Famous Dave’s Seeks A New Recipe
EDITOR’S NOTE: After Twin Cities Business went to press, Famous Dave’s announced on October 23 that founder Dave Anderson would be rejoining the company. “Dave is helping to rebuild our company’s culture and improve our guest experience,” said interim CEO Adam Wright in a statement announcing the news. Anderson will also continue to operate his new concept, Jimmie’s Old Southern BBQ Smokehouse.
When Famous Dave’s of America Inc. opened its first restaurants in the Twin Cities, the allure of barbecue smoke drew long lines of hungry customers to its restaurants. The shack-like “roadhouses” were an unlikely sight in Minnesota and quickly created a buzz. The ribs were serious business and racked up numerous awards at competitions, including “Best Barbecue Sauce in America” at the American Royal Barbecue Contest in 1995.
Founder “Famous” Dave Anderson was the charismatic leader of the fledgling company. Underwriters and investors saw those long lines at the handful of restaurants and had visions of a large national chain. The company went public in 1996, in an era when locally generated concepts including Rainforest CafÃ©, Buca, Timber Lodge Steakhouse and others were hitting the markets. In 1997, Nation’s Restaurant News dubbed Famous Dave’s a “Hot Concept.”
Wisps of wood smoke remain in the air, but somewhere along the line, the flavor of the original vision was lost, or perhaps ceased to evolve. Anderson has long since left the company (he left the board in 2003) and today, the once shining example of a burgeoning restaurant IPO scene in the Twin Cities is struggling to figure out what it needs to be going forward.
CEO Ed Rensi (who was president of McDonald’s from 1984 to 1991 and CEO from 1991 to 1997) abruptly resigned in June, marking the third chief executive to leave in three years. Over the summer Famous Dave’s shuttered its short-lived Eden Prairie location, which had opened in December 2011 as part of a failed “fast-casual” experiment for the chain. The company’s stock—which was trading as high as $34.15 per share in February—closed at $12.91 per share at the end of September.
Rensi tried to broaden Famous Dave’s menu and bring efficiencies to operations, but he tripped up on a rift that has existed for years between the Minnetonka home office and its franchisees.
“Franchisees pushed back because it was a big investment,” says Mark Smith, senior analyst with Minneapolis-based Feltl and Co. of many of the changes that Rensi tried to implement.
Tennessee-based Famous Dave’s franchisee Mike Lister says that the total costs of Rensi’s proposed changes weren’t clear.
“I know it was a wide range of ideas, everything from taking sauce bottles off the table to completely redoing your kitchens with state-of-the-art equipment that was unproven and untested,” says Lister. “Ultimately they were never able to provide a business case that would compel us to make the investment.”
Rensi lost the battle and quit after less than 18 months with the company. Following his unceremonious departure, the company’s second-quarter earnings release skewered the “poor decisions” of prior management.
There’s since been a flurry of changes. Famous Dave’s has a new interim CEO (Adam Wright), a new COO (Abe Ruiz) and four new members on its seven-member board of directors. And that is merely the capstone to an executive merry-go-round: The company has had eight CEOs over the last 20 years. Investors will get their taste of how the new team is doing in early November, when Famous Dave’s releases its third-quarter earnings.
At the head of the table will be management’s plans to deal with the rift that sent Rensi packing—and the cold, hard reality that Famous Dave’s franchises have been doing better than its corporate-owned locations for years now.
Total sales at company-owned restaurants—$131 million in 2014—were almost identical to results the company posted in 2010. The company has been shedding corporate locations. But even amid constant executive and board turnover, sales at franchise restaurants climbed to $369.9 million, 8.6 percent higher than the level posted in 2010. At the beginning of October, Famous Dave’s had 180 restaurants—44 corporate and 136 franchises. In the last few months, franchisees have opened new locations in Irvine, California, and in Puerto Rico.
Looking at the franchise restaurants as a whole, many have better locations than the company-owned stores, says interim CEO Wright.
