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 29, 2009, there were 174 Famous Dave's restaurants operating in 37 states,
including 47 company-owned restaurants and 127 franchise-operated restaurants.
An additional 96 franchise restaurants were in various stages of development as
of March 29, 2009.
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. This
fiscal year, which ends on January 3, 2010 (fiscal 2009) consists of 53 weeks
while the fiscal year ending December 28, 2008 (fiscal 2008) consisted of a
52 weeks.
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 to secure the territory consists of a non-refundable
payment equal to $10,000 per restaurant in consideration for the services we
perform in preparation of executing each area development agreement. These
services include, but are not limited to, conducting market and trade area
analysis, hosting a meeting with the potential franchise partner and the Famous
Dave's Executive Team, and performing potential franchise background
investigation, all of which 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 franchise fee
is typically $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 $35,000 is included in
deferred franchise fees and is recognized as revenue, when a franchisee has
secured a site, meaning a lease has been executed or a property purchase
agreement has been signed, at which time we have substantially performed all of
our obligations. Costs and expenses associated with these services are included
in general and administrative expense. 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. During a time when financing is difficult to obtain, we
suspended our franchisees' development schedule requirements in 2009 and 2010.
Additionally, we eliminated the extension fees that were required to be paid by
a franchisee in order to retain their territory. At the same time, we announced
an incentive program to encourage growth where it makes sense. Any of our
franchisees who choose to build in 2009 or 2010 will receive a reduced royalty
rate for 12 months from date of opening. Our measure of comparable sales
represent net sales for restaurants open year-round for at least 24 months.
Costs and Expenses
Restaurant costs and expenses include food and beverage costs, operating
payroll and employee benefits, 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 are improved 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, Associate 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
March 29, March 30,
2009 2008
Food and beverage costs (1) 30.0 % 30.6 %
Labor and benefits (1) 31.8 % 31.4 %
Operating expenses (1) 25.8 % 25.6 %
Depreciation & amortization (restaurant level) (1) 4.0 % 4.6 %
Depreciation & amortization (corporate level) (2) 0.4 % 0.3 %
General and administrative (2) 12.7 % 13.8 %
Asset impairment and estimated lease termination and other
closing costs (1) 0.4 % 0.0 %
Pre-opening expenses & net gain on disposal(1) 0.0 % 0.9 %
Total costs and expenses (2) 92.8 % 94.8 %
Income from operations (2) 7.2 % 5.2 %
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(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 Form 10-K for the fiscal year
ended December 28, 2008.
Total Revenue
Total revenue of approximately $33.8 million for the first quarter of fiscal
2009 was approximately flat to revenue of approximately $33.7 million for the
comparable quarter in fiscal 2008.
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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
Restaurant Sales, net
Restaurant sales for the first quarter of fiscal 2009 were approximately
$29.3 million, essentially flat compared to net sales of approximately
$29.2 million for the same period in fiscal 2008. Restaurant sales for the first
quarter reflected growth from three restaurants that opened in the fourth
quarter of 2008 and weighted average price increases of approximately 3.6%,
offset by a comparable sales decrease of 5.5%.
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 $4.2 million for the first quarter
of fiscal 2009, essentially flat to the comparable period of 2008. Franchise
royalty revenue reflected 13 new franchise restaurants and 9 closures since the
first quarter of 2008, and was offset by a comparable sales decrease of 6.2%.
Five new franchise restaurants opened during the first quarter of fiscal 2009
and one franchise restaurant closed. There were 127 franchise-operated
restaurants opened at March 29, 2009 compared to 123 franchise-operated
restaurants at March 30, 2008.
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 2009, the licensing royalty revenue was approximately $92,000
compared to approximately $79,000 for the comparable period of fiscal 2008.
During fiscal 2009, as a result of continued growth in our restaurant base and
expanded markets, we expect to see licensing revenue increase slightly compared
to fiscal 2008 levels.
Other revenue for the fiscal 2009 first quarter was approximately $154,000
compared to $107,000 for the comparable prior year quarter. The increase in
other revenue is due to the opening of five restaurants during the first quarter
of 2009 compared to only three restaurants that opened during the first quarter
of 2008. The amount of other revenue is expected to remain essentially flat for
fiscal 2009 based on the level of opening assistance we may be required to
provide during the remaining franchised openings for fiscal 2009.
