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DAVE > SEC Filings for DAVE > Form 10-Q on 2-Nov-2012All Recent SEC Filings

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Form 10-Q for FAMOUS DAVES OF AMERICA INC


2-Nov-2012

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 September 30, 2012, there were 187 Famous Dave's restaurants operating in 34 states and one Canadian province, including 53 company-owned restaurants and 134 franchise-operated restaurants. An additional 68 franchise restaurants were in various stages of development as of September 30, 2012.

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 December 30, 2012 (fiscal 2012) and January 1, 2012 (fiscal 2011) 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). During fiscal 2012, to incentivize growth, any partner who signs a franchise agreement and opens a "Shack" style counter service restaurant in fiscal 2012 will have their initial franchise fees reduced by 50% for that restaurant. 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 franchisees pay us a monthly royalty of 5% of their net sales.

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
                                                           September 30,              October 2,              September 30,              October 2,
                                                                2012                     2011                      2012                     2011
Food and beverage costs (1)                                           31.5 %                 30.0 %                      31.2 %                 29.5 %
Labor and benefits costs (1)                                          32.8 %                 31.6 %                      32.4 %                 31.3 %
Operating expenses (1)                                                30.9 %                 27.8 %                      28.5 %                 27.6 %
Depreciation & amortization (restaurant level) (1)                     3.9 %                  3.6 %                       3.8 %                  3.6 %
Depreciation & amortization (corporate level) (2)                      0.4 %                  0.4 %                       0.4 %                  0.4 %
General and administrative expenses (2)                               10.9 %                 10.3 %                      10.5 %                 10.7 %
Asset impairment and estimated lease termination
and other closing costs (1)                                             -                    (0.1 )%                      0.3 %                  0.2 %
Pre-opening expenses and net loss on disposal of
equipment (1)                                                          0.1 %                  0.7 %                       0.3 %                  0.3 %

Total costs and expenses (2)                                          98.1 %                 93.2 %                      95.4 %                 92.7 %
Income from operations (2)                                             1.9 %                  6.8 %                       4.6 %                  7.3 %

(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 recorded a net loss of $40,000 and net income of $10,000 for the three months ended September 30, 2012 and October 2, 2011, respectively. The Rib Team recorded a net loss of $64,000 and $19,000 for the nine months ended September 30, 2012 and October 2, 2011, 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 1, 2012.

Results of Operations - Three and Nine months ended September 30, 2012 compared to Three and Nine months ended October 2, 2011.

Total Revenue

Total revenue of approximately $39.9 million for the third quarter of fiscal 2012 increased $994,000 or 2.6%, from $38.9 million in the comparable quarter in fiscal 2011. For the nine months ended September 30, 2012, total revenue of approximately $118.7 million increased approximately $1.4 million or 1.2% over revenue of approximately $117.3 million, for the nine months ended October 2, 2011.

Restaurant Sales, net

Restaurant sales were approximately $34.9 million for the third quarter of fiscal 2012 compared to approximately $34.3 million for the same period in fiscal 2011, reflecting a 1.7% increase. The year-over-year increase in third quarter sales reflected a comparable sales increase of 0.2%, the addition of two new company-owned restaurants since the third quarter of 2011 and a weighted average price increase of approximately 2.2%.

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These increases were partially offset by the closure of the Vernon Hills, Illinois and Tulsa, Oklahoma restaurants. On a weighted basis, To-Go represented 0.9% of the comparable sales increase, and was partially offset by a 0.6% decline in dine-in sales and a 0.1% decline in catering sales. For the third quarter of fiscal 2012, off-premise sales were 35.2% of total sales, with To-Go representing 21.9% and catering representing 13.3%. This compares to off-premise sales of 34.1% for the prior year. As a percentage of dine-in sales, our adult beverage sales at our company-owned restaurants were 9.1% and 9.0% for the third quarter of fiscal 2012 and 2011, respectively.

Restaurant sales for the nine months ended September 30, 2012 were approximately $103.9 million compared to approximately $103.6 million for the nine months ended October 2, 2011, reflecting a 0.4% increase. The year over year increase in restaurant sales was the result of the third quarter's sales increase. As a percentage of dine-in sales, our adult beverage sales at our company-owned restaurants were 9.3% and 9.2% for the nine months of fiscal 2012 and 2011, respectively.

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 $4.6 million for the third quarter of fiscal 2012, compared to $4.4 million for the third quarter of fiscal 2011. There were 134 franchise-operated restaurants open at September 30, 2012 compared to 131 franchise-operated restaurants open at October 2, 2011. 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% decline in comparable sales.

Franchise-related revenue was approximately $13.9 million for the nine months ended September 30, 2012 compared to approximately $13.0 million for the nine months ended October 2, 2011, primarily reflecting a year-over-year increase in royalty revenue of 5.6% 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 2012, the licensing royalty revenue was approximately $201,000 compared to approximately $148,000 for the comparable period of fiscal 2011. Licensing royalty revenue was approximately $600,000 for the nine months ended September 30, 2012 as compared to $572,000 for the comparable period of fiscal 2011.

