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DAVE > SEC Filings for DAVE > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for FAMOUS DAVES OF AMERICA INC

Form 10-Q for FAMOUS DAVES OF AMERICA INC


8-Aug-2014

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 29, 2014, there were 194 Famous Dave's restaurants operating in 34 states, the Commonwealth of Puerto Rico and 1 Canadian province, including 53 company-owned restaurants and 141 franchise-operated restaurants. An additional 58 franchise restaurants were in various stages of development as of June 29, 2014.

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 28, 2014 (fiscal 2014) and December 29, 2013 (fiscal 2013) 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 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                    Six Months Ended
                                            June 29,           June 30,          June 29,            June 30,
                                              2014               2013              2014                2013
Food and beverage costs (1)                      28.9 %             30.0 %             29.1 %             30.4 %
Labor and benefits costs (1)                     30.9 %             30.6 %             32.0 %             31.8 %
Operating expenses (1)                           26.4 %             25.4 %             26.6 %             25.8 %
Restaurant level cash flow margins
(1)(3)                                           13.8 %             14.0 %             12.3 %             12.0 %
Depreciation & amortization (restaurant
level) (1)                                        3.6 %              3.4 %              4.0 %              3.8 %
Asset impairment and estimated lease
termination and other closing costs (1)           0.3 %              0.0 %              0.8 %              0.0 %
Pre-opening expenses and net loss on
disposal of equipment (1)                         0.0 %              0.2 %              0.6 %              0.1 %
Costs and expenses (restaurant level)
(1)                                              90.1 %             89.6 %             93.1 %             91.9 %
Restaurant level margin (1)(4)                    9.9 %             10.4 %              6.9 %              8.1 %
Depreciation & amortization (corporate
level) (2)                                        0.4 %              0.4 %              0.5 %              0.4 %
General and administrative expenses (2)           9.7 %             12.9 %             10.7 %             13.9 %
Total costs and expenses (2)                     89.3 %             92.6 %             92.9 %             95.5 %
Income from operations (2)                       10.7 %              7.4 %              7.1 %              4.5 %

(1) As a percentage of restaurant sales, net

(2) As a percentage of total revenue

(3) Restaurant level cash flow margins are equal to taking restaurant sales, net less restaurant level food and beverage costs, labor and benefit costs, and operating expenses.

(4) Restaurant level margin is equal to 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.

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 29, 2013.

During the first six months of 2014, we made a number of strategic decisions that may negatively impact 2014, but we believe will positively impact the organization going forward. We need to be able to evaluate and assess the various aspects of our business with a long-term view, and as such, have elected not to provide any forward looking guidance for fiscal 2014.

Results of Operations - Three and Six months ended June 29, 2014 compared to Three and Six months ended June 30, 2013.

Total Revenue

Total revenue of approximately $41.9 million for the second quarter of fiscal 2014 decreased approximately $1.6 million or 3.8%, from $43.6 million for the comparable quarter in fiscal 2013. For the six months ended

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June 29, 2014, total revenue of approximately $77.6 million decreased approximately $2.6 million or 3.2% from revenue of approximately $80.2 million, for the six months ended June 30, 2013.

Restaurant Sales, net

Restaurant sales were approximately $36.9 million for the second quarter of fiscal 2014 compared to approximately $38.5 million for the same period in fiscal 2013, reflecting a 4.3% decrease driven by a comparable sales decrease of 5.2%. A significant portion of the comparable sales decrease was the result of a strategic decision to discontinue our prior email discounting programs. This decrease was partially offset by a weighted average price increase of 1.4%. There was a 4.9% comparable sales decline in dine-in and a 0.3% decline in To Go sales and catering sales were flat to the prior year. Off-premise sales represented 37.2% of our net restaurant sales during the second quarter of 2014, of which To Go represented 26.8% and catering represented 10.4% of net restaurant sales, respectively. This compares to off premise sales of 35.8% for the second quarter of the prior year.

Restaurant sales for the six months ended June 29, 2014 were approximately $68.1 million compared to approximately $70.8 million for the six months ended June 30, 2013, reflecting a 3.8% decrease.

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 $4.7 million for the second quarter of fiscal 2014, compared to $4.6 million for the second quarter of fiscal 2013. There were 141 and 134 franchise-operated restaurants open at June 29, 2014 and June 30, 2013, respectively. Royalty revenue was essentially flat year over year, primarily reflecting sales from seven net new franchise restaurants that opened since the end of the second quarter of 2013 almost entirely offset by a comparable sales decrease of 2.8 %.

Franchise-related revenue was approximately $8.9 million for the six months ended June 29, 2014 compared to approximately $8.8 million for the six months ended June 30, 2013, primarily reflecting a year-over-year increase in royalty revenue of 1.8% for the six month timeframe as a result of seven net new franchise restaurants, partially offset by a year over year decrease in comparable sales of 3.0%.

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 2014, the licensing royalty revenue was approximately $293,000 compared to approximately $279,000 for the comparable period of fiscal 2013. Licensing royalty revenue was approximately $458,000 for the six months ended June 29, 2014 as compared to $453,000 for the comparable period of fiscal 2013.

