Description

Summary:

BBQ is an underfollowed multi-concept restaurant business with numerous compelling growth drivers. The company was formed via a holding company reorganization in 2019 wherein Famous Dave’s of America (DAVE, subject of prior writeups) became a wholly owned subsidiary of BBQ. The company, led by CEO Jeff Crivello, has since pursued a highly accretive M&A strategy to bring more concepts under its umbrella. These concepts include Granite City, Village Inn / Baker’s Square and Tahoe Joe’s Steakhouse, in addition to two single-location barbecue concepts. In aggregate, the system consists of 303 restaurants of which 214 are franchised. At a high level, BBQ’s growth plan (and our thesis) has three prongs: 1) filling the latent capacity of existing restaurants via dual concepts, ghost kitchens and virtual brands, 2) organic unit growth driven by refreshed prototypes coupled w/a new franchisee pipeline and 3) continued M&A. Recent operating performance has been very strong, underscored by the beat and raise cadence established by the team over the last few quarters. While BBQ faces many of the same near-term labor and food cost challenges as the broader restaurant space, at ~7x 2021 PF EBITDA of $20mm (guidance normalized for full-year contribution from acquisitions) it trades at a slight discount to lower-growing fully-owned concepts and at a material discount to franchised concepts despite it being >70% franchised. We believe BBQ can easily generate $25mm+ of EBITDA in ’23, even if there are some profitability givebacks in 2022 due to the challenging restaurant operating environment. At a so-so 10x multiple, which we think BBQ can easily earn as it proves out its initiatives, our PT is $26/sh. Further upside is possible via many avenues including good M&A execution. Given the valuation differentials and relatively universal nature of the labor / commodity challenges, hedging opportunities are plentiful.

Overview of Concepts / Concept-Level Initiatives:

Famous Dave’s

Famous Dave’s is a barbecue concept that has 135 locations, of which 104 are franchised. The 104 franchised units generated ~$225mm of sales in 2021 and the 31 corporate stores ~$80mm. Average corporate AUV is $2.8-2.9mm. We believe management’s initiatives at the corporate stores have brought a system that was marginally profitable on a 4-wall basis to the 10%+ 4-wall margin range, with further upside possible as better units are achieving margins in the mid-teens. It is important to note that the current store profile is not representative of the growth opportunity, which will come almost entirely from a new line-serve prototype with far better unit economics. For reference, the traditional Famous Dave’s store is 6,000-8,000 sq. ft. with a $1.2-2.2mm investment cost that pays back in 4+ years. The small box target is for a <3,000 sq. ft. store with a $600k-$1.1mm investment cost that pays back in 3 years. Given Famous Dave’s as a concept is north of 50% off-premise, the small-box format should function quite efficiently. A line-serve model strikes us as particularly compelling given the current set-up of the Famous Dave’s menu—it seems most common to order a combination meal that includes multiple meats and sides / putting together a plate. While it is early days, the line-serve prototype is being deployed and tested—franchisees have opened locations in both Coon Rapids, MN and Las Vegas, NV, with a Salt Lake City location (also franchisee) in the works. BBQ has taken pains to ensure the food quality in the smaller boxes is consistent w/the full experience, including sourcing smaller-format smokers to ensure consistent meat preparation. In addition to the line-serve prototype, BBQ will also launch a line-serve w/drive-thru prototype. If franchisees are successful with these openings, the growth profile of the Famous Dave’s concept could really inflect—we believe line-serve (like most of BBQ’s initiatives) is a free option at the current valuation.

The legacy Famous Dave’s box is not optimally configured—too large / a lot of latent kitchen capacity relative to actual volumes. BBQ is attacking this via dual-concepts—essentially two “restaurants” (more like 2 menus) tied to the same kitchen. BBQ has successfully demonstrated this in Colorado Springs w/a dual concept with Texas T-Bone, and in Woodbury, MN with a Famous Dave’s + Cowboy Jacks. Generally, BBQ management models dual concepts as an $800k revenue uplift w/25% flow-through. In addition to dual concepts, BBQ is also launching virtual concepts out of the Famous Dave’s kitchen such as “$5 Burgers”.

Apart from improving the productivity of Famous Dave’s restaurants, BBQ has also leveraged capacity elsewhere in the system to broaden the brand’s footprint. 8 Granite City locations and 20 third-party restaurants serve as ghost kitchens for the concept, w/10 more scheduled to open in 2021 per a November update.

Finally, Famous Dave’s also has a CPG business where BBQ receives a 3% licensing fee, resulting in 2021 licensing revenue of ~$1.5mm. The reason for this low rate is that CPG rights were sold in 2001 when the company needed to raise capital. Clearly this transaction did not age well as Famous Dave’s now claims more SKUs at retail than any other restaurant concept. Because of the economics of the Famous Dave’s CPG business, BBQ is focused on growing the CPG business arising from its other barbecue concepts where they will capture far more of the value.

