Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Famous Dave's of America, Inc. was incorporated as a Minnesota corporation in
March 1994 and opened its first restaurant in Minneapolis in June 1995. As of
September 27, 2009, we had 177 Famous Dave's restaurants operating in 38 states,
including 46 company-owned restaurants and 131 franchise-operated restaurants.
We had an additional 93 franchise restaurants in various stages of development
as of September 27, 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
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 a 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 previously 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 Nine Months
Ended Ended
September 27, September 28, September 27, September 28,
2009 2008 2009 2008
Food and beverage costs (1) 30.5 % 31.3 % 30.2 % 30.8 %
Labor and benefits (1) 31.9 % 32.3 % 31.1 % 30.8 %
Operating expenses (1) 27.0 % 24.7 % 26.2 % 25.9 %
Depreciation & amortization (restaurant
level) (1) 3.9 % 4.2 % 3.8 % 4.0 %
Depreciation & amortization (corporate
level) (2) 0.4 % 0.4 % 0.4 % 0.3 %
Asset impairment and estimated lease
termination and other closing costs (1) 1.6 % 12.8 % 0.1 % 4.2 %
General and administrative expenses (2) 11.1 % 9.5 % 11.6 % 11.5 %
Pre-opening expenses and net loss on
disposal of property(1) - 1.1 % - 0.7 %
Total costs and expenses (2) 93.4 % 102.0 % 91.2 % 95.4 %
Income (loss) from operations (2) 6.6 % (2.0 %) 8.8 % 4.6 %
|
(1) As a
percentage of
restaurant
sales, net
(2) As a
percentage of
total revenue
(3) Data
regarding our
restaurant
operations as
presented in
the table,
includes
sales, costs
and expenses
associated
with our Rib
Team, which
realized net
income of
$38,000 and
$48,000 for
the three
months ended
September 27,
2009 and
September 28,
2008,
respectively.
The Rib Team
realized net
income of
$10,000 and
$12,000 for
the nine
months ended
September 27,
2009 and
September 28,
2008,
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 28, 2008.
Total Revenue
Total revenue of approximately $33.3 million for the third quarter of fiscal
2009 was an approximate 5.1% decrease from revenue of approximately
$35.1 million for the comparable quarter in fiscal 2008. For the nine months
ended September 27, 2009, total revenue of approximately $103.4 million
decreased approximately $4.2 million, or 3.9%, from revenue of approximately
$107.6 million for the nine months ended September 28, 2008. This decrease
reflects a 3.9% decrease in company-owned restaurant sales and a 2.6% decrease
in franchise royalty revenue.
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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
Restaurant Sales, net
Restaurant sales for the third quarter of fiscal 2009 were approximately
$28.8 million, which decreased 5.4% compared to net sales of approximately
$30.4 million for the same period in fiscal 2008. Restaurant sales for the nine
months ended September 27, 2009 were approximately $89.6 million, compared to
approximately $93.2 million for the nine months ended September 28, 2008.
Comparable sales for the third quarter of 2009 for company-owned restaurants
open for 24 months or more declined 6.8%, compared to a decrease of 4.7% for the
third quarter of 2008. The sales decline reflects continued pressure related to
the general economy in all three of our sales levers: dine-in, to-go, and
catering. Of the 6.8% third quarter comparable sales decline, dine-in
represented 3.5%, To-Go accounted for 1.7%, and catering comprised 1.6%.
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 $4.3 million for the third quarter
of 2009, compared to $4.5 million, for the same period in 2008. Franchise
royalty revenue was down 2.8% compared to the prior year, reflecting 11 new
franchise restaurants, net of 3 closures, since the third quarter of 2008, and a
comparable sales decrease of 9.5%. Two new franchise restaurants opened during
the third quarter of 2009, Thousand Oaks, California, which was a conversion of
an Applebee's, and Amarillo, Texas. Despite the challenging economic
environment, these new restaurants had average opening weekly sales of
approximately $88,000. Franchise-related revenue was approximately $13.0 million
for the nine months ended September 27, 2009 compared to approximately
$13.7 million for the nine months ended September 28, 2008, primarily reflecting
a year-over-year decrease in royalty revenue of 2.6% for the nine month
timeframe. There were 131 franchise-operated restaurants opened at September 27,
2009 compared to 123 franchise-operated restaurants at September 28, 2008.
