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Famous Dave's of America
Analyzing DAVE

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By 4Foolz
September 16, 2009

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Figured I'd share what I have composed as my DD on this company.
Many thanks to Rich (forgive me for some plagiarism) and others on this board for help composing this summary. Feel free to correct or add anything you feel is necessary.


Famous Dave's of America (DAVE) first opened in Minneapolis in June 1995. Now it develops, owns, operates and franchises barbecue restaurants. Famous Dave's has 176 locations (Co' owned and franchised) in 38 states, including 46 company-owned restaurants and 130 franchise-operated restaurants (as of 7/29/09). The company recently issued guidance that it expects to open a total of 9 to 11 franchise restaurants in 2009. Its menu features award-winning barbecued and grilled meats, an ample selection of salads, side items and sandwiches, and unique desserts.

Brand Facts:
  • BBQ sauce is an ingredient in a few dishes at Rainforest Café. Overall, DAVE sells 6 different BBQ flavors in supermarkets. (Note: such sales are very minor revenue contributors.)
  • Advertising partnership with Pepsi and NASCAR driver Jeff Gordon (2008) - might have been put on hold this past year
  • Dave has received the SPIRIT Award recognizing its high level of employee satisfaction (10/2/07)
  • Over 300 "Best of" awards for food in various states - points to no regionality for great barbecue

Competition: Texas Roadhouse; Buffalo Wild Wings BWLD; Applebee's; Brinker International EAT (Chili's); Bad Bobs; local eateries.

Franchising Facts:
  • DAVE enters into a contract whereby a private party will build a Famous Dave's restaurant(s) in a specific area. The private party is often a company specializing in operating restaurants in a local area, but can be private individuals if they have the financial clout. It takes about $2.5 to $5.0 million to build and open one restaurant. The franchiser is responsible for all development expenses associated with building and opening their restaurant(s).
  • Historically, the new franchisee store build rate has been between 10 and 30 stores per year. In 2009, expected rate is 9 to 11 stores. When a development agreement is signed it typical includes a schedule for when the new franchisee stores will be built, typically within 7 years.
  • DAVE gets $40,000 up front franchise fee (not refundable) and 5% of net restaurant sales. In return, DAVE has certain obligations and services (advertising, etc.) that they must provide under the contract. (DAVE's expenses for servicing the franchise agreements are reported under the SG&A expense line item in the Income Statement.)
  • Franchisees are required to spend a certain percentage of revenues on advertising. Mostly, though, the Famous Dave's brand has been built through a national ad campaign. Both DAVE and the franchises contribute 1% of restaurant sales to this devoted advertising campaign. (UPDATE 2009: DAVE adjusted required contribution to the national ad fund to 0.5% of net sales from 1%; for first year or 18 months they also reduced the 5% royalty to 4% but only for new stores built in 2009, not existing ones. After that time frame, the new stores will pay the 5%)
  • In 2008 DAVE implemented a franchise training program in the hopes of improving their sales performance. This went with 'mixed' results and franchises' SSS continue to decline.

Sales Facts:
  • 35% of their sales is Catering and Takeout (2007) [10.4% & 23.1%]; 15% is a pipe dream for the industry (Lane Cardwell, acting CEO 2/28/08); DAVE emphasizes to-go ordering in a big way to help draw the eat-at-home crowd. Store prototypes built since 2005 have a separate to-go entrance (not a drive-up window though) and special parking right in front of that door to accommodate to-go customers quickly and efficiently.
  • Franchises represent 74% of stores but contribute just 13% of the total revenue (8/2/07). Yet, operating margins on this revenue are >50%. By comparison, company owner stores struggle to get 7%.
  • Dinner is the busiest time for 79% of Famous Dave's locations; the average check size for a party of two is under $45 for 93% of restaurants polled; 50% said the average tab is less than $30 (8/10/08)

Store Growth:
Date --- Total Stores --- Companies Owned --- Franchised --- Expected Growth
7/29/09 --- 176 --- 46 --- 130 --- Zero new Co. stores / 9 to 11 franchises in 2009
Dec-08 --- 170 --- 47 --- 123 --- 102 franchises were committed as of 12/28/08
Dec-07 --- 164 --- 44 --- 120
Dec-06 --- 145 --- 41 --- 104
Dec-05 --- 126 --- 38 --- 88
Dec-04 --- 104 --- 38 --- 66
Dec-03 --- 92 --- 38 --- 54
Dec-02 --- 73 --- 40 --- 33

