DAVE - Famous Dave's of America, Inc.

[Junto]

I did a fair amount of research on Famous Dave's about a year ago, bought shares at $5.7 and sold them in April @ $9.4. It is a good chain, they had some problems in the downturn but have for the most part righted the ship. Mostly a franchisor (hence the good return on capital), but over the past ~18 months their franchisees haven't been doing well. I haven't followed their recent results since my sale, but I still think even at these prices the stock is one of the cheapest restaurants. Below is a writeup I did for SumZero in October 2009:

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Famous Dave’s is a small restaurant chain with 176 locations around the US. They are primarily a franchisor, with 74% of units franchised. Dave’s is a casual diner that serves primarily barbeque: ribs, steak, fish & chicken. The average customer check is $14, which is about average for casual diners, and lower than most other barbeque & steak restaurants. Dave’s has won countless awards for both food quality and customer satisfaction. (I can personally attest to the ribs and catfish platter.) One of their specialties is catering, and in 2008 off-premise sales accounted for 32% of revenue.

 

They were ranked #1 franchisor in the full-service restaurant category in 2008 by Entrepreneur magazine. Because of this franchise model – where DAVE takes around 4.9% of annual sales – they have a very high incremental return on capital, especially in recent years. Average unit volume for franchises is $2.9mm, or about $500 per square foot. Pre-tax return on capital is 21%, but this will continue to rise as new growth comes from the franchise base (if you look at invested capital, it is only up slightly over the last 6 years). On a normalized basis, DAVE should earn $13mm/year in operating income (EBITDA-Maintenance CapEx).

 

Possible Risks

 

1. Macro risk – The restaurant industry is shrinking (2.1% below steady-state in August), not only with the economy but as consumers continue to spend more of their “food expenditures” elsewhere. In other words, for any restaurant to just maintain current sales, they must be taking share from their competitors. For Dave’s, I believe this is very possible, but if the economy gets significantly worse it could be a problem. They were in violation of their debt covenants in Q408 and Q109, due to write-offs from closed franchise units. But they have been paying off debt recently and this should mitigate the risk. High inflation is also a risk – but with DAVE, I think you’ll be relatively better off because of the larger portion of profits that come from no-capital franchising.

2. Franchise risk – Tied to the macro risks listed above. Most franchisees rely on credit, and their ROC after franchise fees is not stellar. So if the economy gets significantly worse, the franchise relationship becomes win/lose, as DAVE makes money and their franchisees don’t. This could inevitably lead to closed franchise units, as occurred for the Atlanta locations in 2008.

3. Capital allocation risk – From what I’ve seen, management is great at running the restaurant operations and growing the Famous Dave’s brand. However, they have made some poor capital allocation decisions in the past with regard to share repurchases (you can see this well looking at growth in BV/share over the years). The main reason for this, I believe, is the fact that executive bonuses are tied directly to growth in EPS. So the incentives are in favor of higher profits, but without regard to capital costs or the cost of share repurchases. The new CEO seems to be more focused on operations, so that is a positive.

 

Valuation

 

Despite the above risks, I believe that Famous Dave’s is a great buy under $6/share. (Yes, it was a much better buy earlier this year when it traded under a conservative estimate of liquidation value.) With normalized operating income around $13mm (which represents a steady restaurant base of 46 owned and 130 franchised units), at a 9x multiple this puts enterprise value at $117mm. Subtract about $20mm in net debt, and you have an equity value of $97mm or $10.5/share.

 

There have been 10 franchise units opened YTD, and 3 more planned before year-end. Each new franchise location adds an average of around $140k in profit per year, with very little incremental capital needed. There are commitments for 100+ new units, to be rolled out over a period of 8 years. If Dave’s can grow profits at 4% per year through both new units and higher profits per unit, the value per share should be $14-16.

 

Missed the early move, but I have been digging into DAVE and took a starter position yesterday on some rough numbers of where I could see the stock in 2-3 years. Pleasant Lake Partners LLC owns over 10% of the stock and is shaking up management. Complete turnover of the management and directors in the past 12 months.  Additional directors from a local investment firm that hold a significant stake.

 

I like the food and always have being from the area (Minneapolis/St. Paul Metro) where it is headquartered.

 

Anyone else monitoring this situation?

[feynmanresearch]

I did a fair amount of research on Famous Dave's about a year ago, bought shares at $5.7 and sold them in April @ $9.4. It is a good chain, they had some problems in the downturn but have for the most part righted the ship. Mostly a franchisor (hence the good return on capital), but over the past ~18 months their franchisees haven't been doing well. I haven't followed their recent results since my sale, but I still think even at these prices the stock is one of the cheapest restaurants. Below is a writeup I did for SumZero in October 2009:

---------------------

 

Famous Dave’s is a small restaurant chain with 176 locations around the US. They are primarily a franchisor, with 74% of units franchised. Dave’s is a casual diner that serves primarily barbeque: ribs, steak, fish & chicken. The average customer check is $14, which is about average for casual diners, and lower than most other barbeque & steak restaurants. Dave’s has won countless awards for both food quality and customer satisfaction. (I can personally attest to the ribs and catfish platter.) One of their specialties is catering, and in 2008 off-premise sales accounted for 32% of revenue.

