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Monday, December 29, 1997

Famous Dave's of America Inc.
(Nasdaq: DAVE)
Phone: 612-557-5798
Price (12/26/97): $8 15/16

HOW DID IT FIND TROUBLE?

Just last month we were singing the praises of barbecue chain Famous Dave's meteoric rise. Of course, meteors fall too, and this once muscle-bound heavy of the grill has become a shrimp on the barbie.

In that Daily Double we closed with, "In the near term, with profits a few quarters away and a susceptible market that may punish the unproven harder than the rest, the shares are speculative. That should not belittle the lucrative potential of the stock, but serve as a warning for what could be some short-term volatility."

It proved prophetic a month later when the company announced that the losses would be steeper than anticipated and the stock got raked over the coals.

BUSINESS DESCRIPTION


Famous Dave's owns and operates a chain of 14 roadhouse-themed barbecue restaurants. There are ten in the company's home state of Minnesota and four in Wisconsin, and the chain has signed leases to enter into Iowa and Illinois.

In September the company launched a franchising program in 38 states to add to the already heady company-owned unit expansion. Serving traditional barbecue fare, from ribs to chicken to beef brisket, the company provides take-out and dine-in service.

FINANCIAL FACTS

Income Statement
12-month sales: $14.2 million
12-month income: ($2.7 million)
12-month EPS: ($0.38)
Profit Margin: N/A
Market Cap: $73.3 million

Balance Sheet
Cash: $24 million
Current Assets: $25.2 million
Current Liabilities: $1.8 million
Long-term Debt: $1.5 million

Ratios
Price-to-earnings: N/A
Price-to-sales: 5.2

HOW COULD YOU HAVE SEEN IT COMING?

For a while it seemed as if Famous Dave's was coated in Teflon. The chain came public in late 1996 and immediately doubled. Inexperienced management? No problem. Trying to grow a young profitless chain in an underperforming sector? Fine. The company could do no wrong, and, for a while, it didn't. It lined up savvy executives from the ranks of Bennigan's and Gradys, and it embarked on an ambitious expansion schedule.

The only negative Famous Dave's couldn't shake was a lack of positive earnings. For a company that specialized in giving red meat a black crust, the company simply could not do the same with its financials. The story was still intact, but Wall Street can only wait for so long.

On December 15 the company announced that sales and earnings would fall well shy of analyst estimates for the fourth quarter. Many companies reporting shortcomings usually blunder on the way to the bottom line. In Famous Dave's case, it was overpromising on the top line. Famous Dave's had unrealistic expectations of new units opening in green markets. While Wisconsin was a natural geographic choice for expansion, the new eateries were not getting the same kind of welcome the older locations were used to.

So, the loss would fall closer to $0.25 a share rather than the $0.16 per share deficit the analysts were expecting -- this on revenues of just $5.8 million when the pros were lead to believe the company would ring up $7.1 million in sales.

Spotting the shortfall itself would have been difficult unless you were to park at the new restaurants and take in the lower-than-expected head counts. But the historical lack of earnings should have at least prepared investors for a shareholder exodus if the elusive profits were ever to grow more distant -- and the Teflon less resistant.

WHERE TO FROM HERE?

The good news is that the company plans to triple in size in 1998. The bad news is that 75% of the 27 units in development will be outside of the cozy and familiar confines of Minneapolis.

This is not to lay all the blame of the fourth quarter on the Wisconsin locations. The newer local openings have also been sluggish. Famous Dave's is a company that is coming to the uncomfortable realization that it set the bar too high.

This is not a quick fix situation. The slighted analysts who thought the company would finally turn the corner and report a meager profit next year now expect the company to lose between $0.40 to $0.55 a share in 1998. The waiting room has grown wider and emptier. Is this a contrarian's feeding frenzy?

Maybe. Maybe not. The company has issues to address and must do so at a time when expansion is in overdrive. Will the menu need some tweaking? Will the operations need some trimming? It is clearly not what Famous Dave's wanted, and, hit or miss, the company is going to be three times bigger a year from now. It will clearly magnify any improvements -- or continued weaknesses.

-Rick Aristotle Munarriz
(tmfedible@aol.com)


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