Famous Dave's of America Inc. (DAVE) reported second-quarter 2014 results, wherein both earnings per share and revenues beat the Zacks Consensus Estimate.
Famous Dave's’ second-quarter 2014 adjusted earnings per share of 40 cents beat the Zacks Consensus Estimate of 38 cents by 5.3%. Also, earnings increased 42.9% year over year, driven by lower operating expenses.
Total revenue dropped 3.8% year over year to $41.9 million, due to comps decline and lower franchise fee revenues. Quarterly revenues, however, beat the Zacks Consensus Estimate of $41.0 million by 2.2%.
Comps for company-owned restaurants decreased 5.2% which compared unfavorably to an increase of 4.3% in the year-ago quarter. The company’s Dine-in category posted comps decline of 4.9% that compared unfavorably with 2.8% comps growth in the year-ago quarter. The To-Go category posted comps decline of 0.3% against comps growth of 1.1% in the prior-year quarter. The comps decline was mainly due to the strategic decision to discontinue e-mail discounting strategy.
Comps at franchise-operated restaurants declined 2.8% compared unfavorably with a decline of 1.9% in the year-ago quarter.
The company believes that it will continue to struggle with top-line sales and comps, as the level of email discounting gathered momentum in the second half of 2013. Despite ending its discounting strategy, the company believes that its revenues will continue to be negatively impacted until at least the end of the first quarter of 2015.
Behind the Headline Numbers
Restaurant level cash flow margin declined 20 basis points (bps) to 13.8% year over year, due to a decline in net restaurant sales. Restaurant level margin also declined 50 bps year over year to 9.9%.
Total costs and expenses declined 7.1% to $37.5 million year over year.
Food and beverage costs decreased 110 bps to 28.9% of net restaurant sales mainly due to favorable pricing on some of the company’s food contracts.
Operating expenses for the second quarter of fiscal 2014 as a percent of net sales was 26.4%, up 100bps year over year. This was primarily due to sales deleverage on fixed operating costs, as well as higher R&M and occupancy costs, partially offset by lower supply costs during the quarter.
Famous Dave's opened one franchise-operated restaurant during the second quarter in Bayamon Puerto Rico. The company ended the quarter with 194 restaurants, of which 53 were company owned and 141 were franchise operated.
For fiscal 2014, the company expects to open approximately four franchise-operated restaurants.
We believe slowing down of sales remain a serious concern for Famous Dave’s. This is especially alarming as the company has guided for continuously poor comps growth till at least the first quarter of 2015.
Additionally, it operates in an intensely competitive segment and this might dent profits. Although the company is taking steps to lower costs and operational efficiency, increased commodity costs are expected to hurt margins.
However, we expect it to improve going into the upcoming quarters as the spring and summer months have historically been better for Famous Dave’s of America’s business. Additionally, the launch of a new website enabling digital ordering will help the company boost sales in the upcoming quarters, in our view.
Famous Dave’s currently carries a Zacks Rank #4 (Sell). Some other stocks that are performing well in the restaurant industry include BJ's Restaurants, Inc. (BJRI), Chipotle Mexican Grill, Inc. (CMG) and Papa John's International Inc. (PZZA). While BJ's Restaurants and Chipotle Mexican Grill sport a Zacks Rank #1 (Strong Buy), Papa John's carries a Zacks Rank #2 (Buy).