 

They were ranked #1 franchisor in the full-service restaurant category in 2008 by Entrepreneur magazine. Because of this franchise model – where DAVE takes around 4.9% of annual sales – they have a very high incremental return on capital, especially in recent years. Average unit volume for franchises is $2.9mm, or about $500 per square foot. Pre-tax return on capital is 21%, but this will continue to rise as new growth comes from the franchise base (if you look at invested capital, it is only up slightly over the last 6 years). On a normalized basis, DAVE should earn $13mm/year in operating income (EBITDA-Maintenance CapEx).

 

Possible Risks

 

1. Macro risk – The restaurant industry is shrinking (2.1% below steady-state in August), not only with the economy but as consumers continue to spend more of their “food expenditures” elsewhere. In other words, for any restaurant to just maintain current sales, they must be taking share from their competitors. For Dave’s, I believe this is very possible, but if the economy gets significantly worse it could be a problem. They were in violation of their debt covenants in Q408 and Q109, due to write-offs from closed franchise units. But they have been paying off debt recently and this should mitigate the risk. High inflation is also a risk – but with DAVE, I think you’ll be relatively better off because of the larger portion of profits that come from no-capital franchising.

2. Franchise risk – Tied to the macro risks listed above. Most franchisees rely on credit, and their ROC after franchise fees is not stellar. So if the economy gets significantly worse, the franchise relationship becomes win/lose, as DAVE makes money and their franchisees don’t. This could inevitably lead to closed franchise units, as occurred for the Atlanta locations in 2008.

3. Capital allocation risk – From what I’ve seen, management is great at running the restaurant operations and growing the Famous Dave’s brand. However, they have made some poor capital allocation decisions in the past with regard to share repurchases (you can see this well looking at growth in BV/share over the years). The main reason for this, I believe, is the fact that executive bonuses are tied directly to growth in EPS. So the incentives are in favor of higher profits, but without regard to capital costs or the cost of share repurchases. The new CEO seems to be more focused on operations, so that is a positive.

 

Valuation

 

Despite the above risks, I believe that Famous Dave’s is a great buy under $6/share. (Yes, it was a much better buy earlier this year when it traded under a conservative estimate of liquidation value.) With normalized operating income around $13mm (which represents a steady restaurant base of 46 owned and 130 franchised units), at a 9x multiple this puts enterprise value at $117mm. Subtract about $20mm in net debt, and you have an equity value of $97mm or $10.5/share.

 

There have been 10 franchise units opened YTD, and 3 more planned before year-end. Each new franchise location adds an average of around $140k in profit per year, with very little incremental capital needed. There are commitments for 100+ new units, to be rolled out over a period of 8 years. If Dave’s can grow profits at 4% per year through both new units and higher profits per unit, the value per share should be $14-16.

 

Missed the early move, but I have been digging into DAVE and took a starter position yesterday on some rough numbers of where I could see the stock in 2-3 years. Pleasant Lake Partners LLC owns over 10% of the stock and is shaking up management. Complete turnover of the management and directors in the past 12 months.  Additional directors from a local investment firm that hold a significant stake.

 

I like the food and always have being from the area (Minneapolis/St. Paul Metro) where it is headquartered.

 

Anyone else monitoring this situation?

 

I have done some work on the company and I don't see upside in the short-term. I believe the company will continue to languish at these price levels for the foreseeable future. In short, currently the downside outweighs the upside

[A Dhandho Investor]

Anybody still following this name? Stock has dropped about 80% since the initial post.

 

It has been written up on VIC in July, but since then the stock further dropped about 30%.

https://www.valueinvestorsclub.com/idea/FAMOUS_DAVES_OF_AMERICA_INC/1445764378

 

I am currently doing more work on this name myself, but would be interesting to have some insight from people more familiar with the company.

[DTEJD1997]

Anybody still following this name? Stock has dropped about 80% since the initial post.

 

It has been written up on VIC in July, but since then the stock further dropped about 30%.

https://www.valueinvestorsclub.com/idea/FAMOUS_DAVES_OF_AMERICA_INC/1445764378

 

I am currently doing more work on this name myself, but would be interesting to have some insight from people more familiar with the company.

I can confirm that some of the things mentioned in the article have indeed been implemented.  Specifically, that DAVE is focusing more attention on delivery & takeout...that their newer locations tend to have a smaller footprint (should be easier & cheaper to open).

 

My Dad has eaten at a few of them.  He says the food is good, above average.  Not as good as a local specialty BBQ, but above average for a chain.

 

In the new year, I'll try one out and give a more detailed report to the board.

[A Dhandho Investor]

Anybody still following this name? Stock has dropped about 80% since the initial post.

 

It has been written up on VIC in July, but since then the stock further dropped about 30%.

https://www.valueinvestorsclub.com/idea/FAMOUS_DAVES_OF_AMERICA_INC/1445764378

 

I am currently doing more work on this name myself, but would be interesting to have some insight from people more familiar with the company.

I can confirm that some of the things mentioned in the article have indeed been implemented.  Specifically, that DAVE is focusing more attention on delivery & takeout...that their newer locations tend to have a smaller footprint (should be easier & cheaper to open).

 

My Dad has eaten at a few of them.  He says the food is good, above average.  Not as good as a local specialty BBQ, but above average for a chain.

 

In the new year, I'll try one out and give a more detailed report to the board.

 

Thanks for the info!