Famous Dave's Serves Up a Mixed Platter

Famous Dave's (Nasdaq: DAVE  ) doubtlessly pleased a few palates with its first-quarter 2006 earnings. The BBQ restaurant's net income rose to $0.07 per share (including stock-based compensation expenses), topping first-quarter 2005 earnings by $0.02. Revenue increased 15.3% over the prior year, reaching $27.1 million, and franchise-royalty revenue surged 46.5% to reach $3.1 million. Looks yummy so far.

Now tie on that rib bib, because this gets messy. First-quarter costs are still bloated, with general and administrative expenses reaching $4 million, or 15% of total revenue. That's up from $3.3 million, or 14% of total revenue, the previous year. Some of the spike is due to a one-time stock option expense, but since training and franchise service fees are included in general and administrative, and Famous Dave's plans to expand both in FY 2006, don't expect these costs to be trimmer anytime soon.

First-quarter operating expenses hit $6 million, up $1 million from the previous year. In the conference call, management blamed a spike in natural gas for driving utility costs 30% higher during the winter months.

Management was optimistic about utility costs during the summer months, but warned of higher advertising costs for FY 2006. Famous Dave's is launching an advertising blitz this year, including ads in national newspapers and on local radio stations. Advertising and a huge celebration of National BBQ Month -- which is May, if you want to mark your calendars -- is all part of a campaign to "create greater brand awareness," according to Chief Executive David Goronkin.

On the bright side, the bulk of Famous Dave's expenses are feeding a healthy expansion. The Minnesota-based chain plans to open franchises in California, Florida, Maine, and Missouri before the end of the year, bringing the franchise grand total to about 110. The company owns 38 restaurants.

The chain is reporting success with its TO GO and catering services, which raked in 32% of total revenue in FY 2005. And management is savvy about its limited-time-offer menu, which generates the highest margins. The company plans to roll out its baby back ribs and Key lime pie dishes via a limited-time-offer this summer.

Management is also revamping its real estate strategy to cluster more restaurants in high-traffic, suburban areas. The smokehouse theme at its company-owned restaurant in Chantilly, Va., has been a success, according to management. Expect to see more of the smokehouse feel at future restaurants.

However, Famous Dave's trailing P/E is still one of the more unsavory in the industry at 36.31, compared to Cracker Barrel's (Nasdaq: CBRL  ) 17.49, Bob Evans' (Nasdaq: BOBE  ) 25.64 and IHOP's (NYSE: IHP  ) 21.02. Quarterly revenue growth has historically trailed the competition as well.

Management is on the right track with much of its strategy, and this quarter's strong revenue reflects it. There are some holes, though. The company might want to focus more on expanding company-owned stores, rather than its current strategy of boosting the number of franchises. Comparable sales for company-owned stores during the first quarter were up 5.6%, but down more than 1% for franchises. Famous Dave's could be a healthy investment long-term, but I would exercise caution and see how the next quarter pans out.

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Fool contributor Amanda Tyler does not own shares of any company mentioned above. The Fool has a disclosure policy.


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