We pride ourselves on the following:
High Quality Food – Each restaurant features a distinctive selection of authentic hickory-smoked off-the-grill barbecue favorites, such as flame-grilled St. Louis-style and baby back ribs, Texas beef brisket, Georgia chopped pork, country-roasted chicken, and generous signature sandwiches and salads. Enticing side items, such as honey-buttered corn bread, potato salad, coleslaw, Shack Fries™ and Wilbur Beans™, accompany the broad entrée selection. Homemade desserts, including Famous Dave’s Bread Pudding, Hot Fudge Kahlua™ Brownies, and recently added Key Lime Pie, are a specialty. To complement our smoked meat entrée and appetizer items and to suit different customer tastes, we offer five regional tableside barbeque sauces: Rich & Sassy ® , Texas Pit™, Georgia Mustard™, Devil’s Spit ® and Sweet and Zesty™. These sauces, in addition to a variety of seasonings, rubs, marinades, and other items are also distributed in retail grocery stores throughout the country under licensing agreements.
We believe that high quality food, “scratch cooking” and smoking our meats daily at each of our restaurants are principal points of differentiation between us and other casual dining competitors and are a significant contributing factor to repeat business. We also feel that our focus on barbecue and being “True to the ‘Que” allows for product innovation without diluting our brand. As such, we see no
geographic impediments to scaling our concept and brand. Our off-premise sales are the highest in the industry with a separate “TO GO” entrance at many of our restaurants with prominent and distinct signage, and for added convenience, we separately staff the “TO GO” counter.
Distinctive Environment — Décor and Music – Our original décor theme was a nostalgic roadhouse shack (“Shack”), as defined by the abundant use of rustic antiques and items of Americana. In late 1997, we introduced the “Lodge” format which featured décor reminiscent of a comfortable “Northwoods” hunting lodge with a full-service dining room and bar. In addition, we developed a larger “Blues Club” format that featured authentic Chicago Blues Club décor and live music seven nights a week. We have now evolved our format to that of a full-service “Smokehouse” concept. This design incorporates the best attributes of the past restaurants while providing a consistent brand image. Of our 41 restaurants as of December 31, 2006, 35 were full-service restaurants with 24 having the “Lodge” format, 6 having the “Shack” format, and one, located in the Minneapolis market, was a “Blues Club” format. Three new company-owned restaurants were opened in fiscal 2006. With the fiscal 2005 conversion of our Maple Grove, Minnesota restaurant from a counter-service, to a full-service restaurant, we incorporated many of the smokehouse concept elements. We now have a total of four “Smokehouse” restaurants with the smokehouse concept. We also have five counter-service restaurants with the “Shack” format. We will continue to evaluate converting other counter-service restaurants to full-service restaurants where there is determined to be a sufficient return on our investment.
Broad-Based Appeal – We believe that our concept has broad appeal because it attracts customers of all ages, the menu offers a variety of items, and our distinctive sauces allow our guests to customize their experience, appealing to many tastes. We believe that our distinctive barbecue concept, combined with our high-quality food, make Famous Dave’s appealing to families, children, teenagers and adults of all ages and socio-economic backgrounds.
Operating Strategy
Our journey to achieving sustainable profitable growth requires us to deliver high-quality experiences in terms of both food and hospitality to every guest, every day, and to enhance brand awareness in our markets. Key elements of our strategy include the following:
Operational Excellence – During fiscal 2006, we continued our intense focus on operational excellence and integrity, and on creating a consistently great guest experience, both in terms of food and hospitality, across our system. We define operational excellence as an uncompromising attention to the details of our recipes, preparation and cooking procedures, handling procedures, rotation, sanitation, cleanliness and safety. It also means an unyielding commitment to our guests to provide a “Famous” experience with every visit through the execution of precision service. In our restaurants, we strive to emphasize value and speed of service by employing a streamlined operating system based on a focused menu and simplified food preparation techniques.
Our menu focuses on a number of popular smoked, barbeque, meat, entrée items and delicious side dishes which are prepared using easy-to-operate kitchen equipment and processes that use prepared proprietary seasonings, sauces and mixes. This streamlined food preparation system helps lower the cost of operation by requiring fewer staff, lower training costs, and eliminates the need for highly compensated chefs. In 2004, in order to enhance our appeal, expand our audience, and promote our cravable products without discounting, we began to introduce Limited-Time Offerings (LTO’s) which often provide higher margins than our regular menu items. We believe that constant and exciting new product introductions, offered for a limited period of time, encourage trial visits, build repeat traffic and increase exposure to our regular menu. In order to increase customer frequency, we have assembled a research and development product pipeline designed to generate four to six product introductions annually.
