|Shares Out. (in M):||9||P/E||0||0|
|Market Cap (in $M):||60||P/FCF||10||9|
|Net Debt (in $M):||0||EBIT||0||0|
Famous Dave’s of America, Inc. (DAVE)
We focus on smaller companies with Ft. Knox balance sheets and large & sustainable free cash flow yields and we are typically seeking a double-digit FCF yield or higher on an unleveraged basis. The objective is for the sustainable FCF to eventually drive up the share price to a more reasonable valuation, through share buybacks, debt reductions, dividends, or accretive acquisitions. Obviously, it is important we have a management team that cares about shareholder value. We focus on small-cap stocks because there is a much better chance to find an attractive investment opportunity which is under-followed or undiscovered.
Famous Dave’s of America, Inc. (DAVE) develops, owns, operates, and franchises barbeque restaurants under the Famous Dave’s name. It offers smoked, barbequed, and grilled meats, as well as entrée items and side dishes that are prepared using proprietary seasonings, sauces, and mixes. The Company operates full-service and counter-service restaurants. As of May 15, 2018, it owned 15 locations and franchised 136 restaurants in 33 states, Puerto Rico, Canada, and the United Arab Emirates.
Over the last several years, DAVE has recorded weak comp store sales and significant operating losses due to over-expansion and gone through five CEO’s as it attempted to stabilize and turn around its business model. From a market cap of over $200m in 2014, the Company’s market cap has shrunk to about $60m at present due to weak comp store sales and losses. In 2016, DAVE brought back its founder, Dave Anderson, to aid in marketing promotions and to reinject some BBQ credibility to the business. In May 2017, the Company announced that it was refranchising its remaining 33 company-owned restaurants during the next two years, as this strategy would allow it to shift its resources to the growth / viability of the franchise system. Since then, the Company has refranchised its six Chicago units in 2016 and its eight Mid-Atlantic units in December 2017 and closed 13 underperforming company stores.
The Company’s LTM adjusted EBITDA is about $7m and has increased for the last three quarters due to reduced expenses and improved comp store sales. During the Q3 2017 conference call, the Company estimated it could reduce G&A expense to about $8m which compares to almost $15m for 2017 as it aggressively shifted to a franchisor strategy with less corporate infrastructure.
Otto695 wrote up DAVE in November 2017 and since then the stock has done well. There is further evidence that DAVE may be able to sharply reduce total G&A expense as G&A expense was reduced from $4.6m in Q1 2017 to $1.8m in Q1 2018 and adjusted EBITDA for Q1 2018 increased from $0.4m in Q1 2017 to $1.8m. Furthermore, comp store sales results for both corporate and franchised restaurants improved over prior years. Adjusted EBITDA has grown for the last four quarters year over year. It appears management has at least stabilized the business model at this point.
The Company has also strengthened its balance sheet and liquidity. In November 2017, the Company completed a private placement of about 420,000 shares at $3.50 per share with PW Partners, for gross proceeds of about $1.5m. PW Partners is an investment fund led by Patrick Walsh that owns about 10% of DAVE and that has successfully taken an activist role with several restaurant chains (BJRI, DENN, RRGB, TACO) and other small cap companies, most recently CLUB. In connection with the private placement, Jeff Crivello, the CFO of PW Partners and a member of the Board since August 2017, was appointed CEO of the Company effective November 14, 2017. This was followed by a Rights Offering completed in April 2018 for 1.5m shares at $3.50 per share.
After the Rights Offering, DAVE has about 9m shares outstanding currently trading at about $6.70 per share for a market cap of about $60m. We estimate that DAVE has net cash of about $5m for an Enterprise Value (EV) of about $55m. We believe DAVE could generate adjusted EBITDA of $10m+ per annum in 2018 and 2019, so DAVE would be trading at below 6x our adjusted EBITDA estimates. We also believe a substantial portion of adjusted EBITDA could convert into free cash flow given the limited capital expenditures, limited working capital needs, the NOL and fewer cash restructuring charges in 2018 and 2019. We believe DAVE could generate $5m-$6m of FCF per year in 2018 and 2019 for about a 10% FCF yield unleveraged.
We believe as DAVE right-sizes its G&A expenses and implements programs to improve franchise store profitability and comp store sales, adjusted EBITDA could grow and trade at a higher multiple. We believe DAVE could achieve adjusted EBITDA of $10m+ per annum in 2018 and 2019 and trade for 10x adjusted EBITDA with a net cash position of nearly $15m by year-end 2019. This would result in a market cap of about $115m or, based on 9m diluted shares outstanding, a share price of about $13 per share or almost 100% more than $6.70 per share today.
The Company has several initiatives to reduce costs and reinvigorate sales. Management believes customers want increased speed and convenience in purchasing meals and that the Company’s BBQ offering can play well into this trend. Key initiatives include expanding off-premise sales (take-out, third-party delivery, and catering), expanding online sales orders, a new, smaller store prototype, a menu overhaul, and developing a new BBQ brand in collaboration with world champion BBQ pit-master Travis Clark. Further, there is a strong focus on technology and better IT systems and capabilities which will help to increase digital relationships with customers. This includes increasing delivery through shared kitchen spaces and smaller restaurants. It might include smaller stand-al