Licensing and Other Revenue
Licensing revenue includes royalties from a retail line of business,
including sauces, rubs, marinades and seasonings. For the third quarter of
fiscal 2009, licensing royalty revenue was approximately $124,000, compared to
approximately $90,000 for the comparable period of fiscal 2008. Licensing
royalty revenue was approximately $439,000 for the nine months ended
September 27, 2009, as compared to $328,000 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 substantially
compared to fiscal 2008 levels.
Other revenue includes opening assistance and training we provide to our
franchise partners. Other revenue for the fiscal 2009 third quarter was
approximately $96,000 compared to $115,000 for the comparable prior year
quarter. Other revenue for the nine months ended September 27, 2009 was
approximately $372,000 compared to approximately $379,000 for the comparable
period of fiscal 2008. The amount of other revenue is expected to remain
essentially flat for fiscal 2009 compared to fiscal 2008, based on the level of
opening assistance we 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 third quarter of fiscal 2009
decreased 6.8%, which compares to fiscal 2008's third quarter decrease of 4.7%.
At the end of the third quarter of fiscal 2009 and the third quarter of fiscal
2008, there were 38 restaurants, respectively, included in this base. Same store
net sales for company-owned restaurants open at least 24 months for the nine
months ended September 27, 2009 decreased 7.3%, compared to fiscal 2008's nine
months ended September 28, 2008 increase of 0.1%. For the nine months ended
September 27, 2009 and September 28,
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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
2008, there were 38 restaurants and 35 restaurants, respectively, included in
the company-owned 24 month comparable sales base. We attribute the sales decline
in the third quarter to continued industry-wide pressure related to the general
economy, as we suffered declines in all three sales levers: dine-in, to-go, and
catering.
Same store net sales for franchise-operated restaurants for the third quarter
of fiscal 2009 decreased approximately 9.5%, compared to a decrease of
approximately 4.6% for the prior year comparable period. For the third quarter
of 2009 and the third quarter of 2008, there were 100 and 86 restaurants,
respectively, included in the franchise-operated comparable sales base. The
weakening of franchise comparable sales for the third quarter of 2009 reflects
the continuation of economic challenges being faced in many of our franchise
markets. Of the 9.5% third quarter decline, 6 states, representing 34
franchise-operated restaurants, accounted for approximately 50 percent of the
decline.
Same store net sales on a 24 month basis for franchise-operated restaurants
for the first nine months of fiscal 2009 and fiscal 2008 decreased 8.8% and
2.8%, respectively. For the first nine months of fiscal 2009 and fiscal 2008,
there were 92 and 75 restaurants, respectively, included in the
franchise-operated 24 month comparable sales base.
Average Weekly Net Sales and Operating Weeks
The following table shows company-owned and franchise-operated average weekly
net sales and company-owned and franchise-operated operating weeks for the third
quarter of fiscal 2009 and fiscal 2008:
Three Months Ended Nine Months Ended
September 27, September 28, September 27, September 28,
2009 2008 2009 2008
Average Weekly Net Sales:
Company-Owned $ 47,706 $ 49,429 $ 49,427 $ 52,368
Full-Service $ 48,958 $ 51,039 $ 51,121 $ 54,465
Counter-Service $ 37,438 $ 38,489 $ 36,401 $ 38,583
Franchise-Operated $ 53,524 $ 58,276 $ 54,870 $ 58,449
AWS 2005 and Post 2005: (1)
Company-Owned $ 55,340 $ 62,578 $ 58,909 $ 67,918
Franchise-Operated $ 57,683 $ 64,600 $ 60,201 $ 65,691
AWS Pre-2005: (1)
Company-Owned $ 45,011 $ 46,295 $ 46,112 $ 48,608
Franchise-Operated $ 47,472 $ 50,355 $ 47,326 $ 49,834
Operating Weeks:
Company-Owned 598 608 1,807 1,772
Franchise-Operated 1,684 1,597 4,934 4,723
|
(1) Provides
further
delineation
of AWS for
restaurants
opened
during the
pre-fiscal
2005, and
restaurants
opened
during the
fiscal 2005
and
post-fiscal
2005,
timeframes.
Catering represented 11.9% while To-Go represented 20.9% of our 2009 third
quarter off-premise sales, for a total of 32.8%. This compares to catering and
to-go percentages of 13.0% and 21.9%, respectively, for the prior year. Although
To-Go and catering were down on a comparable basis 8.2% and 15.1% for the third
quarter year-to-date timeframe, for comparable restaurants, we saw sequential
improvement from the first and second quarter due to a variety of initiatives to
build sales. To-Go sales were positively impacted by the various promotional
activities, such as Dave's Day, which increased our to-go traffic during the
quarter. Although we continue to see consumers being very conscientious, we
remain optimistic about the upcoming holiday season for in-restaurant family
gatherings and off-premise catering and to-go opportunities, and have
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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
planned several initiatives for the fourth quarter to help build sales. As such,
to support our sales building efforts during the fourth quarter, we will be
offering $10 off for a $30 dine-in or to-go occasion in our company markets
through direct mail and newspaper advertising. We will also be offering special
incentives for booking catering orders.
