Usually when a restaurant chain reports that overall sales and same-store sales are both down for the quarter, it's a disappointing report. Barbeque restaurant chain Famous Dave's of America (NASDAQ:DAVE) reported sales that were down and disappointing across the board, yet the stock hit a new 52 week high. Why? The profitability of the restaurants themselves, as measured by cash-flow margin, more than doubled.
The results are in
Overall revenue decreased from $39.9 million to $39.2 million. Restaurant level cash flow margin soared from 6% to 12.3%. Famous Dave's has been focused on cost control throughout the year, and its efforts have begun to pay off. Adjusted earnings per share more than quadrupled from $0.04 to $0.21.
This demonstrates the power of leverage. Once the overhead was covered, expressed as selling, general, and administrative expenses, the extra cost savings dropped straight to the bottom line. Margin improvement did far more to help Famous Dave's bottom line than a positive change in sales growth alone would have. Its strategy included "extracting unnecessary costs throughout the entire organization."
Famous Dave's hinted that it is busy perfecting the profitability of the concept first before it later begins a more aggressive expansion plan. Famous Dave's CEO John Gilbert stated, "...when the macroeconomic headwinds begin to change in our favor, we will be well-positioned to take advantage of associated growth opportunities." This implies a phase two of its long-term plan. First make the restaurants far more profitable (check). Then get aggressive on expanding the far more profitable concept with many more locations.
Further increase in margins slated
Famous Dave's is looking for more ways to improve economics and reduce inefficiencies, including closing an underperforming restaurant. Expect the 12.3% cash-flow margins to improve further.
Compare Famous Dave's to Brinker International (NYSE:EAT), the owners of the Chili's and Maggiano's chains. Brinker International reported almost a 15% restaurant operating profit margin last quarter. Though it may be harder for Famous Dave's to get to 15% margins with pork ribs than Brinker International with burgers and pasta, 15% is a good target. It would add around $1 million to the bottom line by carving 2.7% off the top. It would also add around $0.14 in EPS, a 67% increase over last quarter. It helps that Famous Dave's has such a small, tight share structure.
Buffalo Wild Wings (NASDAQ:BWLD) has an even better margin to shoot for, with its 18% restaurant margin. Though both Buffalo Wild Wings and Famous Dave's specialize in sauce-covered meat, Buffalo Wild Wings sells much more high-margin booze. It may be too tall of an order for Famous Dave's to match that margin.
For 2013, Famous Dave's expansion has been modest to say the least. It expects to add only a single company-owned restaurant in the fourth quarter and two franchisee-owned restaurants. This is a total of 10 restaurants for the entire year, bringing its total restaurant count to 141. However, this small footprint leaves a lot of room for future growth.
Final foolish thoughts
Pay close attention to restaurant operating margin and Famous Dave's specific plans for expansion. When Famous Dave's decides that it's time to get aggressive, look for its top and bottom lines to rapidly pick up pace. Famous Dave's is developing a long term plan for carefully building shareholder value.
Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings. The Motley Fool owns shares of Buffalo Wild Wings. 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.