But there’s another reason franchisees have fared better: They ignored edicts from HQ, Wright says: “There are franchisees that stuck to the formula that worked from the beginning and didn’t waver under eight CEOs.”
In recognizing this, management now wants to transition out of running corporate restaurants and refranchise its company-run locations. The Famous Dave’s of tomorrow will be a franchisor-only business.
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How the cornbread crumbles
Tinkering with the cornbread muffins was among the alleged sins of former CEO Rensi, a detail mentioned in the company’s second-quarter earnings release. Wright says that under Rensi the corporate stores had switched to making cornbread in a sheet pan.
“There’s not many public companies that sell cornbread,” says Wright. “To me, our cornbread muffins were iconic and should not have been changed.”
Second-quarter results were unappetizing. Restaurant sales dropped 12.7 percent, while net income plummeted 77 percent. The earnings release opened by blasting previous leadership: “Over the last several quarters, prior management made multiple changes to company restaurants throughout the corporate system. The changes included smaller portions, different plateware, and changes to iconic items such as cornbread muffins and other poor decisions.”
Over the years, Wright says, other menu changes chipped away at Famous Dave’s original charm.
“There have been small changes at the restaurants that are very subtle, but cumulatively they’re meaningful. All these are very small details, but I think have changed the experience,” says Wright. “We’re laser-focused on restoring the guest experience and putting the customers first.”
In the intensely competitive restaurant business, Wright’s interim mission is to convince customers they’d rather eat at Famous Dave’s.
“All of the people on the board recognize that we serve better food than many companies with brands that are worth billions of dollars. Chili’s. Applebee’s. Buffalo Wild Wings,” says Wright. “Our food is better than all of theirs.”
Not the Street’s favorite roadhouse
Today Wall Street loves Golden Valley-based Buffalo Wild Wings Inc. (BWW) or New York-based Shake Shack Inc., the fast-growing hamburger chain that went public amid great fanfare earlier this year. Compared to those companies, unflashy Famous Dave’s is yesterday’s news. BWW did not go public until 2003, when it had 220 restaurants (the company pulled the plug on a planned IPO in 1998). By contrast, Dave’s had three restaurants at its IPO.
BWW, roughly 10 times larger than Famous Dave’s, has been a growth juggernaut. At the end of 2014, the company had 1,071 Buffalo Wild Wings locations, a mix of company-owned and franchise stores. For 2014, it reported revenue of $1.5 billion and net income of $94.1 million. Famous Dave’s, meanwhile, had sales of $149.4 million with net income of $2.9 million.
But those who track the company’s stock (ticker symbol DAVE) are watching cautiously from the sidelines. Minneapolis-based Craig-Hallum Capital Group downgraded its rating from “buy” to “hold” in early August after second-quarter numbers hit.
Minneapolis-based Dougherty & Co. lowered its rating from “buy” to “neutral” in June, following Rensi’s exit. Dougherty’s June 22 research report noted, “The resignation of the CEO, who joined DAVE in early 2014 with big plans for revitalizing the company, raises questions on strategy and direction, and likely reflects disappointment on progress within the company.”
But amid all of the change, Famous Dave’s has remained profitable. Franchisees have solid businesses and dedicated customers. And activist investors are bullish on the company. Five of the current seven board members represent investment firms or funds that own a significant stake.
Many of Famous Dave’s customers are perfectly happy not sitting in a Famous Dave’s restaurant. According to the company’s annual filing, takeout orders accounted for 26.8 percent of its restaurant sales, and catering accounted for 10 percent in 2014.
Wright, 37, speaks credibly about the company’s back-to-basics initiative, but he has no restaurant industry experience. He’s managing partner with Minneapolis-based Blue Clay Capital Management, which owns 6 percent of the company.
