DRI Darden Restaurants Inc

Famous Dave's of America Inc. (DAVE) recently reported fourth quarter 2011 adjusted earnings of 9 cents per share, which beat the Zacks Consensus Estimate by a penny and the prior-year quarter's earnings by 2 cents. Including the non-cash impairment charges of approximately 4 cents, the earnings for the reported quarter were 5 cents. In fiscal 2011, earnings were 72 cents per share versus 67 cents in the prior year.

Famous Dave’s, which owns, franchises and operates restaurants in the U.S., reported total revenue of $37.5 million, up 3.6% year over year. Company-owned restaurants sales were $33.3 million, up 3.4% year over year. Franchise royalty revenue climbed 7.4% year over year to $4.0 million. In fiscal 2011, revenue jumped 4.4% to $154.8 million year over year.

Quarter Highlights

Same-store sales for company-owned restaurants grew 3.6% during the quarter compared with an upside of 3.3% in the year-ago quarter.

The upside in comparable sales was attributable to strong sales promotion and innovative offerings. Same-store sales from franchise-operated restaurants rose 2.1% versus a decline of 0.8% in the fourth quarter of 2010.

As a percentage of restaurant sales, both food and beverage costs and labor and benefit expense spiked 90 basis points (bps) to 30.8% and 32.3%, respectively and operating expense rose 30 bps to 29.4%. However, as a percentage of total revenue, general and administrative expense dipped 170 bps to 10.5% and depreciation and amortization expense remained flat year over year at 0.5%. Hence, the company’s operating margin contracted 70 basis points (bps) to 2.1%.

Store Update

During the quarter, the company opened three franchised restaurants and one company-owned restaurants. At the end of 2011, the company operated 187 restaurants, including 54 company-owned restaurants and 133 franchise-operated restaurants.

In 2012, Famous Dave's expects to open up to 15 restaurants, out of which 10 to 12 are franchise-operated restaurants and 2 to 3 are company-owned restaurants. The above openings also include first international location, a restaurant in Winnipeg that is expected to open in June.

Financial Position

Minnetonka, Minnesota-based company ended 2011 with cash and cash equivalents of $1.1 million and shareholders’ equity of $34.1 million.

During the quarter, the company repurchased 304,036 shares at an average price of $8.68.

Our Take

As the economy is showing signs of improvement, we believe Famous Dave's will likely generate improved earnings. In 2012, the company will focus on four key areas i.e. growth in new restaurants – both company and franchise, menu, restaurant format, and guest satisfaction continues evaluation, excellence in core systems and processes with a focus on continuous improvement and lastly enhancing shareholder value.

However, increasing input costs, lower consumer spending and stiff competition from peers like Jamba, Inc. (JMBA) and Darden Restaurants, Inc. (DRI) will drag profits.

Famous Dave's currently retains a Zacks #1 Rank, which implies a short-term Strong Buy rating on the stock. We reiterate our long-term Neutral recommendation.

 
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