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DAVE > SEC Filings for DAVE > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for FAMOUS DAVES OF AMERICA INC


10-May-2013

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 March 31, 2013, there were 187 Famous Dave's restaurants operating in 34 states and 1 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 March 31, 2013.

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 29, 2013 (fiscal 2013) and December 30, 2012 (fiscal 2012) 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 three separate and distinct earnings processes; area development fees, initial franchise fees, and continuing royalty payments. Currently, our domestic area development fee for domestic growth consists of a one-time, non-refundable payment of approximately $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. Currently, our initial, non-refundable, franchise fee for domestic growth is $45,000 per restaurant, of which approximately $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 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). Finally, 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.

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.

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.

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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
                                                           March 31,             April 1,
                                                              2013                 2012
Food and beverage costs(1)                                       30.8 %               31.1 %
Labor and benefits(1)                                            33.3 %               33.2 %
Operating expenses(1)                                            27.8 %               27.3 %
Depreciation & amortization (restaurant level)(1)                 4.3 %                4.0 %
Depreciation & amortization (corporate level)(2)                  0.4 %                0.4 %
General and administrative(2)                                    13.7 %               11.9 %
Asset impairment and estimated lease termination and
other closing costs(1)                                             -                   0.3 %
Pre-opening expenses and net loss on disposal of
equipment(1)                                                       -                   0.1 %
Total costs and expenses(2)                                      99.0 %               96.0 %
Income from operations(2)                                         1.0 %                4.0 %

(1) As a percentage of restaurant sales, net

(2) As a percentage of total revenue

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 Annual Report on Form 10-K for the fiscal year ended December 30, 2012.

Results of Operations - Three months ended March 31, 2013 compared to three months ended April 1, 2012.

Total Revenue

Total revenue of approximately $36.6 million for the first quarter of fiscal 2013 decreased approximately $893,000, or 2.4%, from total revenue of $37.5 million in the comparable quarter of fiscal 2012.

Restaurant Sales, net

Restaurant sales were approximately $32.3 million for the first quarter of fiscal 2013 compared to approximately $32.7 million for the same period in fiscal 2012. During the first quarter, company-owned restaurant sales declined year-over-year, by approximately 1.3%, primarily reflecting a 1.8% comparable sales decrease stemming from adverse weather and macro-economic conditions that negatively impacted consumers. Additionally, sales were unfavorably impacted by the shift of Easter from the second quarter of fiscal 2012 to the first quarter of fiscal 2013. These decreases were partially offset by a weighted average price increase of approximately 1.5%. On a weighted basis, Dine-In sales decreased by 3.5%, which was partially offset by increases in To Go and catering sales of 1.3% and 0.4%, respectively. Off-premise sales as a percentage of net sales, increased approximately 10% year over year and grew from 28.3% for the first quarter of 2012 to 31.1% for the first quarter of fiscal 2013, where To Go represented 25.4% and catering represented 5.7%. Finally, as a percentage of dine-in sales, our adult beverage sales at our company-owned restaurants were approximately 9.5% and 9.7% for the first quarter of fiscal 2013 and 2012, respectively.

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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 $4.1 million for the first quarter of fiscal 2013, compared to $4.5 million for the first quarter of 2012. Franchise royalties decreased year over year, reflecting a comparable sales decline of 6.1%, partially offset by nine new franchise-operated restaurants that opened since the first quarter of 2012 at higher sales volumes than the seven restaurants that closed during the same 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 first quarter of fiscal 2013, the licensing royalty revenue was approximately $174,000 compared to approximately $161,000 for the comparable period of fiscal 2012. Other revenue for the fiscal 2013 first quarter was approximately $10,000 compared to $88,000 for the comparable prior year quarter due to no openings of franchise restaurants during the first quarter of fiscal 2013 compared to one opening in the first quarter of fiscal 2012.

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 first quarter of fiscal 2013 decreased 1.8%, compared to fiscal 2012's first quarter decrease of 1.6%. At the end of the first quarter of fiscal 2013 and the first quarter of fiscal 2012, there were 49 and 50 restaurants, respectively, included in this base.