The first quarter of fiscal 2006 included a successful Spring promotion with our LTO of a Blackened Catfish Dinner, a Corn Dusted Catfish Sandwich, a Crawfish and Cajun Fries Appetizer, and Dave’s Sassy Crawfish BBQ Salad. Our summer promotion in June, July and August featured combinations of our St. Louis-style ribs and baby back ribs, in addition to a phenomenal key lime pie. Our Fall Porktoberfest Promotion consisted of a pork loin entrée, pork sandwich, and a combo. The “Rum Yummy Pork Loin” featured two thick slices of hickory-smoked pork loin, topped with a spicy-sweet glaze made from Captain Morgan ® Original Spiced Rum and Granny Smith apples. The sandwich offering, “the Pig Dipper”, consisted of a thinly sliced hickory-smoked pork loin, topped with jalapeno bacon, and cheddar cheese, piled on a toasted ciabatta bread, served with Dave’s own tangy Georgia Mustard ® au jus. The pork combo offering consisted of a thick slice of tender char-grilled pork loin slathered in Rich and Sassy ® BBQ sauce, complimented with 4 award-winning St. Louis-style spareribs.
The 2007 Seafood promotion is a 9-week program that started in early February and ends in early April. This promotion features St. Louis-style sparerib and fish combinations, featuring either beer-battered cod or sweet and sassy grilled salmon, a beer-battered cod sandwich and platter, as well as existing menu items: a catfish fingers appetizer and sweet and sassy salmon platter.
Human Resources and Training – Our Human Resource and Training Departments are committed to improving performance in our restaurants while making Famous Dave’s the absolute best place to work. Our metrics and overall effectiveness show that we are quickly becoming one of the best employers.
In fiscal 2006 we implemented a recruiting and staffing software solution. This system has helped increase efficiencies in our restaurants and Support Center. The solution includes an on-line application and assessment designed to hire top talent and the best candidates for each position. It also is integrated into our payroll system and saves Managers time filling out paperwork and increases the accuracy of new hire payroll documents.
We are a performance-based organization committed to recognizing and rewarding performance at all levels of the organization. Our compensation is very much viewed as part of a total rewards program, and is benchmarked closely against the industry. Our total rewards program includes health and welfare coverage, 401(k) and non-qualified deferred compensation plans offering a company match, and base pay and incentive programs developed to maintain our competitive position. We are pleased with our progress in retention as Management and hourly Associate turnover has been maintained at or below industry averages. Our Management turnover for fiscal 2006 was 26% and Associate turnover was 86%.
In the Training and Development arena, a number of successful training courses were conducted for both restaurant Manager and Multi-Unit Manager levels to create defined career paths. Training courses are offered to both corporate Management and Franchise Partners. During fiscal 2006, our classes focused on core competencies and opportunities for success. The curriculum included food safety and alcohol awareness; food execution and quality; human resource skills and restaurant supervision.
Our leadership development program, entitled “Good to Great”, was instrumental in assessing and training our high potential leaders at all levels of the organization. This process includes strength coaching, people, sales and profit presentations, financial education, and networking opportunities with the Executive Team. Our General Manager Workshop in 2006 was focused on execution of the basics of restaurant Management and how to effectively manage Generation Y. Participants included all company-owned restaurant General Managers and Area Directors along with most of our franchise-operated restaurant General Managers and Multi-Unit Operators. In addition to developing leaders in our restaurants, we provide individualized training and strength coaching opportunities to all our Support Center Associates.
Our President’s Club program rewards General Managers for accomplishments in many areas directly related to great restaurant operations, such as sales growth, operating results, safety programs, internal promotions, retention and increased Guest satisfaction scores. During fiscal 2006, over half of our General Managers successfully attained the President’s Club designation. During fiscal 2006 we implemented our Smokin’ Superstar program to recognize contributions towards the operational success of the organization. Two Support Center Associates were recognized by both the Company and franchise operation’s team for their outstanding service and support.
During fiscal 2007, Human Resources and Training will focus on the selection and retention of superior talent through our programs in succession planning, talent management, safety and risk reduction, organizational development and training.
Restaurant Operations
Our ability to manage multiple restaurants in geographically diverse locations is central to our overall success. In each market, we place specific emphasis on the positions of Area Director and General Manager, and seek talented individuals that bring a diverse set of skills, knowledge, and experience to the Company. We strive to maintain quality and consistency in each of our restaurants through the careful training and supervision of Associates and the establishment of, and adherence to, high standards relating to performance, food and beverage preparation, and maintenance of facilities.
All General Managers must complete a seven-week training program, during which they are instructed in areas such as food quality and preparation, customer service, hospitality, and Associate relations. We have prepared operations’ manuals relating to food and beverage quality and service standards. New Associates participate in training under the close supervision of our management. Each General Manager reports up through an Area Director, who manages from four to nine restaurants, depending on the region. Our Area Directors have all been successful General Managers, either for Famous Dave’s or for other restaurants, and are responsible for ensuring that operational standards are consistently applied in our restaurants, communication of company focus and priorities, and supporting the development of restaurant management teams. In addition to the training that the General Managers are required to complete, as noted above, our Area Directors receive additional training through Area Director workshops that focus specifically on managing multiple locations, planning, time management, staff and management development skills.
