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DAVE > SEC Filings for DAVE > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for FAMOUS DAVES OF AMERICA INC

Form 10-Q for FAMOUS DAVES OF AMERICA INC


8-Aug-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 June 30, 2013, there were 187 Famous Dave's restaurants operating in 34 states, the Commonwealth of Puerto Rico and 1 Canadian province, including 53 company-owned restaurants and 134 franchise-operated restaurants. An additional 67 franchise restaurants were in various stages of development as of June 30, 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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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES

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: (5)

                                                 Three Months Ended                   Six Months Ended
                                             June 30,           July 1,          June 30,            July 1,
                                               2013              2012              2013               2012
Food and beverage costs (1)                       30.1 %            31.0 %             30.5 %            31.0 %
Labor and benefits costs (1)                      30.5 %            31.2 %             31.8 %            32.2 %
Operating expenses (1)(3)                         25.2 %            26.0 %             25.7 %            26.0 %
Depreciation & amortization (restaurant
level) (1)                                         3.6 %             3.6 %              3.9 %             3.8 %
Asset impairment and estimated lease
termination and other closing costs (1)             -                0.5 %               -                0.4 %
Pre-opening expenses and net loss on
disposal of equipment (1)                          0.2 %             0.8 %              0.1 %             0.5 %
Costs and expenses (restaurant level)
(1)                                               89.6 %            93.1 %             91.9 %            93.8 %
Restaurant level margin (1)(4)                    10.4 %             6.9 %              8.1 %             6.2 %
Depreciation & amortization (corporate
level) (2)                                         0.4 %             0.4 %              0.4 %             0.4 %
General and administrative expenses
(2)(3)                                            13.0 %            10.0 %             13.9 %            11.5 %
Total costs and expenses (2)                      92.5 %            92.3 %             95.5 %            94.1 %
Income from operations (2)                         7.5 %             7.7 %              4.5 %             5.9 %

(1) As a percentage of restaurant sales, net

(2) As a percentage of total revenue

(3) In order to be consistent with what the Company believes to be a more prevalent practice among other public restaurant companies, the Company has decided to reflect multi-unit supervision expenses within general and administrative expenses, rather than as operating expenses, where they previously have been reflected. In the Company's earnings release dated July 24, 2013, multi-unit supervision expenses incurred during the first quarter of 2013 were reclassified in the second quarter of 2013, which is the quarter in which the Company decided to make such reclassification. Such expenses incurred during the first half of 2012 were similarly reclassified in the second quarter of 2012 to be comparable with the current fiscal year's presentation. In contrast to the earnings release, the financial results included in this Quarterly Report on Form 10-Q reflect allocation of reclassified multi-unit supervision expenses to the quarters in which the expenses were actually incurred. For the second quarter of fiscal 2012, this adjustment was approximately $470,000. For the first six months of fiscal 2012, this adjustment was approximately $931,000.

(4) Restaurant level margin equals restaurant sales, net less restaurant level costs and expenses. Restaurant level costs and expenses include food and beverage costs, labor and benefit costs, operating expenses, restaurant level depreciation and amortization, asset impairment and estimated lease termination and other closing costs, pre-opening expenses and net loss on disposal of equipment.

(5) Data regarding our restaurant operations as presented in the table, includes sales, costs and expenses associated with our Rib Team, which netted a loss of $38,000 and $16,000 for the three months ended June 30, 2013 and July 1, 2012, respectively. The Rib Team netted a loss of $45,000 and $24,000 for the six months ended June 30, 2013 and July 1, 2012, respectively. Our Rib Team travels around the country introducing people to our brand of barbeque, 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 December 30, 2013.

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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES

Results of Operations - Three and Six months ended June 30, 2013 compared to Three and Six months ended July 1, 2012.

Total Revenue

Total revenue of approximately $43.4 million for the second quarter of fiscal 2013 increased approximately $2.1 million or 4.9%, from $41.3 million for the comparable quarter in fiscal 2012. For the six months ended June 30, 2013, total revenue of approximately $80.0 million increased approximately $1.2 million or 1.5% over revenue of approximately $78.8 million, for the six months ended July 1, 2012.

Restaurant Sales, net

Restaurant sales were approximately $38.3 million for the second quarter of fiscal 2013 compared to approximately $36.3 million for the same period in fiscal 2012, reflecting a 5.5% increase. The increase, year-over-year, reflected a comparable sales increase of 3.8%, the annualized impact of two new company-owned restaurants that opened in the third and fourth quarters of 2012, in addition to a weighted average price increase of 2.5%. These increases were partially offset by the closure of the Lombard, Illinois restaurant. On a weighted basis, Dine-In and To Go sales, increased by 1.5% and 4.0%, respectively, partially offset by a 1.7% decline in catering sales. Off-premise sales grew to 35.4%, of which To Go represented 26.0% and catering represented 9.4%. This compares to off premise sales of 34.0% for the prior year. As a percentage of dine-in sales, our adult beverage sales at our company-owned restaurants were 9.1% for the second quarter of fiscal 2013 and 2012, respectively.

