Please ensure Javascript is enabled for purposes of website accessibility

3 Reasons Why Famous Dave’s May Break Out in 2014 and Beyond

By Nickey Friedman – Feb 26, 2014 at 2:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Famous Dave’s could be the best investment you've never heard about.

Famous Dave's

As you've seen with Chipotle Mexican Grill (CMG 1.13%) and Buffalo Wild Wings (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 (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.

Ed Rensi

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.

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. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Famous Daves of America Stock Quote
Famous Daves of America
McDonald's Stock Quote
$269.58 (-0.11%) $0.31
Chipotle Mexican Grill Stock Quote
Chipotle Mexican Grill
$1,570.24 (1.13%) $17.52
Buffalo Wild Wings Inc. Stock Quote
Buffalo Wild Wings Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.