Last night, I am very happy to report that my favorite nano-cap company, Famous Dave's (DAVE), reported a very strong Q3 2017. Now there are lot of pieces, and you need to really be following the company in order to move beyond the headlines and understand the nuances, so let's get started.
For context and candor, I am long 3,500 shares of DAVE with a cost basis of $5.90. I bought my first batch of 1,000 shares on October 27, 2015 an average price just north of $8 per share. From the first day I owned shares until Famous Dave's May 2, 2017 annual shareholder meeting (see my notes as I attended) I watched and witnessed disappointing results. However, on May 2nd, management finally proved that they "got it" and took actions that paralleled some of my recommendations. (see my March 27th piece: Adventures in Capitalism. )
The company is transitioning from a blended model of operating both company owned units and franchises to a franchise only model. When I met with the management team in Minnetonka on May 2nd, during the annual shareholders meeting, I picked up on the subtext that during Famous Dave's rapid expansion phase, when operating margins were more robust and casual dining industry headwinds were at bay, the company got really sloppy in its real estate selection process (this is more subtext as they didn't explicitly state that).
As you can see, overall total store units peaked at 194 in Q4 2013. Notably, company owned same store sales have been consistently negative until this quarter. The last time the company had positive company owned comps was back in 2013.
Source: Chart I created using DAVE press releases
From 2013 through Q2 2017 Famous Dave's operating margin, arguably the most important metric for a company's financial health (although some would argue same store sales are equally important) struggled. Restaurant level operating margins were 10.2% in FY14, 6.3% in FY15, and only 4.0% in FY16.
So at face value, assuming that most franchises had modestly better operating margins, not only did company wide profitability decline, but investors feared that margins were too low and could only cover the 4% to 5% franchise royalties. So the continued disappointment in same store sales, operating margins, bloated corporate SG&A, disarray with two failed CEO tenors by Ed Rensi and Adam Wright, and industry wide headwinds took shares from the mid $30s to as low as $3.45 per share.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.