Other revenue for the fiscal 2012 third quarter was approximately $177,000 compared to $80,000 for the comparable prior year quarter. The year over year increase in other revenue was the result of increased opening assistance provided to the three franchise-operated restaurants that opened during the third quarter. Other revenue for the nine months ended September 30, 2012 was approximately $300,000 compared to approximately $211,000 for the comparable period of fiscal 2011.

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 2012 increased 0.2%, compared to fiscal 2011's third quarter decrease of 0.1%. At the end of the third quarter of fiscal 2012 and the third quarter of fiscal 2011, there were 49 and 51 restaurants, respectively, included in the company-owned comparable sales base.

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Same store net sales for company-owned restaurants open at least 24 months for the nine months ended September 30, 2012 decreased 0.6%, compared to fiscal 2011's nine months ended October 2, 2011 increase of 0.8%. For the nine months ended September 30, 2012 and October 2, 2011, there were 49 and 44 restaurants, respectively, included in the company-owned comparable sales base.

Same store net sales on a 24 month basis for franchise-operated restaurants for the third quarter of fiscal 2012 decreased 2.8%, compared to a decrease of 1.0% for the prior year comparable period. For the third quarter of 2012 and the third quarter of 2011, there were 112 and 109 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 first nine months of fiscal 2012 and fiscal 2011 decreased 1.5% and 0.7%, respectively. For the first nine months of fiscal 2012 and fiscal 2011, there were 109 and 102 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 2012 and fiscal 2011:



                                              Three Months Ended                         Nine Months Ended
                                       September 30,          October 2,          September 30,          October 2,
                                            2012                 2011                 2012                  2011
Average Weekly Net Sales (AWS):
Company-Owned                         $         50,554       $     50,199       $          50,231       $     50,859
Full-Service                          $         52,362       $     51,582       $          52,118       $     52,396
Counter-Service                       $         36,411       $     37,089       $          35,483       $     36,373

Franchise-Operated                    $         53,016       $     53,772       $          54,258       $     54,344

AWS 2005 and Post 2005: (1)
Company-Owned                         $         53,200       $     54,806       $          52,910       $     55,647
Franchise-Operated                    $         55,656       $     56,446       $          57,173       $     57,364
AWS Pre-2005: (1)
Company-Owned                         $         48,519       $     47,264       $          48,266       $     47,848
Franchise-Operated                    $         47,549       $     48,562       $          48,218       $     48,445
Operating Weeks:
Company-Owned                                      688                681                   2,063              2,033
Franchise-Operated                               1,717              1,687                   5,131              4,998

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

Food and Beverage Costs

Food and beverage costs for the third quarter of fiscal 2012 were approximately $11.0 million or 31.5% of net restaurant sales, compared to approximately $10.3 million or 30.0% of net restaurant sales for the third quarter of fiscal 2011. We continue to face pressure on our margins primarily due to an increase in commodity costs because of rising corn prices, since corn is a key ingredient in many of our products. Additionally, continuing a trend we saw throughout the second quarter, as guests looked for greater value, we saw a shift in our menu

mix

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during the third quarter toward lower-priced, but lower-margin items. Lastly, we have strategically slowed the progress of some of the initiatives mentioned at the beginning of 2012 to ensure their long-term success, both in terms of dollar savings, as well as delivering a value proposition to our guests. As such we have seen a delay in anticipated savings during 2012 from certain strategic initiatives, but still expect to realize savings in 2013.

As we continue to combat the pressure on our margins, in September, we took a price increase of 1.0% on selected menu items, which combined with a price increase from earlier in the year, resulted in a 2.85% weighted average menu price increase for all of fiscal 2012. In addition, a key for us to effectively manage food costs will be to have a number of suppliers in various geographic regions. As such, we continue to grow our supplier network, particularly in the western part of the United States. We expect that these new suppliers will allow us to optimize our freight costs to distribution centers, thereby lowering freight costs across the rest of the system.

Another key initiative for us is to transition to selling some of our key proteins in the same unit of measure we receive them. An example of this would be selling wings by weight as opposed to by the piece. It is important to note, that as we evaluate this strategy we do not propose to change portion sizes or the value delivered to our guests. We will also be transitioning to a new preparation process for our brisket, resulting in a substantially better product as well as cost savings. Each brisket will now be slow-smoked; hand-crafted in our restaurants each day and will result in a more authentic signature BBQ item but with improved margins.

Food and beverage costs for the first nine months of fiscal 2012 were approximately $32.4 million or 31.2% of net restaurant sales compared to approximately $30.6 million or 29.5% of net restaurant sales for the comparable period of fiscal 2011.