Famous Dave’s two largest owners—Connecticut-based Wexford Capital and New York-based LionEye Capital Management—have both boosted their stakes this year. Wexford owns 19 percent of the company and has two seats on the board, including one held by its new chairman, Joseph Jacobs. LionEye owns 17.7 percent of the company. TCB could not reach representatives of either company for comment.
Feltl and Co. upgraded the stock from a “sell” to a “hold” rating in early August. But analyst Smith says that was a “valuation call” because he felt that the stock price was close to bottoming out.
The Business of BBQ
There is no McDonald’s or Chipotle-scale concept that dominates the barbecue restaurant category. The biggest player is Dallas-based Dickey’s Barbecue Restaurants Inc., which traces its history to 1941 and now has more than 520 locations. The company is growing aggressively; a September press release noted Dickey’s had 58 stores under construction across the country.
Dickey’s made its Minnesota debut in 2009 and currently has 13 locations in the state, with plans to open another four to five locations over the next year, according to spokeswoman Kimberly Harms. Metro locations include Maple Grove, Rogers, Eagan, Burnsville and Chaska.
Dickey’s is not a full-service restaurant like Famous Dave’s, however. It employs a fast-casual concept with counter service. Its average store is 1,800 square feet.
“Dickey’s is like the Subway of barbecue,” says Dave Anderson.
But Famous Dave’s interim CEO Adam Wright says that finding the right mix for smaller stores could one key to the company’s future: “The small-format box with a more limited menu is a significant growth opportunity if we get it right. . . . What Dickey’s has is an economic model that serves its franchisees well.”
Wright says that company previously tested this strategy with an Eden Prairie location and a handful of other stores, but did not strike the right balance with the menu.
“What we need to do with the smaller format is just focus on the core barbecue proteins and sides, and really streamline things and make it very efficient,” says Wright. “You go to Chipotle and it’s a very limited menu, but they do what they do well.”
One of the challenges for anyone in the barbecue business is that customers don’t go out as often for barbecue as for other types of meals.
Statistics from Chicago-based Technomic, which researches food industry trends, underscore that perception. For 2014, it reported that barbecue sales totaled $2.9 billion, about 1 percent of the total restaurant sales of $291.9 billion.
Smoke, no fire
Smith thinks Famous Dave’s food remains a compelling part of its story for potential investors: “I think that Dave’s compares very well against competitors.” But he doesn’t disagree with the likes of Rensi that the company needs an overhaul.
Barbecue has grown into a dynamic food niche nationally over the last decade, reflecting a high level of interest from serious chefs in the variety and authenticity of one of the few indigenous American foodstuffs. Buzzy authentic barbecue restaurants can be found in most major American cities, catering to modern millennial diners with disposable income.
But little of that energy and modernism is on display at Famous Dave’s, whose branding and locations primarily cater to a suburban family customer.
“The chain needs evolution. This is kind of a tired brand, and I think they realize that,” says Smith.
The challenge has been finding the right overhaul. Wright notes that Famous Dave’s is promoting a new brisket to draw customers, moving from the previous dry brisket to a more moist “whole muscle” brisket. Wright dismissively notes that coffee giant Starbucks has started peddling a brisket sandwich.
Meat-centric barbecue is a high food-cost niche, and Rensi was working to find ways to make the restaurants more profitable while modernizing them for a millennial audience. Though the changes backfired, it’s not clear that a return to the past is the elixir for what ails Famous Dave’s.
“What we have is outstanding food,” says Wright, “but we need to get that food into the right economic model, and that’s how we’re going to grow significantly.”
“We like the initial changes that these guys have made, kind of going back to the basics,” notes Smith. “Adam’s known the story for a long time: he has a brother who’s a franchisee. Adam is keenly aware of where this has been in the past. . . . I like the moves that they’ve made.”
There are signs that Famous Dave’s franchisees are also upbeat about the new team in Minnetonka.
Lister has five Famous Dave’s locations in Tennessee and a long track record with the company; he was vice president of operations in the corporate office when the company first went public.
