Famous Dave's Buys Back Stores as Profit Slips
About two years ago, Famous Dave’s unveiled a plan to refranchise its entire company footprint. Within the next 12 months or so, it trimmed corporate stores from 35 to 16, and had just 17 at the end of fiscal 2018. Among other recent changes, it appears that direction is shifting, too.
Famous Dave’s said it spent $4.2 million in the first quarter of 2019 to reacquire four restaurants in Colorado. The company then added six more, including shops in Wisconsin, Michigan, and Ohio, for $132,000.
“We intend to strategically refresh the stores in these markets and believe that higher efficiencies at these locations will result in higher cash flows from previous levels while under franchise ownership,” CEO Jeff Crivello said in a statement.
Famous Dave’s expects to reacquire five additional units throughout the year, the company added.
This could fast-track innovation across the system. Famous Dave’s pushed a remodel program last year that’s been slow to gain traction. Traffic and sales at corporate locations continue to outperform franchises. But the investment to update and access these changes, including exterior and interior design and marketing efforts, remain costly. Former COO Geo Concepcion, who is now heading up The Greene Turtle, told The Star Tribune in March operators would need to fork up between $100,000–$300,000 to update stores. And it would likely take franchisees about two years to recover the investment.
Stephen Anderson, research analyst with Maxim Group, suggested to The Star Tribune last week that franchisees are “hesitant to make changes and skeptical of the changes with a revolving door of CEOs.”
Crivello, formerly CFO PW Partners Capital Management, has led the brand for 18 months. That’s longer than the four executives who came before him. Famous Dave’s cycled through five CEO changes in five years.
The move to reacquire restaurants, refresh them, and showcase the benefits, could provide further proof of concept for Famous Dave’s innovations. Thus inspiring more willing investments as well as better cash flows for the company.
Two corporate units are currently being updated, Crivello said, and should finish by summer’s end.
“The turnaround strategy that we planned in 2017, and are now executing, is well-underway and we’re working on numerous initiatives to boost the financial performance of our company-owned and franchise-operated stores to build a valuable portfolio of highly-performing restaurant properties,” he said.
“Investments we’ve made and continue to make in this multi-year turnaround should begin to deliver more significant financial improvements later this year,” Crivello added.
The company’s Q1 profits declined 35 percent, the company announced. This as dine-in traffic, which accounts for roughly 53 percent of Famous Dave's total net restaurant sales, fell 5.6 percent.
The chain continued another initiative as well: shuttering underperforming units. The brand is down to 138 total restaurants (117 franchised) from 152 as of April 1, 2018. Or about a 10 percent cut as it has closed 14 stores in a year-long span. There were 176 restaurants in October 2016.
Famous Dave’s earned $620,000 in Q1, a decline from $954,000 in the year-ago period. That amounted to 1 cent per share versus 13 cents in the comparable quarter. Revenue was $82.7 million, down from $87.1 million, thanks to the closures.
Same-store sales upped 1.3 percent at company stores and fell 1 percent at franchised units. Again, this progressed a recent trend. In Q4, traffic at company restaurants rose 6.3 percent, year-over-year, to go along with a 2.2 percent uptick in same-store sales. Franchise comps dropped 1.5 percent that period.
Famous Dave’s corporate improvements center on reimagining the restaurant. The first “founder inspired” refresh project took form at a Coon Rapids, Minnesota, location. It reported double-digit sales growth in early reports before leveling out around 10 percent higher with traffic gains in the 12–13 percent range, the company said. It also featured new items curated by founder, Dave Anderson, who was brought back into the fold after splitting with the company in 2015 under previous management. It initially added 23 options but has since scaled back to save on food costs.
Famous Dave’s recently replaced a Tucson, Arizona, location with a fast-casual, downsized version a couple of miles away from the old unit. The 2,500-square-foot store has only 75 seats—about a third the size of a typical unit, which generates average-unit volumes of roughly $2.4 million (Per a 2018 franchise disclosure document, the systemwide average at Famous Dave's was $2,489,323 in the prior year).
The company plans to bring the new format to the Twin Cities when a lease is up at an existing location, per The Star Tribune. It could expand further depending on the performance. Famous Dave’s also continues to explore the notion of ghost restaurants, which would allow it to capitalize on third-party delivery without opening a new space.
“Virtual and ghost restaurants will launch in 2019 as we look to continue growing our digital sales mix which doubled in Q4 from the same period last year," Concepcion said in an earlier email to FSR. "Some of the ideas include fried chicken, sandwich, and burger concepts that will be serviced out of existing Famous Dave’s kitchens. We’re excited by the prospects and believe it will offer another key path for growth.”
Restaurant margin came in at negative 1.7 percent in Q1 compared to last year’s 0.5 percent loss. This due to “new initiatives tested in our corporate stores, including our comprehensive new menu that was rolled out in October 2018.” Famous Dave’s said further training and operational efficiency surrounding the new menu should improve food costs and labor as a percentage of restaurant sales.
The menu asked franchisees to implement four core items from the earlier Anderson 23-product lineup—cheese curds, build-your-own burgers, 3-meat combo, and hand-breaded chicken tenders. Five changes were asked of operators so that, no matter where consumers dined, they’d see about 10 new items on the menu.
A bright spot for Famous Dave’s in Q1 was off-premises growth. Comparable sales for to-go and catering business hiked 10.2 percent and 12.6 percent, respectively.
To-go made up 39 percent of net sales, while 8 percent went to catering.
Famous Dave’s collaborated with MomentFeed and OpenTable in 2018. In a different initiative, Punchh built and launched a loyalty app “to allow us to engage with guests in ways that we have not been able to historically, and allow our guests to engage with our brand conveniently,” Famous Dave's said.
Famous Dave’s new rewards app was announced late February via a partnership with Punchh. Some highlights include a free sandwich or burger giveaway upon download. Then customers receive one “bone” for every $1 spent at Famous Dave’s. When they hit 100 bones, they unlock $5 in rewards. The app also features information about promotions and brand news.
Famous Dave’s introduced third-party delivery and online ordering via its website in 2017.