Same store net sales for franchise-operated restaurants for the first quarter of fiscal 2013 decreased 6.1%, compared to a decrease of 0.1%, for the prior year comparable period. For the first quarter of 2013 and the first quarter of 2012, there were 114 and 112 restaurants, respectively, included in the franchise-operated 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 first quarter of fiscal 2013 and fiscal 2012:

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                                                   Three Months Ended
                                                March 31,      April 1,
                                                   2013          2012
              Average Weekly Net Sales (AWS):
              Company-Owned                     $   46,850     $  46,898
              Full-Service                      $   48,615     $  48,761
              Counter-Service                   $   35,253     $  32,110
              Franchise-Operated                $   51,236     $  53,350

              AWS 2005 and Post 2005:(1)
              Company-Owned                     $   47,486     $  49,566
              Franchise-Operated                $   53,854     $  56,358
              AWS Pre-2005:(1)
              Company-Owned                     $   46,325     $  45,041
              Franchise-Operated                $   45,468     $  47,204
              Operating Weeks:
              Company-Owned                            689           697
              Franchise-Operated                     1,707         1,695

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

Food and Beverage Costs

Food and beverage costs for the first quarter of fiscal 2013 were approximately $10.0 million or 30.8% of net restaurant sales, compared to approximately $10.2 million or 31.1% of net restaurant sales for the first quarter of fiscal 2012. Food and beverage costs as a percentage of net sales declined during the quarter, primarily due to a decline in discounts as well as the positive impact from some of the strategic initiatives, such as our new house-smoked brisket. Our contracted food costs performed as expected during the first quarter as many of our current contracts include the effects of the historically high corn and soy prices of 2012, which are key ingredients in many of our products as well as livestock feed. We are beginning to see these prices soften and anticipate modest relief in fiscal 2013, as it relates to the contracts that are still being negotiated for the remainder of the year. As we begin to look beyond 2013, we are optimistic that we will see greater savings in fiscal 2014.

On a same store basis for fiscal 2013, based on what we have contracted to date along with our continued strategy to optimize our distribution networks and freight costs, we still anticipate a 2.0% decline in our contracted food and beverage costs, year over year. This decline does not include the purchasing volume of any new restaurant openings for the remainder of 2013. We are under contract for the majority of our pork product for all of fiscal 2013, which positions us well to capitalize on future savings should we see further opportunities in 2013 to blend and extend our contract into fiscal 2014. We anticipate a decrease for our brisket, which is contracted through the end of 2013, as well as other items such as hamburger, seafood, and French fries. With regard to chicken, the feed and process components are locked in through the remainder of 2013 at a slight increase year over year.

Despite an anticipated decrease in contracted food costs from prior year, we will continue our efforts to further improve margin through key core-item promotions as well as through strategic menu mix management. Another strategy we will utilize this year is to take advantage of opportunistic commodity purchases. For example, we were able to secure a core product, at favorable pricing terms, baby back ribs. With some promotional support from our vendors, we will feature baby back ribs, along with our St. Louis ribs, in our

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summer rib promotion. Also, we took a price increase of approximately 1.5% on selected menu items in April, concurrent with the new menu launch, and in accordance with the recommendations of our pricing consultant (RMS). Later in 2013, we will determine whether or not we will take additional price later in the year based on greater insight obtained from our work with RMS. During the quarter, we began selling our chicken wings "by weight" as opposed to "by the piece." This has allowed us to standardize food costs by protecting us from the variability of size and weight, but most importantly, it did not change portion sizes or the value delivered to our guest. We will continue to test and evaluate expanding this strategy to our ribs. We are updating our previous guidance and now anticipate food and beverage costs for fiscal 2013, as a percentage of net sales, to be approximately 145 to 150 basis points lower than fiscal 2012's percentage.