Restaurant sales for the six months ended June 30, 2013 were approximately $70.6 million compared to approximately $69.0 million for the six months ended July 1, 2012, reflecting a 2.3% increase. As a percentage of dine-in sales, our adult beverage sales at our company-owned restaurants were 9.3% and 9.4% for the six months of fiscal 2013 and 2012, 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 second quarter of fiscal 2013, compared to $4.7 million for the second quarter of fiscal 2012. There were 134 franchise-operated restaurants open at June 30, 2013 and July 1, 2012. The year over year decrease in franchise royalties primarily reflects a comparable sales decline of 1.9%.

Franchise-related revenue was approximately $8.8 million for the six months ended June 30, 2013 compared to approximately $9.2 million for the six months ended July 1, 2012, primarily reflecting a year-over-year decrease in royalty revenue of 3.8% for the six month timeframe and a year over year decrease in comparable sales of 3.9%.

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 second quarter of fiscal 2013, the licensing royalty revenue was approximately $279,000 compared to approximately $238,000 for the comparable period of fiscal 2012. Licensing royalty revenue was approximately $453,000 for the six months ended June 30, 2013 as compared to $399,000 for the comparable period of fiscal 2012.

Other revenue for the fiscal 2013 second quarter was approximately $112,000 compared to $35,000 for the comparable prior year quarter. Other revenue for the six months ended June 30, 2013 was approximately $122,000 compared to approximately $123,000 for the comparable period of fiscal 2012.

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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES

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 second quarter of fiscal 2013 increased 3.8%, compared to fiscal 2012's second quarter decrease of 0.6%. At the end of the second quarter of fiscal 2013 and the second quarter of fiscal 2012, there were 49 restaurants included in the company-owned comparable sales base, respectively.

Same store net sales for company-owned restaurants open at least 24 months for the six months ended June 30, 2013 increased 1.1%, compared to fiscal 2012's six months ended July 1, 2012 decrease of 1.0%. For the six months ended June 30, 2013 and July 1, 2012, there were 49 restaurants included in the company-owned comparable sales base, respectively.

Same store net sales on a 24 month basis for franchise-operated restaurants for the second quarter of fiscal 2013 decreased 1.9%, compared to a decrease of 1.8% for the prior year comparable period. For the second quarter of 2013 and the second quarter of 2012, there were 117 and 113 restaurants included in the franchise-operated comparable sales base.

Same store net sales on a 24 month basis for franchise-operated restaurants for the first six months of fiscal 2013 and fiscal 2012 decreased 3.9% and 1.0%, respectively. For the first six months of fiscal 2013 and fiscal 2012, there were 114 and 112 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
second quarter of fiscal 2013 and fiscal 2012:



                                         Three Months Ended           Six Months Ended
                                        June 30,      July 1,      June 30,      July 1,
                                          2013          2012         2013          2012
     Average Weekly Net Sales (AWS):
     Company-Owned                     $   55,611     $ 53,331     $  51,231     $ 50,070
     Full-Service                      $   57,639     $ 55,334     $  53,127     $ 51,996
     Counter-Service                   $   42,290     $ 37,928     $  38,771     $ 35,019
     Franchise-Operated                $   56,272     $ 56,394     $  53,764     $ 54,883
     AWS 2005 and Post 2005: (1)
     Company-Owned                     $   56,043     $ 55,929     $  51,764     $ 52,759
     Franchise-Operated                $   58,997     $ 59,476     $  56,432     $ 57,935
     AWS Pre-2005: (1)
     Company-Owned                     $   55,254     $ 51,413     $  50,790     $ 48,144
     Franchise-Operated                $   50,328     $ 49,913     $  47,916     $ 48,555
     Operating Weeks:
     Company-Owned                            689          678         1,378        1,375
     Franchise-Operated                     1,721        1,719         3,428        3,414

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

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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES

Food and Beverage Costs

Food and beverage costs for the second quarter of fiscal 2013 were approximately $11.5 million or 30.1% of net restaurant sales, compared to approximately $11.3 million or 31.0% of net restaurant sales for the second quarter of fiscal 2012. Food and beverage costs for the first six months of fiscal 2013 were approximately $21.5 million or 30.5% of net restaurant sales compared to approximately $21.4 million or 31.0% of net restaurant sales for the comparable period of fiscal 2012.

Food and beverage costs benefited from a strategic and purposeful decline in discounts, as well as the positive impact from some of the strategic initiatives that we had been working towards. Our food contracts continued to perform as expected for the second quarter of fiscal 2013 with the exception of brisket purchases. A higher than anticipated demand for our Burnt Ends product resulted in a fairly significant increase in brisket purchase volumes; and while these sales were incremental, they were at a higher food cost than most of our other core proteins. As a result, our purchase volumes had to increase in order to support demand. Embedded in our contracts are some of 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 continue to see these prices soften and will see some modest relief in fiscal 2013, as it relates to contracts that are still being negotiated for the remainder of the year. And, 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, our six month results, and current visibility of our contracts and initiatives, we now anticipate an approximate 1.5% to 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 our pork product for all of fiscal 2013 at a price decrease of 1.3% compared to the prior year's contract. During the third quarter we will begin negotiating our fiscal 2014 pork contract, and should we see opportunities to capitalize on future savings in 2013 by blending and extending our contract into fiscal 2014 we will do so. With regard to other key products, we are benefiting from a decrease in costs for our brisket, which is contracted through the rest of fiscal 2013, as well as other items such as hamburger, seafood, and corn. With regard to chicken, the cost of feed and processing components are now locked in through the end of the year; and as a result, there will be a slight increase in chicken costs year over year.

