Description

DAVE is a casual dining, BBQ-themed restaurant concept.

I am posting this idea as an interesting turnaround situation. Given short interest, there should also be strong short-term positive trading dynamics as well.  Potential for significant upside should franchisee comps improve further/turn positive versus very little downside given valuation.

DAVE reported it's 3Q earnings a couple days ago and held a brief conference call.  I think the 3Q report marks a significant turning point.  Here were several significant items:

• The first is that the company's SSS finally turned positive in their company operated units (+0.9%).  Franchisees were still negative, but excluding the impact on the puerto rico stores, there was an improvement to -1.5% vs. 1H -4.1%.

• The second major positive, discussed on the very brief call and mentioned in the PR, is that DAVE's will be at an $8M run-rate in G&A within 90 days.  For perspective, 3Q G&A was $3.8M and the first nine months of 2017 was $12M.  Reducing the G&A from current run-rate alone should add close to $1 per share (pre-tax).

• Company is transforming itself into a franchisee-only model.  Post the close of 3Q, company owned stores were reduced from 25 down to 16, with a franchisee buying the bulk of these units.  With 136 franchised units and only 16 company-owned at this point and further reductions likely, DAVE is positioning itself for a simplified income statement with essentially a $14.5-$15M royalty stream and G&A of $8M. 

• There are over 800k shares short with approximately 60 DTC.

• Incentivized new CEO who will be "expeditiously addressing the development and evolution of the Famous Dave’s concept."

Once the dusts settles on DAVE, you should have a company with a franchisee royalty stream of roughly $14.5M, and G&A at $8.0M.  Company store operating margins are positive and improving, up 70bips YoY for the nine months to 6.1% vs. 5.4% and for 3Q they improved 320 bips from 3.8% to 7.0%.  I am assuming that the income from these uniits roughly offsets the D&A.  This leaves us with about $0.85c pretax.  (net interest expense should be negligible as company sold some shares post the close of the quarter and also received approxiimatley $1.5M net as the purchase price for the co-owned stores which were franchised out).  (Note: DAVE also owns some of the remaining real estate for some of its remaining co-owned stores, so there is potentially some additional asset sales in addition to converting these to franchised units).

Risks:

further deterioration in casual dining sector

unquantified need to invest in the brand

Catalyst

• investors taking notice of transformation to franchisee-only model
• further rationalization of co-owned store inventory
• asset sales
• reduction in G&A leades to big swing in profitability
• real estate sales
• investment in concept leads to further turn in comps
• additional franchising agreements (beyond re-franchisiing of existing store-owned inevntory)
• short-covering