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 2009
decreased 5.5%, compared to fiscal 2008's first quarter increase of 3.6%. At the
end of the first quarter of fiscal 2009 and the first quarter of fiscal 2008,
there were 39 and 36 restaurants, respectively, included in this base. The
industry wide declining trend in sales reflects the state of the economy and,
although we are seeing some hints of improvement, we do not expect a fast
recovery. We continue to see softness in all three of our revenue levers -
dine-in, to-go and catering, and we are still experiencing significant declines
in corporate caterings, as businesses continue to hold back on entertainment
budgets.
Same store net sales for franchise-operated restaurants for the first quarter
of fiscal 2009 decreased approximately 6.2%, compared to a decrease of
approximately 3.3% for the prior year comparable period. For the first quarter
of 2009 and the first quarter of 2008, there were 92 and 77 restaurants,
respectively, included in the franchise-operated comparable sales base. The
decline in franchise comparable sales for the 2009 year-to-date period reflects
the continuation of economic challenges being faced in certain franchise
markets. Restaurants in five states accounted for over 50% of the decline in
franchise comparable sales.
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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
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 2009 and fiscal 2008:
Three Months Ended
March 29, March 30,
2009 2008
Average Weekly Net Sales (AWS):
Company-Owned $ 47,939 $ 50,512
Full-Service $ 50,185 $ 52,844
Counter-Service $ 32,595 $ 35,534
Franchise-Operated $ 54,660 $ 55,684
AWS 2005 and Post 2005: (1)
Company-Owned $ 59,030 $ 68,065
Franchise-Operated $ 60,836 $ 63,297
AWS Pre-2005: (1)
Company-Owned $ 44,137 $ 46,349
Franchise-Operated $ 46,272 $ 47,012
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(1) Provides further delineation of AWS for restaurants opened
during the pre-fiscal 2005, and restaurants opened
during the post-fiscal 2005, timeframes.
Operating Weeks:
Company-Owned 611 579
Franchise-Operated 1,594 1,538
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Catering and "TO GO" accounted for approximately 27.3% of 2009's first
quarter net sales compared with approximately 29.2% for the first quarter of
2008, with the decline in the percentage year-over-year reflecting the continued
decline in corporate catering orders from 2008 that were either not repeated in
2009, or were scaled back considerably. We have several initiatives regarding
catering and continue to invest in this important extension of our business.
Recently we hired a catering director who will now oversee catering strategies
across all our company-owned markets and will travel to franchise markets to
assist them with their off-premise opportunities. Also, with our focus on the
upcoming graduation catering season, and knowing that the consumer is more cost
conscious than ever, we have intensified our messaging around value, our
willingness to work with any budget, and our ability and skill at being the
'last minute catering expert'. Additionally, we have developed a new catering
menu highlighting a variety of value-oriented items.
Food and Beverage Costs
Food and beverage costs for the first three months of fiscal 2009 were
approximately $8.8 million or 30.0% of net restaurant sales, compared to
approximately $8.9 million or 30.6% of net restaurant sales for the first three
months of fiscal 2008. As a percentage of dine-in sales, our adult beverage
sales at our company-owned restaurants were 9.4% and 9.5% for the first quarter
of fiscal years 2009 and 2008, respectively.
Our pork contract, which extends through December 2009, resulted in a 2.0%
price decrease from fiscal 2008. Our poultry contract has been locked in through
September of 2009 at a price decrease of approximately 6% from 2008's price and
we are projecting an annual savings of approximately 6%. Our brisket contract is
firm through May of 2009 and we are watching the market closely for
opportunistic buys while exploring
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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
various brisket options at similar prices to prior year. We currently anticipate
an average price increase of 9.3% in our hamburger prices from our two
suppliers. Both suppliers are on contract through August. With regard to other
food and beverage categories, although we have had to absorb increases in
certain items such as salmon, corn and beans, we've realized savings in others,
such as oil, sauces and seasonings. Additionally, we have experienced favorable
freight costs in the first quarter of 2009 due to reduced diesel fuel prices. We
continue to watch the markets closely and have seen the benefit this year of
being flexible through negotiating shorter-term contracts. Additionally, we have
made progress in to identifying secondary suppliers and expect that expanding
our supply chain will result in further protection and ensure a more fair and
competitive pricing environment.
We have completed phase one of our food cost management system, consisting of
implementation of the system in each of our company-owned restaurants. While our
restaurant operators continue to learn how to best use this tool, we will be
moving into the second phase, which consists of validation of recipes and
establishing an ideal food cost at the restaurant unit level. This system will
provide our operations team with an ideal food cost as well as insight into
pricing, product mix, and waste issues.
As a result of all of these initiatives, for the full fiscal 2009 timeframe,
we anticipate a 50 to 60 basis point decrease in our food costs as a percent of
sales year over year.