During fiscal 2006, we introduced the Director of Operations position, which allows us to have our operations’ leadership closer to the day-in and day-out business of our restaurants, thus creating a smaller span of control for each Director of Operations, and allowing them to apply a much sharper focus to their restaurants’ operations. We currently have two Directors of Operations. The Directors of Operations assist in the professional development of our Area Directors and General Mangers as we prepare for future company-owned growth. They are also instrumental in driving our vision of operational integrity and contributing to the improvement of results achieved at our restaurants, including building sales, developing people and growing profits.
We strive to instill enthusiasm and dedication in our Associates and regularly solicit suggestions concerning our operations and endeavors in order to be responsive to their concerns. In addition, we have numerous programs designed to recognize and reward them for outstanding performance. Staffing levels at each restaurant vary according to the time of day and size of the restaurant. However, in general, each restaurant has approximately 40 to 60 Associates.
Off-Premise Occasions — Focus on Convenience – In addition to our lively and entertaining sit-down experience, we provide our guests with maximum convenience by offering expedient take-out service and catering. We believe that Famous Dave’s entrées and side dishes are viewed by guests as traditional American “picnic foods” that maintain their quality and travel particularly well, making them an attractive choice to replace a home-cooked meal. Also, the high quality, reasonable cost and avoidance of preparation time make take-out of our product particularly attractive. During fiscal 2006, we saw continued success in our industry-leading off-premise sales. Approximately 33% of our restaurant sales in fiscal 2006, were derived from catering and “TO GO,” providing us with revenue opportunities beyond our in-house seating capacity and we continue to seek ways to leverage these segments of our business. Our restaurants have been designed specifically to accommodate a significant level of “TO GO” sales, including a separate “TO GO” entrance with prominent and distinct signage and for added convenience; we separately staff the “TO GO” counter.
Catering continues to grow as more consumers and local businesses become aware of the portability of our product. In addition, each restaurant has a dedicated vehicle to fully support our catering initiatives. The demand for Famous Dave’s catering, which accounted for approximately 10% of our sales for fiscal 2006, continues to increase, as consumers learn just how distinctive, flavorful and easy an event can be when they let Famous Dave’s bring the food. We see catering as an opportunity for new consumers to sample our product who would not otherwise have had the opportunity to visit our restaurants.
“TO GO,” which accounted for approximately 23% of our restaurant sales for fiscal 2006, also continues to grow as an integral part of our overall business plan, and our new “Smokehouse” restaurants have a separate entrance for “TO GO” customers’ convenience. This option enables Famous Dave’s to capture a greater portion of the growing convenience and flexibility of the “take-out” market and allows consumers to “trade within our brand,” when dining in isn’t always an option. Our efforts are featured in all company-owned and franchise-operated restaurants and feature signage and merchandising both inside and outside the restaurants. From the time a guest drives into the parking lot to the time they leave the restaurant, they will be reminded of Famous Dave’s excellence in delivering the best barbeque “TO GO.”
Customer Satisfaction – We believe that we achieve a significant level of repeat business by providing high-quality food, efficient friendly service, and warm caring hospitality in an entertaining environment at moderate prices. We strive to maintain quality and consistency in each of our restaurants through the purposeful hiring, training and supervision of personnel and the establishment of, and adherence to, high standards of personnel performance, food preparation and facility maintenance. We have also built family-friendly strategies into each restaurant’s food, service and design by providing children’s menus, smaller-sized entrees at reduced prices and changing tables in restrooms. We diligently monitor the guest experience through the use of mystery shopper programs and an interactive voice response (IVR) guest feedback system to ensure that our system is producing desired results. During 2006, we saw continued improvement in guest satisfaction scores through these monitoring programs.
Value Proposition and Guest Frequency – We offer high quality food and a distinctive atmosphere at competitive prices to encourage frequent patronage. Lunch and dinner entrees range from $6.00 to $21.00 resulting in a per person average of $13.28 during the fourth quarter of fiscal 2006. Lunch checks averaged $11.62 during the fourth quarter of fiscal 2006 and dinner checks averaged $14.48 during the fourth quarter of fiscal 2006. We believe that constant and exciting new product introductions, offered for a limited period of time, will help drive new, as well as infrequent guests into our restaurants for additional meal occasions. We have a fully-equipped test kitchen at our corporate headquarters. This facility allows us to create new menu selections, prepare and test LTO’s and further refine our recipe books and preparation techniques.