Concerns:
  • Same Store Sales (SSS):
Franchise stores SSS have been on the decline for over two years. Why?
- "Honeymoon" period for new stores - a new store has a very high level of sales and then over time these sales gradually drop off to some lower plateau. To some unknown extent this has played a role in Dave's declining SSS for both company-owned and franchises. It happened for the franchises first because there were more new franchise restaurants than company-owned.
- Since the franchises are not owned by the company, the incentives between franchise owners and the Co. are not on the same page. [My most likely cause: Inept franchisee management that isn't aggressively taking action against SSS declines. Franchises don't raise prices along with the company-owned that have been increasing pricing at 1% every 6 months. Service / Waiters / Gas / Economy are culprits?]
- Latest (7/29/09): SSS for company-owned restaurants open for 24 months or more decreased 9.4 percent during the quarter, while same store sales for franchise-operated restaurants declined 10.9 percent.
  • Cost of Food:
- Impairs margins going forward. Higher costs for beef, pork and chicken - all major expense items for DAVE
  • Debt:
Dave carries two types of bank debt:
1) The "Line of Credit" at variable rate and expires in April, 2013 and seems to be secured by real property. The interest rate is variable and is currently a very attractive rate. The current numbers stands at $14.5 million. DAVE has used this facility to repurchase shares, build new stores (CAPEX) and other corporate purposes. (Note: share repurchases and building new company stores have been suspended until the economy improves.)
2) Long Term debt is in the form of various secured notes (the debt uses property and equipment as collateral).
UPDATE 7/1/09:
- Famous Dave's of America, Inc. (NASDAQ: DAVE) today announced that it recently completed the early retirement of approximately $4.2 million of long-term debt at interest rates ranging from 8.83 percent to 10.53 percent, originally due between February 2020 and June 2022. As of the end of the second quarter, the company's line of credit balance was $14.5 million. As of July 31st, the company will have paid down a net total of approximately $8.3 million of debt since the end of fiscal 2008, representing approximately 28% of its outstanding debt.
o DAVE intends to pay all of the Notes off by the end of this year. This will leave only the $14.5 million on the revolver "Line of Credit" as debt, which is classified as short term debt, left to pay.

  • Recent Management Turnover:
- CEO Dave Goronkin left abruptly in 2007
- F. Lane Cardwell was acting CEO
- Wilson L. Craft is the new CEO (promoted from within the organization)
- CFO stayed on after 2007 CEO reshuffle
  • Stock Buy-back Motive and Suspension:
- 7/2/07 - Motive is questionable - long term incentive plan for management is based on the earnings per share growth rate. By reducing the share count, per share earnings are increased.
- 9/27/07 - Another 1 million shares buyback initiated
- 2/26/09 - Share repurchase program suspended (along with development of new company-owned restaurants) to concentrate on cash generation and cash preservation. "Ensuring that our capitalization is as strong as possible, and paying down debt will be a focus in 2009," said O'Donnell.
  • Taste Buds:
- Those who watch the chain restaurant industry say that northern barbecue operations are struggling in general. The barbecue restaurants continue to do well in the South, but northern tastes tend to go more toward traditional steakhouses. DAVE store concentration is in the north.

Stock Price Catalysts:
- Will depend on expansion of store base, primarily franchises
- SSS need to start improving. They have been declining for 3 years
- Paying down debt by the end of 2009 as promised

Insider Purchases:
  • 6/9/09 - Richard Monfort (Director) - initiated what looks like a daily purchase of shares ranging from $8k to $1.2k
  • No sales since 12/17/08

Valuation
Using Rich's write-up:
- Market Cap at current $5.42 price per share: $50 million; Enterprise Value: $64.5 million (assuming all long term debt is paid off as planned, leaving $14.5 million on the revolver). 
- DAVE will likely produce about $12 million in cash flow from operations this year. If that remains constant over time, then in $64.5 / $12 = 5.4 years a buyer of the whole business will have broken even and likely receive $12 million per year to do with as they choose after that. New franchise stores will increase the $12 million per year figure. Another way to look at it is that $12 million / $64.5 million = 18.6% cash flow yield - a very attractive figure.
- DAVE has 47 company owned stores. Each store costs between $3 and $5 million on average to build new. At $50 million in market cap, a stock buyer today is paying only $1 million per company owned store and getting all the franchisee royalties for nothing.
- DAVE spent $44.6 million on share repurchases over the last 5 years. So, at the current quote, DAVE could easily repurchase all remaining shares from free cash flow over the next 5 years.
- CFO (Diana Purcel) thoughts from 4/29/08: The share price (sub-$10) was a compelling value currently but was careful not to speak for the Board of Directors who has final say on any share repurchases.

  • Underfollowed on Wall Street - 3 analysts on 2007-Q4 call:
Mark Smith - Feltl and Company
Robert Reilly - Piper Jaffray
Dougherty and Company

MF message board references:
http://boards.fool.com/Message.asp?mid=25293172 (3/16/07) - company description
http://boards.fool.com/Message.asp?mid=27894007&sort=whole (8/18/09) - valuation pitch
http://boards.fool.com/Message.asp?mid=27402988&sort=whole (2/7/09) - debt structure
http://boards.fool.com/Message.asp?mid=27784525&sort=whole (7/1/09) - debt reduction

MF articles:
http://www.fool.com/investing/general/2007/08/02/one-tasty-bbq-joint.aspx (08/02/07)
http://www.fool.com/investing/small-cap/2008/02/29/a-grilling-at-famous-daves.aspx (02/29/08)