Famous Dave's: A Recipe For Success?

By Will Ashworth | April 28, 2008 AAA

Have you ever been to one of those rib-joints in the south where barbecuing is treated as a religious experience? It's been awhile since I've gone, but I remember my visits fondly. The meat would slide off the bone and the taste was oh so sweet. Restaurant chains have tried to recreate this experience in the north, but never with any great success - that is until Famous Dave's of America (Nasdaq:DAVE) came along.

Who Is Famous Dave?
Dave Anderson founded the company in 1994. He opened his first rib-joint after friends convinced him that he made the best slow-smoked barbecue anywhere and he needed to share that with the rest of the world. That's probably stretching things a bit but you get the idea. This man knew ribs. His first restaurant was brought in 1,000 people a night with three-hour lines on the weekends all for the taste of his famous "rich and sassy" barbecue sauce.

A year later in 1995, the Harvard graduate set up a plan to expand across the United States into other parts of the country. Now, 13 years later, Famous Dave's has grown from one small rib-joint to a chain of 168 units in 35 states.

Growing Pains
Unfortunately, this growth at times came at the expense of profits. From 1996 through 2003, while sales continued to rise, the company lost money in five out of eight years. That's the bad news. The good news is that it has been profitable since 2003 and the future looks good, despite the current slowdown in the economy. Much of the company's early problems were a result of rapid expansion without the necessary staffing and systems in place to accommodate this growth. With the head office now running smoothly, the company can meet the needs of both its franchise and company-owned outlets. (For more on how restaurants run, see Getting to Know Business Models and Sinking Your Teeth Into Restaurant Stocks.)

Slow And Steady Wins The Race
In 2007, it opened three company-owned stores and 16 franchise outlets. This year it plans to open between 20 and 25 stores with six of them company-owned. On the books, it has area development agreements for another 143 restaurants. Assuming a similar rate of development of 19 per year, it'll take seven or eight years to get them all built.

More importantly, Famous Dave's needs to deal with the imbalance between the company-owned and franchised stores. Same-store sales in the company stores (open 18 months or more) have been great, 2.1% increase for all of 2007 and 3.2% increase in the first quarter of 2008 but the franchise numbers continue to disappoint, with a decline of 4.8%. The new CEO, Wilson Craft, hired away from Longhorn Steakhouse, commented in the first quarter earnings announcement that they will have "an intensified focus on [their] franchise business". This is critical because you can only sell new franchises for so long if the existing ones continue to see deteriorating sales. I think the word will get around. (Learn more about franchises in Is Buying A Franchise Wise?)

Is It Worth Buying?
The previous CEO, Dave Goronkin, who left in December 2007, did a good job putting the company on proper financial footing. In 2003, his first year at the company, it had a small ($193,000) operating loss, due to a $4.2 million asset impairment charge. Otherwise, the operating profit was about the same as the previous year. When he left at the end of 2007, sales were $125.9 million and operating profits $10.4 million.

Since Goronkin's departure, the stock is down 29.5% from $12.60 at the beginning of 2008 to a close of $8.88 on April 29. It's been awful for restaurant stocks in the past couple of years, but year-to-date Yum! Brands (NYSE:YUM), Darden Restaurants (NYSE:DRI) and IHOP (NYSE:IHP) are all in positive territory. Not so, for Famous Dave's and it hardly seems justified. First quarter earnings-per-share were four cents lower than the previous year due to increased operating costs including food, labor and advertising. When times are tough you don't cut off the marketing and we're all dealing with higher food costs. Fortunately, customers accepted the 3% increase in prices, helping drive sales up 16.2%.

Bottom Line
The stock is down over 53% in the last year. Meanwhile, both earnings and sales were healthy. The stock price hasn't been this low since 2005. If you buy here, it might drop another couple of dollars. However, if it can re-energize the franchise stores, you have a bargain on your hands.

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