Marketing and Promotion
Famous Dave’s is the category-defining brand in barbecue. Specializing in a unique and distinctive brand of grilled, smoked, and southern style food, our menu specialty helps set the brand apart from the rest of the crowded field in casual dining. During fiscal 2007, we will continue to leverage our brand position. We have a system-wide public relations and marketing fund. All company-owned, and those franchise-operated restaurants with agreements signed after December 17, 2003, are required to contribute 1.0% of sales to this fund. We also use payments received from certain vendors in the form of rebates as additional funding. During fiscal 2007, we expect to spend approximately 3.5% of net restaurant sales on marketing and advertising, with 1.0% of net restaurant sales dedicated to the development of advertising and promotional materials and programs designed to create brand awareness in the markets within which we operate. BBDO of Minneapolis is our advertising agency of record, and they help drive the concept forward and create a distinctive positioning and consistent creative voice for the brand. In coordination with our marketing department, BBDO is responsible for the advertising, promotion, creative development, branding and media-buying for Famous Dave’s. In addition to the traditional marketing and publicity methods embraced in the past, Famous Dave’s used local outreach marketing efforts as appropriate in 2006, including television, cable, radio, and outdoor billboards.
We are also creating awareness for the Famous Dave’s brand through product and brand licensing arrangements that extend our barbeque sauces, seasonings, rubs, marinades and other items in retail outlets across the United States. This retail distribution allows consumers to enrich their at-home barbeque experiences with Famous Dave’s bold and zesty flavors.
Advertising isn’t the only vehicle we use to build awareness of the Famous Dave’s brand. In 2006, our “Rib Team” competed in scores of events and festivals nationwide. This team travels the country, participating in contests and festivals to introduce people to our brand of barbeque and build brand awareness in a segment largely defined by independents. Our “Rib Team’s” most notable award in 2006 was the Critic’s Choice Award at the “Best of the West” barbeque festival in Reno, Nevada, an invitation-only competition that we attended for the second time. Other best ribs awards included, the Great American Rib Cook-Off in Cleveland, Ohio, and the Pig Gig in Jupiter, Florida. We have also received various concept awards of which we are very proud, including Restaurants & Institutions Consumers Choice in Chains – Gold Award. Since inception, we have received over 200 awards. We have received a ranking of 162 out of 200 of the Top Franchises in Franchise Times.
The strategic focus in 2007 for marketing and promotion remains the same – to be the segment-defining brand in BBQ, create more competitive distinction, and continue to strengthen the perception of value in the consumer’s mind.
Growth Strategy
We believe that the barbeque segment of the casual dining niche of the restaurant industry offers strong growth opportunities, and we see no impediments to our growth on a geographical basis. Our geographical concentration as of December 31, 2006 was 52% Midwest, 21% South, 15% West and 12% Northeast. We are in 35 states with our concept. During fiscal 2007, we plan to open up to 5 company-owned restaurants and up to 20 to 25 franchise-operated restaurants. The key elements of our long-term growth strategy include the following:
Company-Owned Restaurant Expansion – We intend to build in our existing markets in high profile, heavy traffic retail locations in order to continue to build brand awareness. Our plan is focused on sustainable, controlled growth, primarily in markets where multiple restaurants can be opened, thereby expanding consumer awareness, and creating opportunities for operating, distribution, and marketing efficiencies.
We have implemented a real estate site selection model to assess the quality and sales potential of new locations. This process involved extensive consumer research in our existing restaurants which resulted in a guest profile, which is updated on an annual basis. Each location is evaluated based on three primary sales drivers, which include the sales potential from the residential base (home quality), employment base (work quality), and retail activity (retail quality). Locations are also evaluated on their site characteristics which include seven categories of key site attributes, including but not limited to, access, visibility, and parking.
Development of company-owned markets is a very strategic process. An overall market development strategy is prepared for each market. The creation of this market strategy starts with identifying trade areas that align demographically with the guest profile. The trade areas are then assessed for viability and vitality and prioritized as initial, second tier, or future development. Since markets are dynamic, the market strategy includes a continual and ongoing assessment of all existing restaurant locations. If financially feasible, a restaurant may be relocated as the retail or residential focus of a trade area shifts.
As previously mentioned, we have created a prototype design, called our “Smokehouse” concept, and we will be using this design for all future restaurants to streamline the development and expansion process. We intend to finance development through the use of cash on hand, cash flow generated from operations, and through availability on our $20.0 million revolving line of credit.
Franchise-Operated Restaurant Expansion – As of December 31, 2006, we had 162 signed franchise area development commitments that are expected to open over the next seven years. We continue to expand our franchisee network throughout the United States. Generally, we find franchise candidates with prior franchise casual-dining restaurant experience in the markets for which they will be granted. The area development agreements generally range from 5 to 15 restaurants.
Purchasing
We strive to obtain consistent quality items at competitive prices from reliable sources. In order to maximize operational efficiencies and to provide the freshest ingredients for our food products, each restaurant’s management team determines the daily quantities of food items needed and orders such quantities to be delivered to their restaurant. The products, produced by major manufacturers designated by us, are shipped directly to the restaurants through foodservice distributors.