In addition to the 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 opportunistic commodity purchases and strategic menu mix management. We were able to secure, at favorable pricing terms, a key protein that we plan to test in the fourth quarter. For our fall menu launch, in mid-September, we anticipate taking a price increase of approximately 1.5% on selected menu items based on the data and insight provided by demand optimized price increases and results obtained through various tests. Based on our results over the first six months, which included a significant mix shift to brisket, we now anticipate food and beverage costs for fiscal 2013, to be approximately 100 to 105 basis points lower than fiscal 2012's percentage.

Labor and Benefits Costs

Labor and benefits costs for the second quarter ended June 30, 2013 were approximately $11.7 million or 30.5% of net restaurant sales, compared to approximately $11.3 million or 31.2% of net restaurant sales for the three months ended July 1, 2012. This decrease was primarily due to sales leverage on fixed labor, partially offset by increased manager bonus, due to the year over year increase in sales, and an increase in benefits due to higher claims' experience. Labor and benefits for the six months ended June 30, 2013 were approximately $22.4 million or 31.8% of net restaurant sales, compared to approximately $22.2 million or 32.2% of net restaurant sales for the six months ended July 1, 2012. For the full year, we still anticipate labor and benefits costs, as a percentage of sales, to be 30 to 35 basis points favorable to fiscal 2012's percentage.

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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES

Operating Expenses

Operating expenses for the second quarter of fiscal 2013 were approximately $9.7 million or 25.2% of net restaurant sales, compared to operating expenses of approximately $9.5 million or 26.0% of net restaurant sales for the second quarter of fiscal 2012. This decrease in operating expenses, as a percentage of net sales, was predominantly due to sales leverage on fixed costs. These costs savings were partially offset by a $310,000 shift in TV advertising costs from the third quarter of 2012 to the second quarter of 2013. During the quarter, we made the decision, in order to be more comparable to other public restaurant companies, to reflect multi-unit supervision expenses within general and administrative expenses as opposed to operating expenses, where it previously had been reflected. The prior year's results have been reclassified to be comparable with the current fiscal year's presentation and we will continue to do so throughout the year for all periods presented. For the second quarter of fiscal 2012, this reclassification to general and administrative expenses was approximately $470,000. For the first six months of fiscal 2012, this adjustment was approximately $931,000. Operating expenses for the six months ended June 30, 2013 were approximately $18.1 million or 25.7% of net restaurant sales, compared to approximately $17.9 million or 26.0% of net restaurant sales for the six months ended July 1, 2012.

We have been testing new media strategies and consequently, have redeployed our marketing spend more effectively. For 2013, we expect advertising expense to now be approximately 2.75% 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 1.0% contribution to the Marketing Fund. As a result of our six month results and in light of the anticipated decline 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 135 - 140 basis points lower than 2012's percentage.

Depreciation and Amortization

Depreciation and amortization expense for the second quarter of 2013 was approximately $1.5 million or 3.5% of total revenue compared to $1.5 million or 3.6% for the second quarter of fiscal 2012. Depreciation and amortization expense for the six months ended June 30, 2013 and July 1, 2012 was approximately $3.1 million and $2.9 million, respectively, and was 3.8% and 3.7%, 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 second quarter of 2013, we incurred approximately $70,000 of pre-opening expenses which included primarily pre-opening rent. During the second quarter of 2012, we incurred approximately $280,000 of pre-opening expenses, which included pre-opening rent. During the six months ended June 30, 2013 and July 1, 2012, we incurred pre-opening expenses of $76,000 and $298,000, respectively. We now anticipate pre-opening costs for 2013 to be approximately $535,000 for the opening of two ground-up full-service company-owned restaurants, one late in the third quarter and one in the fourth quarter.

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 second quarter of fiscal 2013 and fiscal 2012.

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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      Six Months Ended
Restaurants   Reason                                June 30, 2013          June 30, 2013
Various       Costs for closed  restaurants(1)   $                 2     $             (10 )

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

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

                                                                      Three Months Ended           Six Months Ended
Restaurants                  Reason                                     June 30, 2013                June 30, 2013
Vernon Hills, IL             Lease reserve(1)                        $                 77                         77
Various                      Costs for closed  restaurants(2)                         106                        198

Total for 2012                                                       $                183          $             275

(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 the closure of the Vernon Hills, IL and Tulsa, OK restaurants.

General and Administrative Expenses

General and administrative expenses for the second quarter of 2013 were approximately $5.6 million or 13.0% of total revenue, compared to approximately $4.1 million or 10.0% of total revenue for the second quarter of fiscal 2012. . . .

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