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Famous Dave's of America Inc.’s (DAVE - Snapshot Report) second-quarter 2013 earnings of 24 cents per share were in line with the Zacks Consensus Estimate but beat the comparable prior-year quarter's earnings by 14.3%. Higher top line led to the year-over-year rise in earnings.

In the second quarter, Famous Dave’s, which owns, franchises and operates full-service and counter-service restaurants in the U.S., reported total revenue of $43.4 million, up 4.9% year over year and also surpassed the Zacks Consensus Estimate of $42 million by 3.3%. Revenues in the quarter improved on the back of menu innovations, better service platform and advertising strategy.

Behind the Headline Numbers

Restaurant sales increased 5.5% year over year to $38.3 million, driven by 3.8% rise in comps at company-operated restaurants. Moreover, higher sales generated at two company-owned units unveiled in the third and fourth quarter of 2012 also positively impacted the company’s restaurant sales. Franchise fee revenues at Famous Dave’s remained flat at $44 million. Franchise royalty revenues, however, dipped 1.9% year over year to $4.6 million, owing to a 1.9% decline in comps at franchise-operated restaurants.

In the second quarter, restaurant level margin expanded 360 basis points (bps) to 11.8% due to the decline in the company’s food and beverage costs, labor and benefit costs and operating expenses by 90 bps, 70 bps and 80 bps, respectively.

However, Famous Dave’s’ operating margin declined 20 bps to 7.5% as a result of higher general and administrative expenses.

Store Update

During the quarter, Famous Dave’s shut down a franchised restaurant. At the end of second quarter, the company operated 187 restaurants, including 53 company-owned and 134 franchise-operated restaurants across 34 states in the U.S., the Commonwealth of Puerto Rico and one province in Canada.

Famous Dave's is focused on improving its business model through initiating a series of initiatives including improving dine-in, To Go, catering and retail business, aggressive marketing methods and menu enhancement  to further boost its sales. In 2013, Famous Dave's expects to launch 11 restaurants.

For 2013, the company expects operating expenses, as a percentage of revenue will be down 135 to 140 bps from 2012. Advertising expense, as a percentage of revenue is estimated to be 2.75% for 2013.

Our Take

Although this Zacks Rank #2 (Buy) company has been posting disappointing sales for the past few quarters, it has succeeded to post a year-over-year rise in sales in the second quarter gaining from its sales-driving initiatives. Moreover, the company’s cost controlling strategy might help to improve its margin, going ahead. We also remain optimistic about Famous Dave's’ advertising strategies which is expected to benefit its business in the ensuing quarters.

Some other players in the restaurant industry which look attractive at the current level include AFC Enterprises Inc. , Bravo Brio Restaurant Group, Inc. (BBRG - Snapshot Report) and Burger King Worldwide, Inc. (BKW - Analyst Report). All these companies carry a Zacks Rank #2 (Buy).

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