Contract pricing accounts for approximately 86% of all of our total purchases. Contracts for various items are negotiated throughout the year and typically fix prices for twelve months. On occasion, we will enter into a short-term contract in times when it is anticipated that near-term prices could substantially decrease. For fiscal 2007, our poultry and pork contracts are annual contracts, while our brisket contract is from January-May. Of our total purchases, pork is approximately 32%, poultry is approximately 10%, and beef, including hamburger and brisket, is approximately 10%. Our pork contract renewal in October 2006 resulted in a 2.65% price decrease for 2007. Poultry prices negotiated in January 2007, resulted in a price increase of approximately 4%. Our brisket contract resulted in a 6% price increase for the January-May 2007 timeframe as compared to fiscal 2006. We have transitioned to a non-trans-fat oil product which resulted in a 1.7% price decrease over fiscal 2006 contract oil prices. As a result of these newly renewed contracts, we anticipate that food costs, as a percent of net restaurant sales, will remain flat for fiscal 2007 over the prior year.
We believe we have opportunities to offset increases, if any, in commodity pricing through menu engineering such as the use of our LTO’s, which typically carry more margin than many of our core product offerings. Additionally, we will continue to evaluate taking price increases at least annually.
In fiscal 2006, our adult beverage sales as a percentage of dine-in sales were approximately 10%, essentially flat to fiscal 2005. We have determined that we have limited ability to grow the bar in the majority of our existing restaurants due to the fact that these restaurants have little to no designated bar, and some only serve beer and wine. Recent openings in fiscal 2006 of company-owned restaurants with a designated bar are averaging slightly higher adult beverage sales than our overall Company average.
Our food manufacturers produce our products and our distributors’ warehouse and ship our products. Our primary broad line distributor accounts for approximately 85% of our total purchases. We believe that our relationships with our food manufacturers and distributors are excellent, and anticipate no interruption in the supply of product delivered by any of these companies. In the case of a potential supply disruption, however, we have focused on identifying alternative supplies and methods to ensure that there is no disruption of product flow. We believe we could obtain competitive products and prices on short notice from a number of alternative suppliers.
Management Information Systems
We believe that strong information systems are essential to our current operations and are critical towards enhancing our competitive position in our industry. We have invested significantly in building these capabilities.
We have systems in place at the unit level for point-of-sale (POS), Associate screening and hiring, labor scheduling, and inventory management providing management with revenue and other key operating and financial information. These restaurant-level systems facilitate the movement of customer orders between the customer areas and kitchen operations, process credit and gift card transactions providing reporting that allows us to track the average guest check daily, by restaurant, by server, and by day part. They also track the time worked by each Associate, allowing management to more effectively manage labor costs through better determination of staffing needs and scheduling of Associate work hours.
Our unit-level POS, time management and inventory management systems provide data for posting to our general ledger and to other accounting subsystems. Such reporting includes: (i) daily reports of revenue and labor, (ii) weekly reports of selected controllable restaurant expenses, and (iii) detailed monthly reports of revenue and expenses.
In addition, many of our systems at the unit-level have an enterprise component that allows for integrated management and reporting at both the unit and enterprise levels. The enterprise-level systems include menu management providing us with centralized control and ease of deployment for restaurant menu management such as menu changes, tax structure and price changes.
We continue to develop and implement new enhancements to our systems. In fiscal 2006, we implemented the first phase of a new labor-scheduling system and are in the midst of implementing a back-of-the-house management system to prepare for our next stage of growth. This entire project will take 18-24 months to fully implement, and is expected to cost approximately $2.0 million. This is a key restaurant management solution that will provide additional functionality to our restaurants, streamline our operations, improve management information, enhance our enterprise-level reporting, and reduce labor and operating expenses.
Projects slated in fiscal 2007 include upgrades to our network and telecommunications infrastructure, providing additional redundancy at the restaurant and enterprise level, implementation of the back-of-the-house management system mentioned above, providing streamlined inventory and enhanced food cost management capabilities; implementation of a time and attendance system integrating our hiring, labor scheduling, POS, and payroll tools providing a more streamlined Associate on-boarding and management process. In addition, we will upgrade our POS system to the next generation of software and hardware giving us additional capabilities along with enhanced fail-over and redundancy.
Trademarks
Our Company has registered various trademarks and makes use of various unregistered marks, and intends to vigorously defend these marks. “Famous Dave’s” and the Famous Dave’s logo are registered trademarks of Famous Dave’s of America, Inc. There can be no assurance, however, that we will be granted trademark registration for any new applications or for any or all of the proposed uses in our applications. In the event we are granted registration for additional marks, there can be no assurance that we can protect such marks and designs against prior users in areas where we conduct operations. There is also no assurance that we will be able to prevent competitors from using the same or similar marks, concepts or appearance. Nevertheless, the Company highly values its trademarks, trade names and service marks and will defend against any improper use of its marks to the fullest extent allowable by law.
