As you've seen with Chipotle Mexican Grill (NYSE:CMG) and Buffalo Wild Wings (NASDAQ:BWLD), when a public restaurant chain gets into rapid-growth mode the Street tends to take notice. Despite the name, not a lot of investors are familiar with Famous Dave's (NASDAQ:DAVE), but if it meets its three expectations for this year and the next that may change in a big way.
Chipotle Mexican Grill and Buffalo Wild Wings have both been huge home runs for investors, rising 800% and 400% respectively over the last five years. This is because these companies kept their costs low, expanded their same-store sales rapidly, and aggressively increased their location counts. Chipotle Mexican Grill and Buffalo Wild Wings have been darlings of Wall Street even among investors who don't normally invest in restaurant stocks. Could Famous Dave's be the next Chipotle Mexican Grill or Buffalo Wild Wings?
The Famous report
On Feb. 12, Famous Dave's reported fiscal fourth-quarter results. Revenue slipped 1.7% to $35.7 million. Same-store sales fell by 2.6%, but this was an improvement over the 6% drop last year. However, that's not what caused the excitement.
More important than sales was that net income exploded up 153% to $1.9 million or $0.25 per share. This was due mostly to Famous Dave's efforts to cut food and beverage costs along with overall operating expenses. This has paid off. The company has been slow to add new locations, as it has a total of 194 now and plans to open just six more in 2014.
Where it starts to really get good
Aside from the soaring net income even in the off-season (Famous Dave's is more of a spring and summer restaurant chain), Famous Dave's took on a new CEO, Ed Rensi, who himself is "famous" for turning McDonald's into a powerhouse in the 1990s.
That all got further clarified during the conference call. Rensi was described as somebody who Famous Dave's "expects great things out of" in "a very short period" and the call showed that he is already on his way toward doing this. As such, Famous Dave's gave no guidance due to the rapid potential changes which have come as a result of Rensi. It almost sounds like he has the Midas touch.
Rensi was brought on as an "interim CEO" which left a question mark as to whether the famed executive is only making a brief pit stop at Famous Dave's. The original press release described him as coming on board "for the foreseeable future" to "unleash the potential" of the brand. This implied that he was going to be around for the long term and he was eyeing aggressive expansion and same-store sales growth.
When pushed for answers during the Q&A session, Chairman Dean Riesen said, "We will begin a search, but we are under no pressure since we have such a talented leader with Ed." It sounds like Rensi is here to stay. Don't be surprised if the "interim" is dropped from his title soon.
It's not just Ed. Two more reasons:
The costs for the business have come down and it appears that they will stay down. You saw it with the slippage in sales while net income skyrocketed. This is because in the restaurant business when a company is able to shave its costs, often each dollar it saves finds its way to the bottom line.
Costs had been unusually high for Famous Dave's. CFO Diana Garvis Purcel pointed out that new contracts have been already executed on much of the company's food for 2014. He expects 5.5% food deflation for the year. This extra cost savings should likewise flow right to the bottom line.
Finally, there's a new menu launch coming in April. While it's always a risky venture to change a menu for a restaurant, with Rensi's guidance this venture has an excellent chance of success. When new menus hit restaurants, they can sometimes be game-changers.
Famous Dave's had already tacked on a 2.5% menu increase in the fourth quarter. As long as the new menu can at least maintain current traffic and order levels, that extra 2.5% should fall to the company's bottom line just like the cost savings did.
Foolish final thoughts
New leadership, a new menu, new pricing, and lower costs could be the perfect storm to set up a successful 2014. With a market cap under $200 million, Famous Dave's share price does not price in much long-term success. If Rensi is successful this year, look for a much more aggressive expansion plan, which he is famous for executing. With only an average of four Famous Dave's in each U.S. state, it's hard not to imagine that there isn't a plethora of opportunities to turn this small chain into a much larger company.
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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings, Chipotle Mexican Grill, and McDonald's. The Motley Fool owns shares of Buffalo Wild Wings, Chipotle Mexican Grill, and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.