While franchisees were unenthusiastic about suggested changes, now Lister says that he’s encouraged by the early signals from the new management team. “One of the big challenges for the brand is figuring out the model that works best for the brand’s future. The franchise community is more bullish on the brand than it’s been,” he notes. “The new leadership team has been a breath of fresh air.”
Slow food, fast markets
Dave Anderson, 62, is no longer “famous,” but he’s back in front of a barbecue smoker. In April, he opened Jimmie’s Old Southern BBQ Smokehouse in Hayward, Wisconsin.
“Barbecue is a lifestyle,” says Anderson.
These days, Anderson says he does not own a single share of stock in the company he started two decades ago, but “there’s no sour grapes between me and Famous Dave’s.”
The mid-1990s were go-go days for many local restaurant concepts, which went public with just a handful of locations and big plans for growth. Anderson recalls that Famous Dave’s went public at $6.50 per share in late 1996 with just three locations: Linden Hills (Minneapolis), Calhoun Square (Minneapolis) and Roseville.
“You could never do that today,” says Anderson. An early public filing indicates that the company’s revenue was just $4.75 million in 1996.
But if he had it to do over again, he says he might have been happier as a privately held company. “Had I understood what going public meant, I would have never done it,” reflects Anderson. “It would have been better to figure things out and go slowly, rather than trying to go fast.”
“The stock went crazy” initially, recalls Anderson, but he inevitably found himself under pressure to continue posting growth quarter after quarter.
“We were doing really good back then, but then I was told being a publicly traded company, I should probably hire a Wall Street-savvy restaurant executive,” recalls Anderson. “And I don’t think that ever worked.”
Serial restaurateur Steve Schussler remembers the mid-’90s IPO climate for restaurants clearly. He took his ambitious Rainforest CafÃ© concept public in 1995 with only one location (at the Mall of America) in operation. By 1999, Rainforest CafÃ© had grown, reporting $262.7 million in revenue. Houston-based Landry’s Inc. acquired Rainforest in 2000.
Schussler, chairman and COO of Schussler Creative, says he doesn’t own any stock in Famous Dave’s, but has watched its trajectory with interest. He’s skeptical that the current Famous Dave’s board has enough insight into the restaurant industry.
“They’re not restaurant people. None of them ever flipped a hamburger,” says Schussler. “If you’re not in the food business, why are you on the board?”
He says that the company has lost its way since Anderson left and recipes started to change.
“It was an incredibly successful concept, and then you had seven different CEOs,” says Schussler. “I think they’ve gone sideways. Famous Dave’s used to be fun. I would say it’s not as fun as it used to be.”
But Famous Dave’s has survived as an independent company, unlike other local restaurant concepts that went public in the 1990s. The Italian family-dining concept Buca—started in 1993 by Edina-based Parasole Restaurant Holdings—was spun off in 1996 and went public in 1999. But as the company grew, so did losses. Florida-based Planet Hollywood ultimately bought Buca in 2008 for a deal valued at $28.5 million, including assumption of debt.
Anderson says previous iterations of the Famous Dave’s board have to bear some of the weight of the company’s troubles. But he’s encouraged by what he’s seen so far from Wright. “I think at some point, you can’t blame the CEO; you’ve got to blame the board. I think this new group is trying to do things right,” says Anderson. “Right off the bat they’re doing things totally different: They’re getting the input of the franchise partners. The people who have stuck to the original vision, they’re all doing well.”
But change is in the offing again. Wright makes it clear that he is not going to be CEO for the long haul.
“The board is very clear: I’m the interim CEO,” says Wright. “The board is trying to find the right person who understands our brand, understands our culture, understands what made the company successful from the start and why people loved our food and can build upon the great assets we have here.”
For his part, Anderson is starting to slowly build a new company.
He’s opening his second Jimmie’s in October in Rice Lake, Wisconsin, and says that he could eventually open in the Twin Cities. “I think we have found a formula where we can grow and be successful.”
Burl Gilyard is TCB’s senior writer.