Food and Beverage Costs
Food and beverage costs for the third quarter of fiscal 2009 were
approximately $8.8 million or 30.5% of net restaurant sales, compared to
approximately $9.5 million or 31.3% of net restaurant sales for the third
quarter of fiscal 2008. As a percentage of dine-in sales, our adult beverage
sales at our company-owned restaurants were 8.3% and 8.7% for the third quarter
of fiscal years 2009 and 2008, respectively.
Food and beverage costs for the first nine months of fiscal 2009 were
approximately $27.0 million or 30.2% of net restaurant sales compared to
approximately $28.8 million or 30.8% of net restaurant sales for the comparable
period of fiscal 2008.
As for our core proteins, we continue to benefit from an approximate 2.0%
pricing decrease in our pork contract, which extends throughout the balance of
fiscal 2009. Our chicken pricing is firm through fiscal 2009 at a continued
price decrease of 6.0% from the prior year. Our brisket contract extends through
December 2009 at a sustained price decrease of approximately 2.0% compared to
the prior year. Our seafood contracts are locked in through December, as well,
however at a continued price increase of approximately 7.6% from the prior year,
due to a change in industry conditions relating to the salmon harvest. Our
hamburger contract is firm through December at a price increase of approximately
8.0% from the prior year, a slight decrease from the prior quarter.
It's still early yet to give firm guidance on our 2010 key products, however,
during the third quarter, we locked in our pork contract for all of 2010, at an
approximate savings of 3.5% from 2009 pricing. If the futures market for pork
begins to look unfavorable beyond 2010, however, we may extend our contract and
blend in a price increase during the year in an effort to carry our current
savings past 2010. We have recently extended our chicken contract through the
first quarter of 2010 at a price decrease of approximately 3.5% from 2009
pricing. We continue to watch the markets closely and believe we are seeing the
benefit of being flexible through negotiating certain shorter-term contracts.
While not final yet, we anticipate a decrease of 2.0% for brisket, and a 3.0%
increase in seafood, for 2010.
Effective in November, we will be changing our food distributor to secure
more flexibility for maximizing freight savings and optimizing distribution for
our system. We anticipate the transition to our new distributor and optimization
of the distribution network to occur over the next six to nine months.
We continue to make progress with identifying secondary suppliers that will
result in further protection of our supply chain as well as ensure a more fair
and competitive pricing environment. As of today, we have sourced secondary
suppliers for 8 of our top 15 most critical items, and anticipate having this
initiative completed by the end of fiscal 2010.
Finally, we continue to track our progress on, and measure improvements in,
managing within an ideal food cost at the restaurant unit level.
As a result of all of the initiatives mentioned above, for the full fiscal
2009 timeframe, we anticipate an approximate 50 - 60 basis point decrease in our
cost of goods sold as a percent of sales year over year.
Labor and Benefits Costs
Labor and benefits costs for the third quarter ended September 27, 2009 were
approximately $9.2
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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
million or 31.9% of net restaurant sales, compared to approximately $9.8 million
or 32.3% of net restaurant sales for the third quarter ended September 28, 2008.
Labor and benefits for the nine months ended September 27, 2009 were
approximately $27.9 million or 31.1% of net restaurant sales, compared to
approximately $28.7 million or 30.8% of net restaurant sales for the nine months
ended September 28, 2008.
We have seen dollar savings in labor and benefits costs year-over-year,
predominantly due to the reduction in our labor matrix in early 2009. For the
third quarter, labor as a percentage of net restaurant sales was 40 basis points
lower than the prior year, primarily reflecting this optimization of labor.
Additionally, labor as a percentage of sales for the third quarter reflected a
positive impact of approximately 110 basis points, as compared to prior year,
due to the acquisition of the Atlanta restaurants in July of 2008, that
collectively had a higher labor percentage. This was negatively offset by an
approximate 110 basis point impact from the year over year decline in net
restaurant sales.
As we look to the balance of 2009, primarily as a result of sales
de-leveraging, we expect labor and benefits costs as a percentage of sales, to
be 10 - 20 basis points unfavorable to fiscal 2008's percentage.
