If you haven't heard of Diversified Restaurant Holdings (BAGR) yet, chances are you haven't been reading my articles over the last two years. The restaurant chain is one of the largest Buffalo Wild Wings (BWLD) franchisees in the country and also has its own original concept, Bagger Dave's, which is expanding rapidly in the Midwest. Put strong cash flow from Buffalo Wild Wings together with a growing concept and you have an explosive small cap growth stock that should be on investors' radar.
At the end of 2013, Diversified had a total of 54 restaurants, made up of 36 Buffalo Wild Wings and 18 Bagger Dave's. The estimates for 2014, given during an April presentation, called for a year end tally of 65, composed of 39 Buffalo Wild Wings and 26 Bagger Dave's. By the year 2017, Diversified estimated it would have 103 to 113 restaurants, made up of 48 Buffalo Wild Wings and 55 to 65 Bagger Dave's. You read that write, Diversified believes it will have doubled its store count from the end of 2013 to the end of 2017.
Bagger Dave's started in Michigan in 2008. The chain grew to expand in Indiana in the year 2012 and is also franchised to Missouri. The chain is expected to expand to Ohio in 2015. In 2020, Diversified believes Bagger Dave's will be in Illinois and Wisconsin. If you're following along, the goal of having 55 to 65 Bagger Dave's will be through only four states: Michigan, Missouri, Indiana, and Ohio. That leaves a ton of expansion room from 2017 on for this burger chain.
Each Bagger Dave's averages 4200 square feet. Average revenue for restaurants is around $1.6 million. EBITDA margins are above 20%. The chains have build your own burger menus with several protein and topping options. Craft brews and craft sodas are also among the high margin items that make the restaurants so financially successful.
Diversified recently reported second-quarter earnings (earnings call). Revenue grew 11% to $30 million. Same store sales increased 2.3%, adjusted for the Easter holiday impact. This marked the 14th consecutive quarter of positive same store sales growth. EBITDA was a company quarterly record $3.9 million.
Diversified also announced the acquisition of three Buffalo Wild Wings franchises in Florida. This brought the quarter end total to 60 restaurants, comprised of 20 Bagger Dave's and 40 Buffalo Wild Wings. The company is now on track to have 68 restaurants at year end, up from the 65 originally planned due to the acquisition. That goal seems incredibly realistic, considering seven of the eight to open later this year are currently under construction.
One of the keys from the first half of the year was Diversified's $20 million line of credit taken out in March. This goes against what I have said about the strong cash flow being the funding for Bagger Dave's expansion. Diversified believes so much in the Bagger Dave's concept that it decided it needed to speed up expansion by taking out the credit line. This is a positive for investors, but also increases the debt level for the company.
Bagger Dave's continues to be the growth story for Diversified and the part investors should be focused on. The concept has performed extremely well in its home state of Michigan. Turkey Burgers, a unique offering not found at many burger shops, make up 18% of all burger sales. This is one item on the menu that keeps bringing customers back.
The recent opening of a Bagger Dave's in Woodhaven Michigan doubled the previous record for grand opening volume at a Bagger Dave's restaurant. This was pointed out during the earnings call and should be taken into consideration by investors. The buzz of future locations could continue to drive huge volume and revenue to the top line. Strong margins are also bringing large cash numbers to the bottom line.
The biggest risks with Diversified Restaurant Holdings are their use of cash and expansion of the Bagger Dave's brand. As a new restaurant concept is brought to consumers, there is always a chance that the chain will not be well received and could close or scale back on expansion. There is also the possibility that Diversified blows all of its Buffalo Wild Wings cash flow into Bagger Dave's and is left scrambling to recoup its losses. I see these risks minimized as Bagger Dave's stores continue to post solid comparable same store sales and have had huge openings recently, as noted above.
I have been a bull for Diversified stock since my first article in February of 2012. In that article I called the stock "a long term home run". In 2013, I highlighted the "explosive growth" of the Bagger Dave's brand. I continue to believe in both of these article ideals, as the company has demonstrated a good track record of expansion of both Buffalo Wild Wings and Bagger Dave's. This is a stock that trades with a market capitalization of $113 million, despite annual revenue of more than $125 million.
Shares of Diversified are now up 48% since my first article visiting the stock. Buffalo Wild Wings shares are up 64% since that time. In 2014, shares of Diversified have fallen 9%. Diversified shares trade with a price to sales ratio of 0.9. Buffalo Wild Wings shares trade with a price to sales ratio of 1.8, or double the rate of Diversified. Buffalo Wild Wings post strong net earnings
Diversified's targeted full-year revenue is $128 to $133 million. This was an increase to the pre-Florida acquisition. Original estimates were $125 to $130 million for full-year revenue. Adjusted EBITDA is expected in a range of $14.0 to $15.0 million. In the first six months of the year, revenue has increased 11.9% to $60.5 million. Analysts on Yahoo Finance see the company posting annual revenue of $126.3 million in fiscal 2014 and $153.1 million in fiscal 2015. More importantly, analysts see a profit of $0.14 per share being earned in fiscal 2015.
By the end of 2017, Diversified should have double the number of restaurants as it does today. That rapid expansion should pad both the top and bottom lines for the company. The company recently raised cash, but continues to utilize strong cash flow from its steady Buffalo Wild Wings business to fund the expansion of Bagger Dave's. This small restaurant stock continues to be a favorite of mine for the long term.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in BAGR over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.