year over year, partially offset by a comparable sales decline of 1.0%. Ten new franchise-operated restaurants opened since the third quarter of fiscal 2010 and five restaurants closed. There were 131 franchise-operated restaurants open at October 2, 2011 compared to 126 franchise-operated restaurants open at October 3, 2010.

Franchise-related revenue was approximately $13.0 million for the nine months ended October 2, 2011 compared to approximately $12.4 million for the nine months ended October 3, 2010, primarily reflecting a year-over-year increase in royalty revenue of 3.6% for the nine month timeframe.

Licensing and Other Revenue

Licensing revenue includes royalties from a retail line of business, including sauces, rubs, marinades and seasonings. Other revenue includes opening assistance and training we provide to our franchise partners. For the third quarter of fiscal 2011, the licensing royalty revenue was approximately $148,000 compared to approximately $130,000 for the comparable period of fiscal 2010. Licensing royalty revenue was approximately $572,000 for the nine months ended October 2, 2011 as compared to $507,000 for the comparable period of fiscal 2010.

Other revenue for the fiscal 2011 third quarter was approximately $80,000 compared to $103,000 for the comparable prior year quarter. Other revenue for the nine months ended October 2, 2011 was approximately $211,000 compared to approximately $182,000 for the comparable period of fiscal 2010.

Same Store Net Sales

It is our policy to include in our same store net sales base, restaurants that are open year round and have been open at least 24 months. Same store net sales for company-owned restaurants for the third quarter of fiscal 2011 decreased 0.1%, compared to fiscal 2010's third quarter increase of 2.4%. At the end of the third quarter of fiscal 2011 and the third quarter of fiscal 2010, there were 51 and 42 restaurants, respectively, included in this base.

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Same store net sales for company-owned restaurants open at least 24 months for the nine months ended October 2, 2011 increased 0.8%, compared to fiscal 2010's nine months ended October 3, 2010 decrease of 0.3%. For the nine months ended October 2, 2011 and October 3, 2010, there were 44 and 41 restaurants, respectively, included in the company-owned comparable sales base.

Same store net sales for franchise-operated restaurants for the third quarter of fiscal 2011 decreased 1.0%, compared to an increase of 0.7% for the prior year comparable period. For the third quarter of 2011 and the third quarter of 2010, there were 109 and 102 restaurants, respectively, included in the franchise-operated comparable sales base.

Same store net sales on a 24 month basis for franchise-operated restaurants for the nine months of fiscal 2011 and fiscal 2010 decreased 0.7% and 0.8%, respectively. For the nine months of fiscal 2011 and fiscal 2010, there were 102 and 95 restaurants, respectively, included in the franchise-operated 24 month comparable sales base.

Average Weekly Net Sales and Operating Weeks

The following table shows company-owned and franchise-operated average weekly
net sales and company-owned and franchise-operated operating weeks for the third
quarter of fiscal 2011 and fiscal 2010:



                                             Three Months Ended                             Nine Months Ended
                                    October 2,           October 3,               October 2,           October 3,
                                       2011                 2010                     2011                 2010
Average Weekly Net Sales
(AWS):
Company-Owned                      $     50,199         $     50,106             $     50,859         $     49,927
Full-Service                       $     51,582         $     51,557             $     52,396         $     51,531
Counter-Service                    $     37,089         $     36,381             $     36,373         $     35,340

Franchise-Operated                 $     53,773         $     53,367             $     54,314         $     54,057

AWS 2005 and Post 2005: (1)
Company-Owned                      $     54,806         $     57,343             $     55,647         $     56,946
Franchise-Operated                 $     56,446         $     56,740             $     57,326         $     58,002
AWS Pre-2005: (1)
Company-Owned                      $     47,264         $     45,791             $     47,848         $     46,183
Franchise-Operated                 $     48,564         $     47,567             $     48,430         $     47,470

Operating Weeks:
Company-Owned                               681                  680                    2,033                1,969
Franchise-Operated                        1,687                1,607                    4,998                4,826

(1) Provides further delineation of AWS for restaurants opened during the pre-fiscal 2005, and restaurants opened during and after the fiscal 2005, timeframes.