Labor and Benefits Costs
Labor and benefits costs for the three months ended March 29, 2009 were
approximately $9.3 million or 31.8% of net restaurant sales, compared to
approximately $9.2 million or 31.4% of net restaurant sales for the three months
ended March 30, 2008. Although we reduced our labor matrices in early 2009, we
still saw an increase in labor and benefits costs year-over-year, predominantly
due to higher health insurance claims and insurance reserve adjustments, which
caused an unfavorable 80 basis point impact in comparison to the first quarter
of 2008. For the remainder of 2009, we expect labor and benefit costs as a
percent of sales, to be approximately 40-50 basis points lower as compared to
2008 due to expected labor efficiencies from changes to our labor matrix, and
the normalization of the three restaurants that opened in late 2008, partially
offset by the expected continuation of increases in medical claims costs.
Operating Expenses
Operating expenses for the first quarter of fiscal 2009 were approximately
$7.6 million or 25.8% of net restaurant sales, compared to operating expenses of
approximately $7.5 million or 25.6% of net restaurant sales for the first
quarter of fiscal 2008. The increase in restaurant level operating expenses as a
percentage of net restaurant sales for the first quarter of fiscal 2009
reflecting a de-leverage of sales and higher occupancy costs. Additionally,
repairs and maintenance costs increased year over year due to storm damage and
other losses at certain of our restaurants, which were below our insurance
deductible in order to qualify for submission of a claim. These increases were
partially offset by reduced utility costs and lower advertising expense.
Advertising expense in 2009 is still expected to be approximately 3.5% of net
sales, including 0.5% contribution to the National Ad Fund. For fiscal 2009,
operating expenses as a percentage of net sales is expected to be approximately
20 - 30 basis points lower than 2008's percentage as a result of lower utility
costs somewhat offset by higher repairs and maintenance expense.
Depreciation and Amortization
Depreciation and amortization expense for the first quarter of 2009 was
approximately $1.3 million or 3.9% of total revenue, compared to the first
quarter of 2008 at approximately $1.5 million or 4.3% of total revenue. During
fiscal 2009, depreciation and amortization is expected to decrease by
approximately 10 basis points compared to fiscal 2008 reflecting the impairments
recorded during the last half of 2008.
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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 which will
vary based on lease terms. During the first quarter of 2009, we had no
pre-opening expenses and had approximately $254,000 of pre-opening expenses in
the first quarter of 2008. We do not plan to open any company-owned restaurants
in fiscal 2009 and therefore do not expect any pre-opening expenses. As
previously disclosed, however, we will remain watchful for any real estate
opportunities that may present themselves due to other casual dining
establishments slowing down their growth.
General and Administrative Expenses
General and administrative expenses for the first quarter of 2009 were
approximately $4.3 million or 12.7% of total revenue, compared to approximately
$4.7 million or 13.8% of total revenue for the first quarter of fiscal 2008.
General and administrative expenses as a percent of total revenue, excluding
stock-based compensation, were 12.3% for the first quarter of 2009 and 13.0% for
the first quarter of 2008. A one-time grant of 25,000 shares was made to the
chairman of the board of directors which vests over a one year term. An initial
one-time grant of 25,000 shares was made to the new chairperson of our audit
committee which vests over a five year term. As a result of a material increase
in our stock price since the first quarter of fiscal 2009 earnings were released
on April 22, 2009, we are updating our guidance on stock-based compensation
expense as follows: Including performance shares for the 2009-2011 program and
grants to our board of directors, we are expecting stock-based compensation to
be approximately $874,000 in fiscal 2009, as follows (in thousands):
Performance Restricted Board of Directors Unvested Stock
Shares Stock Units Shares Options Total
$397 $136 $318 $23 $874
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We expect that general and administrative expenses in 2009, as a percentage
of revenue, with full accrual for bonus achievement, will be approximately flat
to fiscal 2008's general and administrative expense as a percentage of revenue
which included an approximate $200,000 bonus payout for individual achievement
for associates below the executive level.
Interest Expense
Interest expense was approximately $474,000 or 1.4% of total revenue for the
first three months of fiscal 2009, compared to approximately $511,000 or 1.5% of
total revenue for the comparable time frame of fiscal 2008. This category
includes interest expense for notes payable, financing lease obligations, our
line of credit, and a company match and interest for deferrals made under our
non-qualified deferred compensation plan. The year over year decrease is due to
lower interest rates and a lower line of credit balance compared to the prior
year. For fiscal 2009, we expect interest expense to be approximately 20 basis
points lower than fiscal 2008 levels due to our strategy of focusing on
repayment of our line of credit and lower expected interest rates in fiscal 2009
as compared to fiscal 2008. We had a balance on our line of credit of $15.0
million as of March 29, 2009.