Franchise Program
We have offered franchises of our concept since July 1998 and currently file our franchise circular in all 50 states. Our growth and success depends in part upon our ability to attract, contract with and retain qualified franchisees. It also depends upon the ability of those franchisees to successfully operate their restaurants with our standards of quality and promote and develop Famous Dave’s brand awareness.
Although we have established criteria to evaluate prospective franchisees, and our franchise agreements include certain operating standards, each franchisee operates his/her restaurants independently. Various laws limit our ability to influence the day-to-day operation of our franchise restaurants. We cannot assure you that franchisees will be able to successfully operate Famous Dave’s restaurants in a manner consistent with our standards for operational excellence, service and food quality.
At December 31, 2006, we had 36 franchise partners operating 104 Famous Dave’s franchise restaurants. Signed area development agreements, representing commitments to open an additional 162 franchise restaurants, were in place as of December 31, 2006. There can be no assurance that these franchisees will fulfill their commitments or fulfill them within the anticipated timeframe. We continue to grow the franchise program for our restaurants and anticipate up to 20 to 25 additional franchise restaurants will open during fiscal 2007.
As of December 31, 2006, we had franchise-operated restaurants in the following locations:
| State | Number of Franchise-Operated Restaurants |
|
Arizona |
4 | |
California |
5 | |
Colorado |
2 | |
Connecticut |
1 | |
Florida |
2 | |
Georgia |
4 | |
Illinois |
3 | |
Indiana |
2 | |
Iowa |
3 | |
Kansas |
4 | |
Kentucky |
1 | |
Massachusetts |
2 | |
Michigan |
10 | |
Minnesota |
8 | |
Missouri |
1 | |
Montana |
3 | |
Nebraska |
4 | |
Nevada |
1 | |
New Hampshire |
1 | |
New Jersey |
6 | |
New York |
4 | |
North Dakota |
2 | |
Ohio |
3 | |
Pennsylvania |
3 | |
South Dakota |
1 | |
Tennessee |
5 | |
Texas |
1 | |
Utah |
4 | |
Washington |
2 | |
West Virginia |
2 | |
Wisconsin |
10 | |
Total |
104 |
During 2007, we plan to open restaurants in existing states and plan to add the state of Maine.
Our Franchise Business Consultants (“FBC’s”) are a critical position for us as well as to our franchise community. FBC’s manage the relationship between the franchisee and the franchisor and provide an understanding of the roles, responsibilities, differences, and accountabilities of that relationship. They are active participants towards enhancing performance, as they partner in strategic and operational planning sessions with our franchise partners and review the individual strategies and tactics for obtaining superior performance for the
franchisee. The FBC’s share best practices throughout the system and work to create a one-system mentality that benefits everyone. In addition, they ensure compliance with obligations under our area development and franchise agreements. Franchisees are able to utilize all available assistance from the FBC’s and the Support Center but are not required to do so.
We make periodic inspections of our franchise-operated restaurants to ensure that the franchisee is complying with the same quality of service, operational excellence and food specifications that is found at our company-owned restaurants. We generally provide support as it relates to all aspects of the franchise operations including, store openings, operating performance, and human resource strategic planning.
Our franchise-related revenue consists of area development fees, initial franchise fees and continuing royalty payments. Our area development fee consists of a one-time, non-refundable payment equal to $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, 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, at which time we have performed substantially all of our obligations. The franchise agreement represents a separate and distinct earnings process from the area development agreements. 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%. Currently, new franchises pay us a monthly royalty of 5% of their net sales.
The franchisee’s investment depends primarily upon restaurant size. This investment includes the area development fee, initial franchise fee, real estate and leasehold improvements, fixtures and equipment, POS systems, business licenses, deposits, initial food inventory, smallwares, décor and training fees as well as working capital. All new franchisees are required to contribute 1% of net sales to a national public relations and marketing fund dedicated to building system-wide brand awareness.
Seasonality
Our restaurants typically generate higher revenue in the second and third quarters of our fiscal year as a result of seasonal traffic increases experienced during the summer months, and lower revenue in the first and fourth quarters of our fiscal year, due to possible adverse weather which can disrupt customer and Associate transportation to our restaurants.
Government Regulation
Our Company is subject to extensive state and local government regulation by various governmental agencies, including state and local licensing, zoning, land use, construction and environmental regulations and various regulations relating to the sale of food and alcoholic beverages, sanitation, disposal of refuse and waste products, public health, safety and fire standards. Our restaurants are subject to periodic inspections by governmental agencies to ensure conformity with such regulations. Any difficulty or failure to obtain required licensing or other regulatory approvals could delay or prevent the opening of a new restaurant, and the suspension of, or inability to renew a license could interrupt operations at an existing restaurant, any of which would adversely affect our operations. Restaurant operating costs are also affected by other government actions that are beyond our control, including increases in the minimum hourly wage requirements, workers compensation
insurance rates, health care insurance costs, property and casualty insurance, and unemployment and other taxes. We are also subject to “dram-shop” statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.