Other revenue for the fiscal 2014 second quarter was approximately $43,000 compared to $112,000 for the comparable prior year's second quarter. Other revenue for the six months ended June 29, 2014 was approximately $54,000 compared to approximately $122,000 for the comparable period of fiscal 2013. Changes in both periods were due to timing in franchise openings year over year.

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 2014 decreased 5.2% from that of the prior year period, compared to fiscal 2013's second quarter increase of 4.3% over the comparable fiscal 2012 period, and compared to a 0.5% decrease from the comparable fiscal

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2013 period in the casual dining industry overall, as reported by Black Box Intelligence (BBI). At the end of the second quarter of fiscal 2014 and the second quarter of fiscal 2013, there were 49 restaurants included in the company-owned comparable sales base.

Same store net sales for company-owned restaurants open at least 24 months for the six months ended June 29, 2014 decreased 5.0% from that of the prior year period, compared to fiscal 2013's increase of 1.4% over the comparable fiscal 2012 period, and compared to a 0.8% decrease over the comparable 2013 period in the casual dining industry overall, as reported by BBI. For the six months ended June 29, 2014 and June 30, 2013, there were 49 restaurants included in the company-owned comparable sales base.

Same store net sales for franchise-operated restaurants for the second quarter of fiscal 2014 decreased 2.8% from that of the prior year period compared to fiscal 2013's second quarter decrease of 1.9% over the comparable fiscal 2012 period. For the second quarter of 2014 and the second quarter of 2013, there were 121 and 117 restaurants included in the franchise-operated comparable sales base.

Same store net sales for franchise-operated restaurants for the first six months of fiscal 2014 and fiscal 2013 decreased 3.0% and 3.9%, respectively, from their respective comparable prior year periods. For the first six months of fiscal 2014 and fiscal 2013, there were 119 and 114 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 2014 and fiscal 2013:



                                      Three Months Ended           Six Months Ended
                                    June 29,      June 30,      June 29,      June 30,
                                      2014          2013          2014          2013
       Average Weekly Net Sales:
       Company-Owned               $   53,532     $  55,921     $  48,980     $  51,386
       Full-Service (46)           $   55,646     $  57,968     $  50,884     $  53,292
       Counter-Service (7)         $   39,639     $  42,470     $  36,331     $  38,861
       Franchise-Operated          $   55,234     $  56,272     $  52,629     $  53,764
       Operating Weeks:
       Company-Owned                      689           689         1,391         1,378
       Franchise-Operated               1,811         1,721         3,621         3,428

Food and Beverage Costs

Food and beverage costs for the second quarter of fiscal 2014 were approximately $10.7 million or 28.9% of net restaurant sales, compared to approximately $11.5 million or 30.0% of net restaurant sales for the second quarter of fiscal 2013. This improvement was largely driven by more favorable pricing on some of our food contracts. Food and beverage costs for the first six months of fiscal 2014 were approximately $19.8 million or 29.1% of net restaurant sales compared to approximately $21.5 million or 30.4% of net restaurant sales for the comparable period of fiscal 2013.

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Labor and Benefits Costs

Labor and benefits costs for the second quarter ended June 29, 2014 were approximately $11.4 million or 30.9% of net restaurant sales, compared to approximately $11.8 million or 30.6% of net restaurant sales for the three months ended June 30, 2013. The percentage increase was primarily due to sales deleverage on fixed labor and management labor costs partially offset by lower employee benefit costs. Labor and benefits for the six months ended June 29, 2014 were approximately $21.8 million or 32.0% of net restaurant sales, compared to approximately $22.5 million or 31.8% of net restaurant sales for the six months ended June 30, 2013.

Operating Expenses

Operating expenses for the second quarter of fiscal 2014 were approximately $9.7 million or 26.4% of net restaurant sales, compared to operating expenses of approximately $9.8 million or 25.4% of net restaurant sales for the second quarter of fiscal 2013. This increase in operating expenses, as a percentage of net sales, was primarily related to sales deleverage on fixed operating costs as well as higher repair and maintenance and occupancy costs. These increases were partially offset by lower supply costs during the second quarter. Operating expenses for the six months ended June 29, 2014 were approximately $18.1 million or 26.6% of net restaurant sales, compared to approximately $18.3 million or 25.8% of net restaurant sales for the six months ended June 30, 2013.

During the second quarter of 2014, advertising as a percentage of net sales was 3.7% which was essentially flat to the comparable period of 2013. In both years there was a 0.75% marketing ad fund contribution.

Depreciation and Amortization

Depreciation and amortization expense for the second quarter of 2014 was approximately $1.5 million or 3.5% of total revenue, essentially flat to the second quarter of fiscal 2013. Depreciation and amortization expense for the six months ended June 29, 2014 and June 30, 2013 was approximately $3.0 million and $3.1 million, respectively, and was 3.9% and 3.8%, 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. We did not incur any pre-opening costs during the second quarter of 2014. During the second quarter of 2013, we incurred approximately $70,000 of pre-opening expenses, which included pre-opening rent. During the six months ended June 29, 2014 and June 30, 2013, we incurred pre-opening expenses of $7,000 and $76,000, respectively.