Operating Expenses
Operating expenses for the third quarter of fiscal 2009 were approximately
$7.8 million or 27.0% of net restaurant sales, compared to operating expenses of
approximately $7.5 million or 24.7% of net restaurant sales for the third
quarter of fiscal 2008.
Operating expenses as a percentage of sales for the third quarter of 2009
were 230 basis points higher than prior year, primarily reflecting 100 basis
points due to lower sales levels, as well as a year over year shift in the
timing of advertising spending. Partially offsetting impacts included a
reduction of 0.5 percent for the National Ad Fund, and lower utility costs due
to favorable rates and usage stemming from cooler average temperatures. Finally,
in 2008, the Company recaptured 160 basis points related to deferred rent
credits associated with a change in estimate regarding the lease term of several
company owned restaurants. This negatively affects the year-over-year
comparison.
Operating expenses for the nine months ended September 27, 2009 were
approximately $23.5 million or 26.2% of net restaurant sales, compared to
approximately $24.2 million or 25.9% of net restaurant sales for the nine months
ended September 28, 2008. Restaurant operating expenses as a percent of net
restaurant sales increased year over year on a year to date basis due to lower
sales volume partially offset by lower utility and advertising costs. Operating
expense as a percent of net sales for fiscal 2009 is now expected to be
approximately 40 - 50 basis points higher than 2008's percentage.
Due to a more favorable than anticipated advertising environment we expect
that our 2009 advertising expense will be approximately 3.3% of net sales,
including a 0.5% contribution to the National Ad Fund.
Depreciation and Amortization
Depreciation and amortization expense for the third quarter of 2009 was
approximately $1.3 million or 3.8% of total revenue, compared to approximately
$1.4 million, or 4.0% of total revenue, during the third quarter of 2008.
Depreciation and amortization expense in the third quarter was $144,000 less
than 2008, primarily reflecting impairments recorded during the last half of
2008, partially offset by the 3 new restaurants added in the fourth quarter of
2008. Depreciation and amortization expense for the nine months ended
September 27, 2009 and September 28, 2008 was approximately $3.8 million and
$4.1 million, respectively, and was 3.7% and 3.8% respectively, of total
revenue. For the full year, we expect depreciation to be essentially flat, as a
percentage of total revenue, to fiscal 2008.
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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
Asset Impairment and Estimated Lease Termination and Other Closing Costs
During the third quarter, the Company executed a lease termination for a
restaurant that had previously closed in fiscal year 2006, and negotiated a
lease termination settlement. In addition, there was a lease termination for
another restaurant site where construction had never commenced. These charges
were approximately $291,000, including legal fees, which were paid subsequent to
the end of the third quarter.
For the quarters ended September 27, 2009 and September 28, 2008, the Company
recorded asset impairment charges of approximately $129,000 and $3.9 million,
respectively, as required under Accounting Standards Codification for Property,
Plant and Equipment. The asset impairment charge in the third quarter of fiscal
2009 was related to a software product that was replaced with an alternative
solution prior to implementation.
The Company recorded costs for restaurants previously closed of approximately
$26,000 for the three month period ended September 27, 2009. For the nine months
ended September 27, 2009 the costs for restaurants previously closed were
approximately $151,000.
General and Administrative Expenses
General and administrative expenses for the third quarter of 2009 were
approximately $3.7 million or 11.1% of total revenue, compared to approximately
$3.3 million or 9.5% of total revenue for the third quarter of fiscal 2008. The
percentage for 2009 reflects a 210 basis point impact year over year for full
accrual of bonus achievement for 2009, compared to 2008, and a 40 basis point
impact from reduced revenue year over year partially offset by cost savings
initiatives. General and administrative expenses as a percent of total revenue,
excluding corporate bonuses and stock-based compensation, were 9.2% for the
third quarter of 2009 and 10.2% for the third quarter of 2008.
General and administrative expenses for the first nine months of fiscal 2009
were approximately $12.0 million or 11.6% of total revenue compared to
approximately $12.4 million or 11.5% of total revenue for the first nine months
of fiscal 2008. General and administrative expenses, excluding bonuses and
stock-based compensation expense, as a percentage of total revenue was 9.8% and
10.5%, for the year-to-date periods of 2009 and 2008, respectively. Including
performance shares for the 2009-2011 program and grants to our board of
directors, we are expecting stock-based compensation to be approximately
$861,000 in fiscal 2009, as follows (in thousands):
. . .