Labor and Benefits Costs

Labor and benefits costs for the three months ended March 31, 2013 were approximately $10.8 million or 33.3% of net restaurant sales, compared to approximately $10.9 million or 33.2% of net restaurant sales for the three months ended April 1, 2012. For the first quarter of fiscal 2013, labor and benefits, as a percentage of net restaurant sales, were unfavorable to the comparable period in fiscal 2012, primarily due to sales deleverage on fixed labor, partially offset by a slight decline in direct labor costs and lower than anticipated employee benefit costs due to a worker's compensation refund. We affirm our previous guidance and still anticipate labor and benefits costs, as a percentage of sales, to be 30 to 35 basis points favorable to fiscal 2012's percentage.

Operating Expenses

Operating expenses for the first quarter of fiscal 2013 were approximately $9.0 million or 27.8% of net restaurant sales, compared to operating expenses of approximately $8.9 million or 27.3% of net restaurant sales for the first quarter of fiscal 2012. Operating expenses for the first quarter as a percentage of net sales were unfavorable to the prior year due to sales deleverage, increased gas costs due to an elongated and colder winter, and increased advertising costs due to a shift in media spending. These increases were partially offset by lower costs associated with the timing of our menu printing.

For the remainder of 2013, we made the decision to decrease our media spend while we evaluate whether or not our prior programs provide the intended results and a satisfactory return. We are updating our previous guidance and currently anticipate advertising expense will be approximately 2.85% of net sales for all of fiscal 2013, including a 0.75% contribution to the Marketing Fund. This compares to a 2012 spend of 3.4% of net sales, which included a 1% contribution to the Marketing Fund. Based primarily on this change in advertising spend, we are updating our previous guidance and now anticipate operating expenses as a percentage of net sales for fiscal 2013 to be approximately 115 - 120 basis points lower than 2012's percentage.

Depreciation and Amortization

Depreciation and amortization expense for the first quarter of 2013 was approximately $1.5 million or 4.2% of total revenue compared to $1.5 million, or 3.9% of total revenue for the first quarter of fiscal 2012.

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. Fiscal 2013's first quarter had $6,000 of pre-opening expenses, compared to $18,000 in the first quarter of 2012. We are updating our previous guidance and now anticipate pre-opening costs for 2013 to be approximately $529,000 for the opening of two ground-up full service company-owned restaurants later this year.

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Asset Impairment and Estimated Lease Termination and Other Closing Costs

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. Below is a summary of these events and situations during the first quarter of fiscal 2013 and fiscal 2012.

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

                                                        Three Months Ended
       Restaurants   Reason                               March 31, 2013
       Various       Costs for closed restaurants(1)   $                (12 )

(1) The Company incurred various costs for closed restaurants which were more than offset by a common area maintenance refund from its Palatine, IL restaurant which was closed in fiscal 2010.

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

                                                        Three Months Ended
        Restaurants   Reason                               April 1, 2012
        Tulsa, OK     Costs for closed restaurants(1)   $                92

(1) The Company incurred various costs for the closure of the Tulsa, OK restaurant.

General and Administrative Expenses

General and administrative expenses for the first quarter of 2013 were approximately $5.0 million or 13.7% of total revenue, compared to approximately $4.5 million or 11.9% of total revenue for the first quarter of fiscal 2012. Approximately 130 basis points of the 180 basis point increase in general and administrative expenses as a percentage of revenue year over year reflects the reorganization of the Chief Executive Officer and Chief Operating Officer positions, including bonus and stock-based compensation, as well as legal and professional fees incurred related to board activity. The remainder of the increase was primarily due to a decline in total revenue leverage. We still anticipate stock-based compensation and board of director cash compensation to be approximately $2.3 million for fiscal 2013, as follows (in thousands):

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                                 Restricted
        Performance Shares        Stock and        Board of Directors'
         and Performance         Restricted          Stock-Based and
           Stock Units           Stock Units        Cash Compensation        Total
       $              1,381     $         405     $                 549     $  2,335

Over the course of 2013, we will look to implement various initiatives aimed at reducing general and administrative expenses. If we were to exclude stock based compensation, board of director cash compensation and achievement of full bonus, collectively equaling 170 basis points year over year, general and administrative expenses as a percentage of revenue would be 30-35 basis points favorable.