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's 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, discount rate 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

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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 three and six months ended June 29, 2014 and June 30, 2013.

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

                                                                        Three Months Ended          Six Months Ended
Restaurants                     Reason                                    June 29, 2014               June 29, 2014
Various                         Asset impairment(1)                    $                 -          $             342
Salisbury, MD                   Costs for closed  restaurants(2)                          8                       107
Décor Warehouse                 Lease termination costs(3)                               94                        94
Salisbury, MD                   Lease termination costs(4)                               -                         19

Total                                                                  $                102         $             562

(1) Change in strategic direction regarding décor resulted in the impairment of the décor located in the company's restaurants.

(2) The Company incurred various costs for the closure of the Salisbury, MD restaurant.

(3) Lease termination costs associated with closure of the Décor Warehouse.

(4) Lease termination costs associated with closure of the restaurant, net of deferred rent credit.

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.

General and Administrative Expenses

General and administrative expenses for the second quarter of 2014 were approximately $4.1 million or 9.7% of total revenue, compared to approximately $5.6 million or 12.9% of total revenue for the second quarter of fiscal 2013. This decrease reflects the impact from reductions in force that occurred during fiscal 2013, the recapture of stock-based compensation of approximately $349,000 predominately due to the recent departure of executive-level employees. These decreases were partially offset by approximately $427,000 of severance costs compared to $271,000 of severance costs in the second quarter of fiscal 2013, along with revenue deleverage.

General and administrative expenses for the first six months of fiscal 2014, were approximately $8.3 million or 10.7% of total revenue, compared to approximately $11.1 million or 13.9% of total revenue for the first six months of fiscal 2013.

Interest Expense

Interest expense was approximately $237,000 or 0.6% of total revenue for the second quarter of fiscal 2014, compared to approximately $253,000 or 0.6% of total revenue for the comparable time frame of fiscal 2013. This decrease reflects lower interest rates. This category includes interest expense for our term loan, financing lease obligations, line of credit, and interest for deferrals made under our non-qualified deferred compensation plan.

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Interest expense was approximately $500,000 or 0.6% of total revenue for the first six months of fiscal 2014 and approximately $538,000 or 0.7% of total revenue for the first six months of fiscal 2013.

Interest Income

We did not earn any interest income during the second quarter of 2014 and earned approximately $1,000 for the second quarter of fiscal 2013. Interest income was approximately $1,000 and $5,000 for the first six months of fiscal 2014 and fiscal 2013, respectively. Interest income reflects interest received on short-term cash and cash equivalent balances.

Provision for Income Taxes

For the second quarter of 2014, we recorded an estimated tax provision of approximately $1.4 million or 32.8% of income before income taxes. For the six months ended June 29, 2014, our tax provision was approximately $1.7 million, or 32.9% of income before income taxes. This compares to an estimated tax expense of approximately $880,000 or 29.6% of income before income taxes, for the second quarter of 2013, and an estimated tax expense of approximately $903,000, or 29.5% of income before income taxes, for the six months ended June 30, 2013.

Basic and Diluted Net Income Per Common Share

Net income for the three months ended June 29, 2014 was approximately $2.9 million, or $0.39 per basic and diluted share, respectively, on approximately 7,219,000 weighted average basic shares outstanding and 7,250,000 weighted average diluted shares outstanding, respectively. Net income for the three months ended June 30, 2013 was approximately $2.1 million, or $0.28 per basic share and $0.27 per diluted share on approximately 7,451,000 weighted average basic shares outstanding and 7,736,000 weighted average diluted shares outstanding, respectively.

Net income for the six months ended June 29, 2014 was approximately $3.4 million, or $0.47 per basic share and $0.46 per diluted share, respectively, on approximately 7,229,000 weighted average basic shares outstanding and approximately 7,260,000 weighted average diluted shares outstanding, respectively. Net income for the six months ended June 30, 2013 was approximately $2.2 million, or $0.29 per basic share and $0.28 per diluted share, respectively, on approximately 7,404,000 weighted average basic shares outstanding and approximately 7,690,000 weighted average diluted shares outstanding, respectively.

Financial Condition, Liquidity and Capital Resources

Our balance of unrestricted cash and cash equivalents was approximately $2.2 million at June 29, 2014 and approximately $1.3 million at December 29, 2013.

Our current ratio, which measures our immediate short-term liquidity, was 0.86 at June 29, 2014 and 0.88 at December 29, 2013. The current ratio is computed by dividing total current assets by total current liabilities. 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 for the six months ended June 29, 2014 was approximately $7.1 million and reflects net income of approximately $3.4 million, depreciation and amortization of approximately $3.0 million, asset impairment and estimated lease termination and other closing costs of approximately $562,000, a net loss of loss on disposal of property of approximately $421,000 and a decrease in prepaid expenses and other current assets of approximately $548,000. These were partially offset by a decrease in accounts payable of approximately $1.2 million and a net stock-based compensation expense recapture of approximately $780,000.

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