Description

SAUC

With an Enterprise Value Of 163 million, Diversified restaurant Holdings trades at 6x estimated ebitda for 2016 and has a six-year CAGR of 28%.  The stock is worth 100% higher 2 years from now.

Diversified Restaurant Holdings, Inc. (SAUC) ("DRH" or the "Company")  is the largest Buffalo Wild Wings Franchisee and the operator of Bagger Dave’s Burger Tavern. The product is targeted to the ultra casual segment - the gap  between fast-casual (e.g. Chipotle, Panera, Five Guys) and traditional casual dining (e.g. Red Robin, Chili’s). The brand is strongly aligned with the millennials and key fast-casual trends - freshness, dedication to food segment, quality and price.  The locations are  characterized by a high energy environment, satisfying the service and social gap unfulfilled by fast casual.  

The company has achieved 19 consecutive quarters of consolidated same store sales growth.  DRH’s restaurant-level EBITDA margins (excluding BWW Royalty) are 21.3% vs 18.8% for the entire BWLD system for Q3 LTM. DRH is pursuing growth in Midwest and Florida to leverage operational presence, streamlined distribution and branding. Each unit has target cash-on-cash returns of approximately 30% (BWW) and 25% (Bagger Dave’s).  

Management has successfully completed acquisitions of 38 BWW since inception - leveraging operational expertise, G&A infrastructure, and systems to drive stronger profitability and unit volumes. Its 18-store St. Louis acquisition last year enables DRH to own the entire market in St Louis

The Buffalo Wild Wings (BWW) concept features  a variety of made-to-order menu items including bone-in and boneless wings, burgers, sandwiches, wraps, and salads  ~24 to 30 domestic and imported beers on tap, including several local or regional microbrews  Menu items complemented with 16 signature sauces and 5 signature seasonings, ranging from Sweet BBQ to Blazin. Chicken wings spun in one of 16 signature sauces or 5 signature seasonings, ranging from sweet to screamin’ hot complement and distinguish BWW’s wings from other menu offerings by giving the guest the option to customize wing orders. BWW provides a welcoming neighborhood atmosphere with an extensive multimedia social environment and open layout designed to create a distinctive dining experience for sports fans and families. Sound system, Buzztime Trivia, and easy sports viewing provide a source of entertainment and reinforce energetic nature of the concept. Buffalo Wild Wings has a presence in every U.S. State, totaling ~1,100 locations, (~500 owned and ~600 franchised).  “Stadia” floor plan focuses on creating an arena-like atmosphere with 60+ TVs.  All Buffalo Wild Wings restaurants feature a full bar which offers an extensive selection of ~24 to 30 domestic, imported, and craft beers on tap as well as bottled beers, wine, and liquor.

Bagger Dave’s is a full-service restaurant and bar, operating in the “better-burger” ultra-casual space.  Bagger Dave’s is a full-service concept with popular fast casual attributes such as FRESH, SPECIALIZED, and CUSTOMIZABLE FOOD,  featuring seasonal LOCAL Craft Beers on tap, accompanied with unique signature Craft Cocktails.  It has a  true hometown feel in each and every restaurant featuring local décor displayed throughout. Eclectic, hip depot themed atmosphere that contains an electric train that runs throughout the restaurant and 10-12 50” high-definition flat screen televisions.

For 2015, SAUC generated top-line growth of over 34%, achieved the fifth year of positive comparable-store sales with a 2.9% gain. SAUC also opened eight restaurants, acquired and began integrating 18 BWW in the St. Louis market, and rationalized the Bagger Dave’s portfolio by closing 11 underperforming locations.

For fiscal year 2016, the company estimates revenues to be $194MM to 200MM, a six year CAGR of 27.5 to 28.1%. It plans to open 3 new restaurants, consisting of one Bagger Dave’s and two BWW.  Capital expenditures range from $14M to $16M, consisting of new restaurant development, eight BWW Stadia design remodeling projects, and maintenance capital expenditures.  This represents a capital reduction of over $15 million from fiscal year 2015. Adjusted EBITDA is expected to be $24 to $26 million, a six year CAGR of 33% to 35%. Restaurant-level EBITDA is expected to be $36.0 million to $38.0 million allowing the company to pay down debt and build cash reserves.