Food and Beverage Costs

Food and beverage costs for the third quarter of fiscal 2011 were approximately $10.3 million or 30.0% of net restaurant sales, compared to approximately $10.2 million or 29.7% of net restaurant sales for the third quarter of fiscal 2010. This increase primarily reflects the negative impact on food and liquor margins of our special

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promotional pricing during the Hog Days of Summer limited time offering related to ribs, wings, and beer. As a percentage of dine-in sales, our adult beverage sales at our company-owned restaurants were 9.0% and 8.8% for the third quarter of fiscal 2011 and 2010, respectively. Food and beverage costs for the first nine months of fiscal 2011 were approximately $30.6 million or 29.5% of net restaurant sales compared to approximately $29.1 million or 29.4% of net restaurant sales for the comparable period of fiscal 2010.

Approximately 90% of our food and non-alcoholic beverage purchases are on contract now, and pork, chicken, and brisket represent approximately 55% of total purchases. We are protected on our pork and chicken contracts throughout 2011, at a year over year price increase of approximately 2.3% and 4.9%, respectively. Our brisket contract extends throughout 2011 at a net cost increase of 4.9% over fiscal 2011's pricing. Lastly, we anticipate an approximate 2.5% year over year increase for the remainder of our contracts, which includes hamburger, seafood, and other key items, such as, our sauces, seasonings, cooking oil, and corn muffin batter. In order to mitigate the cost pressures, we took price increases twice during fiscal 2011 equating to weighted average price increase of approximately 2.6% for 2011. We continue to indentify strategies to combat the rising cost environment, including optimizing our freight distribution network, taking advantage of negotiated early-pay discounts with our food distributor and leveraging our secondary supplier program for key items on our menu. These strategies have helped us partially offset market conditions in fiscal 2011.

Due to some recently added fourth quarter marketing promotions, which carry an increased level of discounting, and higher commodity prices relating to our side items, we now anticipate an approximate 15 - 20 basis point increase in our food and beverage costs, as a percentage of net sales, year over year.

For 2012, we have locked in pricing for pork purchases, which represents approximately 35% of our total contracted purchases. For the past two years we have been able to mitigate the impact from rising pork prices by effectively blending and extending our existing pork contracts. In late 2011, we made the decision not to blend and extend for 2012 and, as a result, we recently locked in 2012 pricing for pork purchases and anticipate an approximate 20.5% price increase on an annualized basis over fiscal 2011's pricing. Should we see pork prices soften in 2012, we will aggressively pursue a strategy of blending and extending our pork contracts into fiscal 2013. For other products such as chicken, brisket and several of our key side items, we are actively negotiating our contracts for fiscal 2012. At this time we are projecting a 5% to 7%, year over year increase in contracted food and beverage costs. We will be aggressively trying to offset these price increases, where possible, by continuing our 2011 cost savings initiatives, such as optimizing our distribution network and maximizing freight savings.

Labor and Benefits Costs

Labor and benefits costs for the third quarter ended October 2, 2011 were approximately $10.8 million or 31.6% of net restaurant sales, compared to approximately $10.9 million or 31.9% of net restaurant sales for the three months ended October 3, 2010. Labor and benefits for the nine months ended October 2, 2011 were approximately $32.4 million or 31.3% of net restaurant sales, compared to approximately $31.2 million or 31.6% of net restaurant sales for the nine months ended October 3, 2010.

For fiscal 2011, we originally anticipated advertising expense, as a percentage of net restaurant sales, to be 3.5%; however we now expect advertising expense will be approximately 3.3%, including a 0.75% contribution to the National Ad Fund. We are confident that we will be able to accomplish our marketing objectives while achieving these cost savings. For fiscal 2011, we still anticipate operating expenses, as percentage of net sales, to be approximately 45 - 50 basis points higher than 2010's percentage.

Operating Expenses

Operating expenses for the third quarter of fiscal 2011 were approximately $9.5 million or 27.8% of net restaurant sales, compared to operating expenses of approximately $9.5 million or 27.6% of net restaurant sales for the third quarter of fiscal 2010. This year over year increase was primarily related to higher supply,

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advertising and repairs and maintenance costs, partially offset by lower utility costs. Operating expenses for the nine months ended October 2, 2011 were approximately $28.6 million or 27.6% of net restaurant sales, compared to approximately $26.7 million or 27.0% of net restaurant sales for the nine months ended October 3, 2010.

For fiscal 2011, advertising expense will be approximately 3.3% of net sales, including a 0.75% contribution to the National Ad Fund. We are confident that we will be able to accomplish our marketing objectives while still achieving these cost savings. For fiscal 2011, we still anticipate operating expenses, as percentage of net sales, to be approximately 45 - 50 basis points higher than 2010's percentage.

