Famous Dave's Of America Had A Lousy FY 2014
Summary
- Famous Dave’s of America saw its revenue and net income decline in FY 2014.
- The company is driving consumers away by discontinuing its discounts.
- Famous Dave’s of America’s margin of safety in interest cost coverage is declining.
On Feb. 19, barbecue restaurant chain Famous Dave's of America (NASDAQ: DAVE) came out with its FY 2014 earnings announcement. The company had the double whammy of declining fundamentals and disappointing Wall Street on the EPS line in the final quarter.
In FY 2014, Famous Dave's of America saw its revenue and net income decline 4% and 39%, respectively year-over-year. According to the limited data available in the earnings announcement, DAVE's operating cash flow declined 19% year-over-year in 2014.
The company did see its cash position improve. At the end of 2014, Famous Dave's of America clocked in a cash and equivalent balance of $2.1 million or 7% of stockholder's equity vs. 4% at the end of 2013. However, I like to see companies with cash amounting to 20% of stockholders' equity or greater to get them through rough times. Let's take a look to see what is going on with the company.
What happened?
First of all Famous Dave's of America saw sales at its established company and franchised store sales decline 5% and 3%, respectively. This gives indication that consumers are losing interest. Consumers are most likely turned off by the fact that company management eliminated its "heavy discounting strategy". The consumer who was used to its low prices got offended by the higher prices. Moreover, they may be sensing a sinking ship due to its lack of popularity. DAVE also reduced its location count. The company saw its location count decline by 5 in 2014, or 3%.
Cutting it close on interest coverage
The company is also experiencing increasing difficulty meeting its interest expense obligations, despite using less credit relative to 2013. In 2014, its long-term debt as a percentage came in at 16%, almost half the 35% it registered in 2013. This definitely lies below my personal threshold of 50%. However, DAVE's operating income declined a whopping 37% year-over-year in 2014. Times interest earned clocked in at 5.5 in 2014 vs. 7.8 in 2013 despite the 10% decline in interest expense. The rule of thumb for safety for times interest earned is five times or more.
Thoughts on the future
I am really discouraged by the fact that Famous Dave's of America's corporate management believes that discontinuing its "heavy discounting strategy" represents the right move. Management needs to counteract this move by attracting consumers to its locations with quality food. Otherwise, consumers will continue to go elsewhere. I do like the company's focus on reducing costs, but a great deal of that comes from reducing its store count, which is not a good sign.
Finally, DAVE trades at a P/E ratio of 29 vs. 18 for the S&P 500 and 21 for its five-year average, according to Morningstar. This gives the company market price risk, in addition to the fundamental degradation highlighted above. There are better uses for your cash investment.
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