Interest Income
Interest income was approximately $34,000 and $58,000 for the first three
months of fiscal 2009 and fiscal 2008, respectively. Interest income reflects
interest received on short-term cash and cash equivalent balances. We expect
fiscal 2009 interest income to be essentially flat compared to fiscal 2008.
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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
Provision for Income Taxes
For the first quarter of 2009, we recorded an estimated provision for income
taxes of approximately $680,000 or 34% of income before income taxes, compared
to a tax provision of approximately $450,000, or 35% of income before income
taxes, for the first quarter of 2008. We estimate a tax provision of 34% of
income before income taxes for fiscal 2009.
Basic and Diluted Net Income Per Common Share
Net income for the three months ended March 29, 2009 was approximately
$1.3 million or $0.15 per basic and diluted share on approximately 9,082,000
weighted average basic shares outstanding and 9,087,000 weighted average diluted
shares outstanding. Net income for the three months ended March 30, 2008 was
approximately $835,000 or $0.09 per basic and diluted share on approximately
9,611,000 weighted average basic shares outstanding and 9,773,000 weighted
average diluted shares outstanding.
Financial Condition, Liquidity and Capital Resources
During the first quarter of 2009, our balance of unrestricted cash and cash
equivalents was approximately $2.0 million, compared to the fiscal 2008 year-end
balance of approximately $1.7 million.
Our quick ratio, which measures our immediate short-term liquidity, was 0.24
at March 29, 2009 and 0.25 at March 30, 2008. The quick ratio is computed by
adding unrestricted cash and cash equivalents with accounts receivable, net and
dividing by total current liabilities less restricted marketing fund
liabilities. The change in our quick ratio was primarily due to increased
current liabilities from the increase in our line of credit balance as compared
to the first quarter of fiscal 2008.
Net cash provided by operations for the first quarter of 2009 was
approximately $3.8 million. Cash provided during the first quarter of fiscal
2009 was primarily from net income of approximately $1.3 million, depreciation
and amortization of approximately $1.3 million, an increase in accrued
compensation and benefits of $943,000, and a decline in restricted cash of
approximately $516,000. These net increases were partially offset by an
approximate $1.1 million decrease in accounts payable.
Net cash provided by operations for the first quarter of 2008 was
approximately $3.6 million. Cash provided during the first quarter of fiscal
2008 was primarily from depreciation and amortization of approximately
$1.5 million, net income of approximately $835,000, a decline in restricted cash
of approximately $1.2 million and a decrease in accounts receivable of $865,000.
In addition, there were increases in stock based compensation of $281,000. These
net increases were partially offset by an approximate $1.1 million decrease in
accounts payable.
Net cash used for investing activities was approximately $311,000 for the
first quarter of fiscal 2009 and $2.3 million for the first quarter of fiscal
2008. During the first quarter of 2009, we used approximately $322,000 on
capital expenditures for existing restaurants and for other projects. During the
first quarter of 2008, we used approximately $2.4 million for capital
expenditures primarily related to the construction of our new restaurants. In
fiscal 2009, we expect capital expenditures to be approximately $2.6 million,
primarily reflecting continued investments in existing restaurants.
Net cash used for financing activities was approximately $3.1 million in the
first quarter of fiscal 2009 and approximately $764,000 for the first quarter of
fiscal 2008. During the first quarter of 2009, we had draws of $2.0 million on
our line of credit and had repayments of $5.0 million. In addition we paid
$45,000 for the 2008 fourth quarter waiver and amended credit agreement and
repaid $102,000 of long-term debt. During the first quarter of 2008, we had
draws of $5.5 million on our line of credit and had repayments of $6.0 million.
In addition, we repaid approximately $93,000 of debt and repurchased 16,000 of
our shares for
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approximately $156,000, including commissions.
On April 17, 2008, the Company and certain of its subsidiaries (collectively
known as the "Borrower") entered into an amendment and restatement of an
existing Credit Agreement with Wells Fargo Bank, National Association, as
administrative agent and lender (the "Lender"). The Credit Agreement, which
amended and restated an agreement previously entered into by the company on July
31, 2006, increased the Company's existing revolving credit facility from
$20.0 million to $30.0 million (the "Facility") with an opportunity, subject to
the Company meeting identified covenants and elections, to increase the
commitment to $50.0 million. The maturity date on the Facility was extended five
. . .
