Famous Dave's Tops Estimates

Minnetonka, Minnesota-based Famous Dave's of America Inc. (DAVE - Snapshot Report) recently reported third quarter 2011 earnings of 19 cents per share, which surpassed the Zacks Consensus Estimate by 3 cents and the prior-year quarter's earnings by 2 cents.

Famous Dave’s, which owns, franchises and operates restaurants in the U.S., reported total revenue of $38.9 million, up 0.5% year over year. Company-owned restaurants sales were $34.3 million, flat year over year. Franchise royalty revenue climbed 5.0% year over year to $4.2 million, reflecting the contribution of five new franchise-operated restaurants.

Same-store sales for company-owned restaurants inched down 0.1% during the quarter compared with an upside of 2.4% in the year-ago quarter.

The plunge in comparable sales was attributable to uncertain economic conditions, menu price increase and lower traffic on the East coast arising from the earthquake and Hurricane Irene. Same-store sales from franchise-operated restaurants declined 1.0% versus an increase of 0.7% in the third quarter 2010.

As a percentage of restaurant sales, food and beverage costs spiked 30 basis points (bps) to 30% and operating expense rose 20 bps to 27.8%. However, labor and benefit expense fell 30 bps to 31.6%, general and administrative expense dipped 10 bps to 10.3% and depreciation and amortization expense dropped 10 bps to 3.6%. Hence, the company’s operating margin expanded 50 basis points (bps) to 6.8%.

Store Update

During the quarter, the company opened two franchised restaurants. At the end of the third quarter, the operated 184 restaurants, including 53 company-owned restaurants and 131 franchise-operated restaurants.

The company remains on track to open two company-owned restaurants and approximately eight franchise-operated restaurants. For the fourth quarter of 2011, Famous Dave's expects to open one or more company-owned restaurant and three franchise-operated restaurants.

The company has also inked a multi-unit franchise deal with Famous Ribs of Canada Ltd, a subsidiary of Tribal Councils Investment Group of Manitoba Ltd. (“TCIG”) to expand in Canada. The first unit is expected to come up in June 2012 in Winnipeg, Manitoba.

Financial Position

Famous Dave's ended the quarter with cash and cash equivalents of $1.7 million and shareholders’ equity of $36.1 million.

During the quarter, the company repurchased 46,620 shares at an average price of $9.55.

Our Take

As the economy is showing signs of improvement, we believe Famous Dave's will likely generate improved earnings. We also remain optimistic as the company sees immense expansion opportunities in the international market and thus its first international foray in the Canadian market provides ample scope to broaden its footprint.

Apart from unit growth, the company continues to focus on menu offerings to drive traffic. However, increasing input costs and stiff competition from peers like Domino’s Pizza, Inc. (DPZ - Snapshot Report) and Kona Grill Inc. (KONA - Snapshot Report) will drag profits.

Famous Dave's currently retains a Zacks #2 Rank, which implies a short-term Hold rating on the stock. We reiterate our long-term Neutral recommendation.

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