As a franchisor, we are subject to federal regulation and certain state laws that govern the offer and sale of franchises. Many state franchise laws impose substantive requirements on franchise agreements, including limitations on non-competition provisions and the termination or non-renewal of a franchise. Bills have been introduced in Congress from time to time that would provide for federal regulation of substantive aspects of the franchisor-franchisee relationship. As proposed, such legislation would limit, among other things, the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew a franchise, and the ability of a franchisor to designate sources of supply.
The 1990 Federal Americans with Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. We could be required to incur costs to modify our restaurants in order to provide service to, or make reasonable accommodations for, disabled persons. Our restaurants are currently designed to be accessible to the disabled, and we believe we are in substantial compliance with all current applicable regulations relating to this Act.
Associates
As of December 31, 2006, we employed approximately 2,600 Associates, of which approximately 270 were full-time. None of our Associates are covered by a collective bargaining agreement. We consider our relationships with our Associates to be good.
ITEM 1A. RISK FACTORS
Famous Dave’s makes written and oral statements from time to time, including statements contained in this Annual Report on Form 10-K regarding its business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends and other matters that are forward-looking statements within the meaning of Sections 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases “will likely result,” “anticipates,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, written or oral presentations made by our officers or other representatives to analysts, shareholders, investors, news organizations, and others, and discussions with our management and other Company representatives. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statements made by us or on our behalf speak only as of the date on which such statement is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. We do not undertake any obligation to update or keep current either (i) any forward-looking statements to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement which may be made by us or on our behalf.
In addition to other matters identified or described by us from time to time in filings with the SEC, including the risks described below and elsewhere in this Annual Report on Form 10-K, there are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement that may be made by us or on our behalf.
Our Future Revenue and Operating Income Are Dependent on Consumer Preference and Our Ability to Successfully Execute Our Plan.
Our Company’s future revenue and operating income will depend upon various factors, including continued and additional market acceptance of the Famous Dave’s concept, the quality of our restaurant operations, our ability to grow our brand, our ability to successfully expand into new and existing markets, our ability to successfully execute our franchise program, our ability to raise additional financing as needed, discretionary consumer spending, the overall success of the venues where Famous Dave’s restaurants are or will be located, economic conditions affecting disposable consumer income, general economic conditions and the continued popularity of the Famous Dave’s concept. An adverse change in any or all of these conditions would have a negative effect on our operations and the market value of our common stock.
It is our plan to open up to five company-owned restaurants and up to 20-25 franchise-operated restaurants in fiscal 2007. There is no guarantee that any of our company-owned or franchise-operated restaurants will open when planned, or at all, due to the risks associated with the development of new restaurants, such as governmental approvals, the availability of sites, and the availability of capital, many of which are beyond our control. There can be no assurance that we will successfully implement our growth plan for our company-owned and franchise-operated restaurants. In addition, we also face all of the risks, expenses and difficulties frequently encountered in the development of an expanding business.
Competition May Reduce Our Revenue and Operating Income.
Competition in the restaurant industry is intense. The restaurant industry is affected by changes in consumer preferences, as well as by national, regional and local economic conditions, and demographic trends. Discretionary spending priorities, traffic patterns, tourist travel, weather conditions, Associate availability and the type, number and location of competing restaurants, among other factors, will also directly affect the performance of our restaurants. Changes in any of these factors in the markets where we currently operate our restaurants could adversely affect the results of our operations.
Increased competition by existing or future competitors may reduce our sales. Our restaurants compete with moderately-priced restaurants primarily on the basis of quality of food and service, atmosphere, location and value. In addition to existing barbeque restaurants, we expect to face competition from steakhouses and other restaurants featuring protein-rich foods. We also compete with other restaurants and retail establishments for quality sites. Competition in the restaurant industry is affected by changes in consumer taste, economic and real estate conditions, demographic trends, traffic patterns, the cost and availability of qualified labor, product availability and local competitive factors.
Many of our competitors have substantially greater financial, marketing and other resources than we do. Regional and national restaurant companies continue to expand their operations into our current and anticipated market areas. We believe our ability to compete effectively depends on our ongoing ability to promote our brand and offer high quality food and hospitality in a distinctive and comfortable environment. If we are unable to respond to the various competitive factors affecting the restaurant industry, our revenue and operating income could be adversely affected.
Our Failure to Execute Our Franchise Program May Negatively Impact Our Revenue and Operating Income.
Our growth and success depends in part upon increasing the number of our franchised restaurants, through execution of area development agreements with new and existing franchisees in new and existing markets. Our ability to successfully franchise additional restaurants will depend on various factors, including our ability to attract, contract with and retain quality franchisees, the availability of suitable sites, the negotiation of acceptable leases or purchase terms for new locations, permitting and regulatory compliance, the ability to meet construction schedules, the financial and other capabilities of our franchisees, our ability to manage this anticipated expansion, and general economic and business conditions. Many of the foregoing factors are beyond the control of the Company or our franchisees.