Depreciation and Amortization

Depreciation and amortization expense for the third quarter of 2011 and 2010 was approximately $1.4 million or 3.6% of total revenue. Depreciation and amortization expense for the nine months ended October 2, 2011 and October 3, 2010 was approximately $4.2 million and $4.1 million, respectively, and was 3.5% and 3.6%, respectively, of total revenue.

Pre-opening Expenses

Pre-opening expenses consist of labor, food, utilities, training and rent costs incurred prior to the opening of a restaurant. Included in pre-opening costs is pre-opening rent for approximately 16 weeks prior to opening but this will vary based on lease terms. During the third quarter of 2011 and 2010, we incurred $237,000 and $219,000, respectively, of pre-opening expenses consisting of pre-opening rent and other pre-opening expenses. During the nine months ended October 2, 2011 and October 3, 2010, we incurred pre-opening expenses of $282,000 and $300,000, respectively.

Pre-opening expenses during the third quarter of 2011 related to a company-owned restaurant in Falls Church, Virginia that we opened during the third quarter. During the fourth quarter, we will open another company-owned restaurant in Eden Prairie, Minnesota. We anticipate pre-opening expenses for 2011 to be approximately $436,000, including pre-opening rent, for the two restaurants just mentioned.

Asset Impairment and Estimated Lease Termination and Other Closing Costs

In accordance with FASB Accounting Standards Codification for Property, Plant, and Equipment, we evaluate restaurant sites and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of restaurant sites to be held and used is measured by a comparison of the carrying amount of the restaurant site to the undiscounted future net cash flows expected to be generated on a restaurant-by-restaurant basis. If a restaurant is determined to be impaired, the loss is measured by the amount by which the carrying amount of the restaurant assets exceeds its fair value. Fair value is estimated based on the best information available including estimated future cash flows, expected growth rates in comparable restaurant sales, remaining lease terms and other factors. If these assumptions change in the future, we may be required to take additional impairment charges for the related assets. Considerable management judgment is necessary to estimate future cash flows. Accordingly, actual results could vary significantly from such estimates. Restaurant sites that are operating but have been previously impaired are reported at the lower of their carrying amount or fair value less estimated costs to sell. The following is a summary of these events during the third quarter of fiscal 2011 and fiscal 2010.

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                FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES



Asset Impairment and Estimated Lease Termination and Other Closing Costs (in
thousands):



                                                     Three Months Ended           Nine Months Ended
Restaurants                      Reason               October 2, 2011              October 2, 2011
Palatine, IL               Costs for a closed
                           restaurant(1)            $                (28 )       $                10
Gaithersburg, MD           Asset impairment(2)                        -                          148

Total for 2011                                      $                (28 )       $               158

(1) The Company incurred various costs for previously closed restaurants, including a recapture of accrued expenses for approximately $30,000, in Palatine, IL and Carpentersville, IL.

(2) Based on the Company's assessment of expected cash flows, an asset impairment charge was recorded, in accordance with FASB Accounting Standards Codification for Property Plant and Equipment, for this restaurant which we expect to relocate within its existing market in early 2013.

Asset Impairment and Estimated Lease Termination and Other Closing Costs (in thousands):

                                                                    Three Months Ended            Nine Months Ended
Restaurants                              Reason                       October 3, 2010              October 3, 2010
Various                     Costs for closed  restaurants(1)        $                 4          $                16
Marietta, GA                Gain on lease termination(2)                             -                           (84 )

Total for 2010                                                      $                 4          $               (68 )

(1) The Company incurred various costs for previously closed restaurants.

(2) During the year, the Company negotiated lease buyout for this location. Total termination fees were approximately $506,000 less lease reserve of approximately $590,000 for a net gain of approximately $84,000.

General and Administrative Expenses

General and administrative expenses for the third quarter of 2011 were approximately $4.0 million or 10.3% of total revenue, compared to approximately $4.0 million or 10.4% of total revenue for the third quarter of fiscal 2010. General and administrative expenses as a percent of total revenue, excluding stock-based compensation and board of directors' cash compensation, were 9.2% for the third quarter of 2011 and 9.6% for the third quarter of 2010, respectively. General and administrative expenses for the first nine months of fiscal 2011, respectively, were approximately $12.5 million or 10.7% of total revenue compared to approximately $11.8 million or 10.5% of total revenue for the first nine months of fiscal 2010.

For the third quarter, board of directors' cash and stock-based compensation expense was $427,000 compared to $325,000 for the third quarter of 2010. This year over year change reflects a higher stock price in 2011 on the date of . . .

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