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Famous Dave's


premfan
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Hi guys, I went to dinner at famous dave's last night for the first time. I came away extremely impressed by the quality of food. I'm not a huge BBQ guy but, that was probadly the best BBQ i ever had. The athmosphere was fun and rustic. I can see a huge market for a chain BBQ place in the U.S. Most BBQ places are mom and pop places that have been around for decades.  Has anyone in the board been following Famous Dave's?

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I've passively followed it for years. Interesting concept, good to see they're making money again.

I live near many of their stores, and it's grown a ton since I first went there in '95 or '96 (in Minneapolis)...

 

They have really good BBQ - but not great.

 

They talk with a southern accent, but it's based in MN. I really like the place, just saying...

Never owned the stock.

 

They have a few in Omaha, one in the market area (just saying for anyone that's never been the Dave's, but may be in Omaha once a year...).

But I like the "Smoke Pit" around 25th and Farnam for some authentic "que".

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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.

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