Our growth and success also depends upon the ability of our franchisees to successfully operate their restaurants to our standards and promote the Famous Dave’s brand. Although we have established criteria to evaluate prospective franchisees, and our franchise agreements include certain operating standards, each franchisee operates his/her restaurant independently. Various laws limit our ability to influence the day-to-day operation of our franchise restaurants. We cannot assure you that our franchisees will be able to successfully operate Famous Dave’s restaurants in a manner consistent with our concepts and standards, which could reduce their sales and correspondingly, our franchise royalties, and could adversely affect our operating income and our ability to leverage the Famous Dave’s brand. In addition, there can be no assurance that our franchisees will have access to financial resources necessary to open the restaurants required by their respective area development agreements.
The Inability to Develop and Construct Our Restaurants Within Projected Budgets and Time Periods Could Adversely Affect Our Business and Financial Condition.
Many factors may affect the costs associated with the development and construction of our restaurants, including landlord delays, weather interference, unforeseen engineering problems, environmental problems, construction or zoning problems, local government regulations, modifications in design to the size and scope of the project, and other unanticipated increases in costs, any of which could give rise to delays or cost overruns. If we are not able to develop additional restaurants within anticipated budgets or time periods, our business, financial condition, results of operations and cash flows could be adversely affected.
The Restaurant Industry is Subject to Extensive Government Regulation That Could Negatively Impact Our Business.
The restaurant industry is subject to extensive state and local government regulation by various government agencies, including state and local licensing, zoning, land use, construction and environmental regulations and various regulations relating to the preparation and sale of food and alcoholic beverages, sanitation, disposal of refuse and waste products, public health, safety and fire standards, minimum wage requirements, workers’ compensation and citizenship requirement. To the extent that we offer and sell franchises, we are also subject to federal regulation and certain state laws which govern the offer and sale of franchises. Many state franchise laws impose substantive requirements on franchise agreements, including limitations on non-competition provisions and termination or non-renewal of a franchise. We may also be subject in certain states to “dram-shop” statutes, which provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.
Any change in the current status of such regulations, including an increase in Associate benefits costs, workers’ compensation insurance rates, or other costs associated with Associates, could substantially increase our compliance and labor costs. Because we pay many of our restaurant-level personnel rates based on either the federal or the state minimum wage, increases in the minimum wage would lead to increased labor costs. In addition, our operating results would be adversely affected in the event we fail to maintain our food and liquor licenses. Furthermore, restaurant operating costs are affected by increases in unemployment tax rates, sales taxes and similar costs over which we have no control.
We Are Subject to the Risks Associated With the Food Services Industry, Including the Risk That Incidents of Food-borne Illnesses or Food Tampering Could Damage Our Reputation and Reduce Our Restaurant Sales.
Our industry is susceptible to the risk of food-borne illnesses. As with any restaurant operator, we cannot guarantee that our internal controls and training will be fully effective in preventing all food-borne illnesses. Furthermore, our reliance on third-party food suppliers and distributors increases the risk that food-borne illness incidents could be caused by third-party food suppliers and distributors outside of our control and/or multiple locations being affected rather than a single restaurant. New illnesses resistant to any precautions may develop in the future, or diseases with long incubation periods could arise that could give rise to claims or allegations on a retroactive basis. Reports in the media of one or more instances of food-borne illness in one of our corporate-owned restaurants, one of our franchise-operated restaurants or in one of our competitor’s restaurants could negatively affect our restaurant sales, force the closure of some of our restaurants and conceivably have a national or international impact if highly publicized. This risk exists even if it were later determined that the illness had been wrongly attributed to the restaurant. Furthermore, other illnesses could adversely affect the supply of some of our food products and significantly increase our costs. A decrease in customer traffic as a result of these health concerns or negative publicity could materially harm our business, results of operations and financial condition.
Pursuant to its Authority to Designate and Issue Shares of Our Stock as it Deems Appropriate, Our Board of Directors May Assign Rights and Privileges to Currently Undesignated Shares Which Could Adversely Affect the Rights of Existing Shareholders.
Our authorized capital consists of 100,000,000 shares of capital stock. Our Board of Directors, without any action by the shareholders, may designate and issue shares in such classes or series (including classes or series of preferred stock) as it deems appropriate and establish the rights, preferences and privileges of such shares, including dividends, liquidation and voting rights. As of March 9, 2007, we had 10,138,789 shares of common stock outstanding.
The rights of holders of preferred stock and other classes of common stock that may be issued could be superior to the rights granted to the current holders of our common stock. Our Board’s ability to designate and issue such undesignated shares could impede or deter an unsolicited tender offer or takeover proposal. Further, the issuance of additional shares having preferential rights could adversely affect the voting power and other rights of holders of common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None. |
