Entrepreneur magazine ranked Famous Dave's (NASDAQ:DAVE) No. 1 BBQ franchise for 2013 for a reason. The BBQ restaurant chain is one of the top franchises in the U.S. today, with more than 72% of its restaurants currently operated by franchisees. At the end of last year, the company had 194 restaurants open in 34 states, of which 140 were owned by franchisees. On top of this, Famous Dave's has commitments from franchise owners to develop an additional 60 restaurants over the next five years.
Franchise establishments are on pace to create $493 billion in output this year, according to research from IHS. To put that in perspective, that's about 3.5% of gross domestic product in the U.S. Whether you are a potential franchisee or a stock investor looking to unlock serious growth, let's look at how Famous Dave's stacks up as a top franchise company today.This is a popular business model among restaurants and fast casual chains like Famous Dave's because it enables these companies to rapidly grow their footprint, while collecting a steady stream of revenue from franchisees.
So what does it take to become a Famous Dave's franchise partner? For starters, you need a net worth of at least $1.5 million and liquid assets of $750,000 per restaurant. That last part is important because the company often requires each franchise partner to open between three and 15 restaurants in their dedicated market. Nevertheless, before jumping in potential franchisees should know how Famous Dave's franchised restaurants have performed lately.
Unfortunately, a deeper look reveals that the same-store sales at the company's franchise-operated locations declined 2.9% last year, following a 2% drop in comparable sales in 2012. Perhaps a better way to benefit from Famous Dave's franchise system, then, is to invest in its stock. After all, for a public company such as Famous Dave's, the franchise model helps increase profitability by offering a steady stream of revenue in the form of rent and royalty income.
For every franchise-operated restaurant in development, Famous Dave's collects a one-time $10,000 fee for "area development." On top of this, the company collects a non-refundable "initial franchise fee" of $45,000 per restaurant. And those are just some of the upfront fees that contribute to Famous Dave's franchise-related revenue. All 140 of the company's franchises currently pay a monthly royalty fee of 5% of their net sales. This certainly takes some of the appeal out of owning a franchise. However, it also translates into a reliable source of income for shareholders regardless of how company-owned restaurants perform month to month.
In addition to royalty payments, Famous Dave's franchise owners must contribute to other costs such as store remodeling and marketing efforts. Franchisees are required to pay 1% of their net sales to the company's systemwide marketing fund, in addition to being responsible for advertising and marketing campaigns in their local markets. For these reasons, owning the stock probably makes more sense today.
Famous Dave's stock is up nearly 44% year-to-date to where it trades at around $26 per share. The stock has enjoyed a nice run recently, but shares still trade more than 24% below the stock's 52-week range. Moreover, at just 22 times next year's earnings the stock looks reasonably priced for long-term investors. There is still plenty of growth left for this company because the majority of its restaurants are currently located within the United States. Therefore, Famous Dave's should be able to increase its earnings as it opens new franchise locations in the quarters ahead.
Together, these things create an opportunity for investors to own one of the top franchise companies today, without taking on much of the risk associated with being a franchise owner.