Interest Expense

Interest expense was approximately $285,000 or 0.8% of total revenue for the first quarter of fiscal 2013, compared to approximately $264,000 or 0.7% of total revenue for the comparable time frame of fiscal 2012. Interest expense for the first quarter of fiscal 2013 was slightly unfavorable in both dollars and as a percentage of revenue compared to the prior year due to a year over year increase in weighted average interest rates and a higher average outstanding balance on our line of credit. For full fiscal 2013, we still expect interest expense to be essentially flat, as a percentage of revenue, to fiscal 2012.

Interest Income

Interest income was approximately $4,000 and $2,000 for the first quarter of fiscal 2013 and fiscal 2012, respectively. Interest income reflects interest earned on short-term cash and cash equivalent balances and on outstanding notes and accounts receivable balances.

Provision for Income Taxes

For the first quarter of 2013, we recorded an estimated provision for income taxes of approximately $23,000 or 27.1% of income before income taxes, compared to a tax provision of approximately $422,000 or 34.0% of income before income taxes, for the first quarter of 2012. The difference year over year was primarily due to a more precise calculation methodology for employee related tax credits. We still expect an approximate 29.0% effective tax rate for fiscal 2013.

Basic and Diluted Net Income Per Common Share

Net income for the three months ended March 31, 2013 was approximately $62,000 or $0.01 per basic and per diluted share on approximately 7,370,000 weighted average basic shares outstanding and 7,648,000 weighted average diluted shares outstanding, respectively. Net income for the three months ended April 1, 2012 was approximately $817,000 or $0.11 per basic and per diluted share on approximately 7,636,000 weighted average basic shares outstanding and 7,747,000 weighted average diluted shares outstanding, respectively.

Financial Condition, Liquidity and Capital Resources

Our balance of unrestricted cash and cash equivalents was approximately $2.0 million at March 31, 2013 and approximately $2.1 million at December 30, 2012.

Our current ratio, which measures our immediate short-term liquidity, was 0.88 at March 31, 2013 and 1.02 at December 31, 2012. The current ratio is computed by dividing total current assets by total current liabilities. The change in our ratio was primarily due to an increase in accounts payable as a result of strategic decisions to make minor adjustments to vendor terms to allow the company to reduce its debt levels. This increase was

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partially offset by an increase in our prepaid expenses relating to our payments for insurance premiums. As is true with most restaurant companies, we often operate in a negative working capital environment due to the fact that we receive cash up front from customers and then pay our vendors on a delayed basis.

Net cash provided by operating activities through the first quarter of 2013 was approximately $3.9 million and reflects net income of approximately $62,000, depreciation and amortization of approximately $1.5 million, an increase in accounts payable of $2.8 million and a decrease in accounts receivable of $817,000. These were partially offset by a decrease in accrued compensation and benefits of $1.3 million and an increase in prepaid expense and other current assets of $650,000.

Net cash used for operating activities for the three months ended April 1, 2012 was approximately $33,000. Cash used for operating activities was primarily from net income of approximately $817,000, depreciation and amortization of approximately $1.5 million, increases in accounts payable of $1.8 million, and tax benefit for equity awards issued of $901,000. These net increases were partially offset by decreases in accrued compensation and benefits of $3.1 million and other current liabilities of $1.1 million, as well as an increase in prepaid expense and other current assets of $1.5 million.

Net cash used for investing activities was approximately $968,000 for the first three months of fiscal 2013. Net cash provided by investing activities was approximately $431,000 for the comparable period in fiscal 2012. The company paid the remaining balance of a liquor license for a new company-owned restaurant scheduled to open in the fourth quarter of fiscal 2013. During the first three months of 2013, we used approximately $739,000 on capital . . .

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