Diversified Restaurant Holdings Could Be A Long-Term Home Run

| About: Diversified Restaurant (SAUC)

I recently took a look at small cap company Diversified Restaurant Holdings (DFRH.OB) and their financials. The company is one of the leading franchisees of Buffalo Wild Wing Restaurants (NASDAQ:BWLD) in Florida and Michigan. What caught my eye on the company was their ownership of the Bagger Dave's Legendary Burger Tavern brand, which recently opened a location in my home city of Grand Rapids, Michigan. The name will likely be new to all my readers on this site but I will try and show the facts and explain why I think the company could be a long term home run pick.

New Buffalo Wild Wings in Downtown Detroit

It was after I began working on this article that a new Buffalo Wild Wings location was announced. The location, which will be the 23rd Buffalo Wild Wings for Diversified, is being opened in downtown Detroit, Michigan. The restaurant, which will be the first in Detroit, will open at 1211 Randolph Street. The important thing for investors is the location will be within walking distance to Greektown Casino, Ford Field, Comerica Park, and Joe Louis Arena.

The close proximity to three professional sports venues will make this Buffalo Wild Wings one of the hottest destinations many months out of the year. The restaurant will open in November and will allow seating for 425 customers. The new Buffalo Wild Wings will have a second floor dedicated to a banquet room, and a rooftop patio bar. This location has the potential to be the busiest location for all of its 23 locations.

Third Quarter Results (11/09/11)

Diversified Restaurant Holdings reported their third quarter earnings on November 9, 2011. Among the financial highlights:

  • Revenue increased 27.7% to $14.6 million vs. third quarter 2010.
  • Increased cash position by 62% to $2.2 million.
  • Net income reported at $151,000 vs. a loss of $1,000 in third quarter 2010.
  • Earnings per share of $0.01 vs. $0.00 in last year's third quarter.
  • Assets increased by 46%
  • Current operating profit margin of 5.4% (was 4.9% third quarter 2010).

2011 Results to Date

  • Revenue for 2011 was $60.7 million, a 34.2% increase from 2010.
  • Opened three Bagger Dave's locations.
  • Opened three Buffalo Wild Wings locations.
  • Same store sales Growth of 9.8% at Bagger Dave's locations.
  • Same store sales Growth of 4.5% at Buffalo Wild Wings locations.
  • Implemented online ordering system for Bagger Dave's.

Fourth quarter results and full year 2011 results will be reported to the public in March.

Bagger Dave's Legendary Burger Tavern

Bagger Dave's is a new ultra casual concept that the company started in 2008 to diversify itself away from Buffalo Wild Wings. The company had heavily relied on the customers of its Buffalo Wild Wings franchises and the prices of chicken and wanted to create a restaurant concept centering around burgers. Since the initial restaurant was opened in 2008, Bagger Dave's now has six locations in the state of Michigan. The concept centers around using fresh, never frozen burgers with over thirty toppings. The restaurants offer a full bar and operate as a full-service, family-friendly, casual dining experience.

Two of the locations opened this calendar year (February and September). The company has certain criteria for reported same store sales at locations based on the time they have been open. In the three stores that fit these criteria, Bagger Dave's saw a 5.7% increase in its same store sales for the quarter. Two additional locations have recently been announced to be opening in Grandville and Holland, Michigan. The locations will open in the second and third quarters of 2012.

Franchising Bagger Dave's

The company has not been quiet about its intentions to franchise the Bagger Dave's concept. Diversified Restaurant Holdings has the rights to franchise Bagger Dave's in Michigan, Indiana, Ohio, Illinois, Kentucky, Wisconsin, and Missouri.

Great news for the company came recently at the end of November. An announcement was made that the first franchisor of the Bagger Dave's concept was signed. The new franchisee will open its first location in March 2012 in Cape Girardeau, Missouri. This location will be the first of six locations over five years. The new franchisee has experience with opening restaurants as an owner of six Buffalo Wild Wing franchisees.

Buffalo Wild Wings Franchises

At the end of the third quarter, the company reported that it owned 22 franchised Buffalo Wild Wing locations. The company has eight locations in Florida and fourteen in Michigan. Diversified Restaurant Holdings has an agreement to open a total of 32 locations by 2017. The most recent franchised location was opened at the end of October. The third quarter saw same store sales growth of 10.2% for the quarter in the eighteen Buffalo Wild Wings locations open over a year.

At the end of the conference call this quote from President and Chief Executive Officer Michale Ansley was left with investors: "We are pleased with our performance and very excited about the opportunities that lie ahead. ... 2012 will be the strongest year yet for Diversified Restaurant Holdings." This is a great statement as an investor to see. Ansley is the largest shareholder of the company. His current 11.1 million shares are valued at $55 million and gives him ownership of 59%.

Diversified Restaurant Holdings Future

The company trades at $3.10 at the time of writing. Diversified Restaurant trades as an over the counter stock not listed on a major exchange. I think this company has an amazing future ahead of it. By 2017, thirty two Buffalo Wild Wings will be owned and operated by the company. This pace represents annual unit growth of 7.5% for its Buffalo Wild Wings locations. The company's Bagger Dave concept is less than three years old and offers plenty of growth potential. The first of many signed franchisee deals was signed at the end of November.

By 2016, there will be at least 11 Bagger Dave's, which represents almost double the current number. With six locations in Michigan and a planned six in Missouri, the company is open for numerous locations and grow to over 100 Bagger Dave's across the Midwest. Buy this stock and ride the cash flow from Buffalo Wild Wing's success while having the potential for a home run in the Bagger Dave's growth.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DFRH.OB over the next 72 hours.