Village Inn / Baker’s Square

Village Inn / Baker’s Square was BBQ’s most consequential recent acquisition. Village Inn is a breakfast-focused concept that is not too different from Denny’s / IHOP. System consists of 131 restaurants, with 110 of those franchised. Village Inn started in Colorado in the 1950s and the footprint is primarily in the Rockies, Midwest, Arizona and Florida. Baker’s Square is more of an all-day restaurant / bakery concept that has award-winning pies as its claim to fame. There are 11 Baker’s Square locations, all corporate and all in the Midwest. BBQ was able to purchase the combined entity (which had entered bankruptcy just prior to COVID) for a rather attractive ~2.9x pro forma net EBITDA of ~$4.6mm. In the bankruptcy (BBQ bought post-emergence), Village Inn / Baker’s Square were able to close 59 underperforming locations, reject 50 leases and refranchise 37 locations. Village Inn AUVs are in the $1.8mm range and Baker’s Square $1.7mm. The Village Inn royalty stream is approximately $4mm and the company stores produce ~10% 4-wall margins currently.

BBQ has ambitious plans for Village Inn, focused on refreshing existing locations into more upscale AM eateries, similar to richly-valued First Watch (FWRG). So far, a few initial restaurants have been converted to the new concept, which features a more “timeless” aesthetic vs. the traditional orange and yellow and adds things like counter/bar seating (concept attracts an older demographic / many parties of one) as well as upgraded coffee and alcohol offerings. There are clear tailwinds to the sit-down breakfast space from work-from-home and this is the perfect initiative to focus on in this environment given it is largely refresh oriented (do not need to staff new stores) and the commodity basket for Village Inn is not inflating at nearly the same level as center-of-plate proteins. The decision to pivot the concept in this way seems to be reinvigorating franchisee interest in the system. As some of the refreshes prove themselves out, we think a unit growth story will emerge. FWRG, which is a largely company-owned system vs. the franchise-heavy Village Inn, trades at a high-teens EBITDA multiple on the promise of opening a vast number of AM eateries—having been to FWRG’s stores, there is nothing all that special about their concept and we believe the refreshed Village Inns could be formidable competitors and help bring a younger demographic into the brand.

While the Baker’s Square restaurants are a very small component of the story, their pies have somewhat of a cult following in the Midwest and BBQ is actively exploring ways to expand distribution at retail outlets / bring the pies to its other restaurant concepts.

Granite City

Granite City is a restaurant / brewery concept based in the Midwest that has 18 corporate stores generating $65-67mm in 2021 revenues. AUV is $3.2-3.3mm w/21% liquor mix and 10% of pre-pandemic revenues came from Sunday brunch. Having visited, these are pretty large / elaborate buildouts and the restaurants look very fresh—more upscale ambience than other concepts in BBQ’s portfolio. Wort is shipped to the restaurants and craft beer is brewed on-site, and BBQ is looking for additional ways to monetize Granite City’s beer. The issue w/the concept, which allowed BBQ to acquire for 1.3x 2019 EBITDA after synergies in a distressed context, is that the buildouts were very expensive and realized volumes didn’t bail out that spend (not BBQ’s problem). BBQ’s primary initiative is to add a full breakfast daypart to better utilize capacity. The acquisition of Village Inn will accelerate this / the first iteration of breakfast at Granite City is actually a Village Inn within a Granite City location that is opening soon (similar to the dual-concept initiative at Famous Dave’s). Management estimates that adding a breakfast daypart could generate $1mm in additional sales / location. At 25% flow-through, this is potentially $4-5mm of additional EBITDA vs. 2021 EBITDA guidance for the whole business of $16.5-17mm.

Other

Clark Crew BBQ – BBQ has a controlling interest in Clark Crew BBQ, which is a single location in Oklahoma City ($8-8.5mm in revenue) oriented around Travis Clark, a pitmaster who first partnered w/Famous Dave’s in 2018 to improve food quality and consistency across the system. Main opportunity here is CPG, where BBQ owns 49% rights—sauces and rubs are popular and sell well, although there is an opportunity to broaden distribution beyond the 60 stores currently.

Real Urban BBQ – founded in 2009 by current Director of Culinary and Development at BBQ. BBQ acquired the concept for its line-service prototype—the store does $2.5-3mm in revenue and is good proof of concept w/the line-serve model—1.5 minute ticket times. CPG revenue for Real Urban was $350k in 2020. Purchased for less than 1x realized 2020 EBITDA.

Tahoe Joe’s – most recent deal, in October 2021. 5 locations in California, ski-lodge styled steakhouses, $18mm in system sales. Primary reason for this deal was the potential for dual concepts w/Famous Dave’s and the attractive valuation <3x EBITDA.

Catalyst

• Progress with both line-serve at Famous Dave’s and the new Village Inn prototype

• Successful roll-out of breakfast at Granite City

• Concerns over restaurant environment, particularly labor and center-of-plate protein costs begin to abate

• Improved IR initiatives / awareness of the story

• Potential strategic or financial sponsor interest in BBQ