Unit Economics for BWW:

• $2.0 MM estimated cash investment

• Target revenue per store $3 MM

• Target restaurant level margin 20%

• Target restaurant level ebitda $600K

• Target cash on cash return 30%

• Estimated average check $26.10

• Target sq footage: 6,400

• Target revenue/sq foot $469

• Target number of seats 225

• Estimated Incremental Margin% >35%

Unit Economics for Bagger Daves:

• $1.3 MM estimated cash investment

• Target revenue per store $1.7MM

• Target restaurant level margin 20%

• Target restaurant level ebitda $320K

• Target ash on cash return 25.6%

• Estimated average check $25.40

• Target sq footage: 4,300

• Target revenue/sq foot $395

• Target number of seats 160

• Estimated incremental margin >45%

Revenue mix for BWW is 19.1% Lunch, 14.8% Happy Hour, 14.4% Late Night, and 51.7% Dinner.  Alcohol is 18.6%. Food & Beverage is 81.4%.

Revenue mix for Bagger Dave’s is 27.1% Lunch, 25.7% Happy Hour, and 42.8% Dinner.  Alcohol is 13.5%. Food & Beverage is 86.5%.

DRH’s restaurant level EBITDA margins of 21.3% (before BWW franchise royalty) ranks favorably among its pers (Red Robin is 21.7%, Texas Roadhouse 17.1%, BJ’s 19.0%)

The formula to its same store sales growth is based on:

• Stay ahead of the curve through differentiated, customizable and proprietary menu offerings that decrease “veto” vote and enhance guest experience

• Table side selling of food and beverage items encourages higher attachment and productivity gains

• Create “buzz” around concept

• Technologically sophisticated loyalty program attracts and retains guests.

Bagger Dave’s aligns with the millennials by offering natural beef, turkey, chicken and produce.  It does not have walk-in freezers.  It offers fresh, cooked to order burgers, hand cut fries and full service at price points competitive with fast casual concepts.  It offers mobile payment, fresh rewards app, hand-held POS, music controlled by phone app. It allows create-your-own-burger or meal with COY menu sheets.  It allows you to order online or from the mobile app, charge your computers or mobile device at your table with power and USB outlets, WiFi.  It also has large flat-screen televisions throughout, energizing atmostphere.

Bagger Dave’s invests in technology to improve guest experience and productivity.  In Q1 2015, it launched an enhanced mobile app featuring customer voice, online ordering, and mobile pay.  In Q2 2015, it began testing Ziosk tabletop devices allowing paying at the table, ordering refills on demand, improving speed to service, and an option for game entertainment at the table.

The CEO has been buying shares of DRH on an automatic plan since September 2015.  The CEO is Michael Ainsley who served as the President, CEO, and Chairman of the Board since DRH's inception. He became a BWLD franchisee in 1996, opened DRH's first Buffalo Wild Wings location in 1999, and opened the first Bagger Dave's location in 2008. He owns 11 million shares or almost 40% of the company.

The company also has a share repurchase plan.  In March 2015, the Board of Directors authorized a program to repurchase up to $1.0 million of the Company's common stock in open market transactions at market prices or otherwise. In April 2015, SAUC repurchased $98,252 in outstanding shares, representing 24,500 shares. The weighted average purchase price per share was $4.01. Upon receipt, the repurchased shares were retired and restored to authorized but unissued shares of common stock.

Valuation:

By 2017, the company should be generating revenues of at least $240MM with an EBITDA of $30MM. With a maintenance capex of $10MM, the current price indicates an 8 times multiple of (EBITDA less maintenance capex). Applying a 10 multiple, this equates to about a 100% upside to the current stock price.

Risks:

• A recession (which seems likely) will hurt the restaurant industry severely.

• Restaurants can be quite prone to fads.

Catalyst

• Insider buying
• Company share repurchases
• Continued CAGR of 25 to 28%