As mentioned at the beginning of fiscal 2012, we anticipated food inflation for fiscal 2012 to be approximately 5.0% to 7.0% for all of our contracted food items such as pork, chicken, and brisket, and as we look to the remainder of the year, we affirm our food inflation will be approximately 6.0%. Predominately due to the strategic delay in certain initiatives, as well as the increased discounts associated with our fourth quarter direct mail and bounce-back programs, we are updating our previous guidance, and now anticipate food and beverage costs, as a percentage of net sales, to be approximately 140 to 145 basis points higher than the prior year.

In spite of the challenges in the commodity markets, we are cautiously optimistic about 2013. Based on what we have contracted to date, in combination with our previously mentioned strategic initiatives, we are currently anticipating a 2.0% decline in our contracted food and beverage costs for next year. During the third quarter of 2012, we executed a new contract for the majority of our pork product through all of fiscal 2013 at a minimum of a 0.5% year over year decline, which positions us well to capitalize on future savings should we see further opportunities in 2013. Certain components of our chicken and brisket contracts have been negotiated through the first quarter of 2013; however, we are still trying to negotiate final pricing.

Labor and Benefits Costs

Labor and benefits costs for the third quarter ended September 30, 2012 were approximately $11.5 million or 32.8% of net restaurant sales, compared to approximately $10.8 million or 31.6% of net restaurant sales for the three months ended October 2, 2011. This increase was primarily due to higher direct labor costs as well as higher medical claims and workers compensation premiums year over year. Labor and benefits for the nine months ended September 30, 2012 were approximately $33.7 million or 32.4% of net restaurant sales, compared to approximately $32.4 million or 31.3% of net restaurant sales for the nine months ended October 2, 2011.

Based on the results from the first nine months of the year and the anticipated increased level of discounts in the fourth quarter resulting in less cost efficient labor, we are updating our previous guidance, and now expect labor and benefits costs, as a percentage of sales, to be 110 to 115 basis points unfavorable to fiscal 2011's percentage.

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Operating Expenses

Operating expenses for the third quarter of fiscal 2012 were approximately $10.8 million or 30.9% of net restaurant sales, compared to operating expenses of approximately $9.5 million or 27.8% of net restaurant sales for the third quarter of fiscal 2011. This increase was primarily due to the shift in timing of the fourth quarter media and direct-mail marketing initiatives of approximately 280 basis points from the fourth quarter of 2011 to the third quarter of 2012, as well as increased other restaurant operating costs year over year due to price inflation. Operating expenses for the nine months ended September 30, 2012 were approximately $29.6 million or 28.5% of net restaurant sales, compared to approximately $28.6 million or 27.6% of net restaurant sales for the nine months ended October 2, 2011.

Due to an increased spend related to a more targeted fourth quarter direct-mail marketing promotions, we now anticipate, on an annual basis, advertising expense will be approximately 3.4% of net sales for 2012 including a 1.0% contribution to the Marketing Fund. We are updating our previous guidance and are now projecting operating expenses, as a percentage of net sales, for fiscal 2012 to be approximately 40 - 45 basis points higher than 2011's percentage. This increase from our previous guidance reflects increased marketing spend from our original estimate of 3.0% to the current estimate of 3.4%, as well as increased discounts associated with our fourth quarter promotions.

Depreciation and Amortization

Depreciation and amortization expense for the third quarter of 2012 was approximately $1.5 million or 3.8% of total revenue compared to $1.4 million or 3.6% for the second quarter of fiscal 2011. Depreciation and amortization expense for the nine months ended September 30, 2012 and October 2, 2011 was approximately $4.4 million and $4.2 million, respectively, and was 3.7% and 3.5%, 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 2012, we incurred approximately $19,000 of pre-opening expenses. During the third quarter of 2011, we incurred approximately $237,000 of pre-opening expenses, which included pre-opening rent. During the nine months ended September 30, 2012 and October 2, 2011, we incurred pre-opening expenses of $317,000 and $282,000, respectively. We anticipate pre-opening costs for 2012 to be approximately $502,000 for the opening of two company-owned restaurants later in the year, including pre-opening rent of $85,000.

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 restaurants' 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 2012 and fiscal 2011.

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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                                  September 30, 2012            September 30, 2012
Vernon Hills, IL             Lease reserve(1)                        $                -           $                 77
Various                      Costs for closed  restaurants(2)                         13                           211

Total for 2012                                                       $                13          $                288

(1) The lease reserve equals the net present value of the remaining lease obligations for the Vernon Hills, IL restaurant, net of expected sublease income, which is equal to zero.

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

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

                                                                        Three Months Ended             Nine Months Ended
Restaurants                    Reason                                    October 2, 2012                October 2, 2012
Various                        Costs for closed  restaurants(1)        $                (28 )         $                10

Gaithersburg, MD Asset Impairment(2) - 148

Total for 2011 $ (28 ) $ 158

(1) The Company incurred various costs for a previously closed restaurant, 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 for this restaurant that will be relocated within its existing market in 2013.

. . .

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