- Famous Dave’s of America struggles with same store sales.
- Cost controls and long-term debt reduction boosted net income significantly.
- Lower capital expenditures stemming from a slowdown in expansion contributed to free cash flow gains.
On Nov. 7, restaurant chain Famous Dave's of America (NASDAQ: DAVE) came out with its Q3 2014 quarterly statement which followed up on its earnings statement released on Nov. 5. Established stores are losing ground in terms of growing revenue. However, the company has been focusing on reducing cost and shoring up its balance sheet. Let's take a look to see what's going on with this company.
Famous Dave's of America saw its year-to-date revenue decline 4%. Its established stores struggled to bring customers through the door, both at its company owned stores and franchisee locations, which saw year-to-date same store sales decline 5.2% and 2.8% respectively vs. the same time last year.
Net income and free cash flow increased
However, the company has been focusing on cost reduction which served as a catalyst for an 86% expansion in year-to-date net income vs. the same time last year. Famous Dave's negotiated better food contracts which contained more favorable pricing. Store pre-opening expenses declined significantly due to a rightful slowdown in expansion. Lower store impairment costs also added to year-to-date growth. The departure of certain executives caused a decline in the general and administrative expense line item contributing to the increase in net income. Moreover, year-to-date free cash flow increased 16% vs. the same time last year. Capital expenditures, due to the aforementioned slowdown in expansion, declined 47% year-over-year contributing to the gain.
Balance sheet improved
Famous Dave's of America's executives focused on shoring up its balance sheet this year. Its $1.5 million in cash last quarter amounted to a miniscule 4.5% of stockholder's equity which remained roughly even with the end of 2013 when it possessed $1.3 million or 4% of stockholder's equity. I prefer to see companies with cash to stockholder's equity of 20% or more to get them through tough times.
Famous Dave's of America's debt position improved since the end of 2013. The company's long-term debt registered at $11.8 million last quarter or 34% of stockholder's equity vs. $18.9 million or 58% of stockholder's equity at the end of 2013. This is well below my personal threshold of 50%. Its interest expense declined 8% as a result of the debt reduction and lower interest rates. Long-term debt creates interest which chokes out profitability and cash flow. So far this year, Famous Dave's of America's operating income exceeded interest expense by 12 times. The rule of thumb for safety lies at five times or more.
Company management has indicated that it will eye expenses like a hawk. They also want to focus on improving guest experience and selling some of the company locations to franchisees, effectively transferring some of the overhead to them. The low cash balance on Famous Dave's balance sheet leaves me a little cautious. Currently, the company is trading at a P/E ratio of 25 vs. 19 for the S&P 500 and 17 for its five year average making this company overvalued. Investors may want to wait for a market correction and an improvement in the top line driven by higher customer traffic and same store sales before investing.
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