Famous Dave's Pit Boss

David Goronkin has added discipline to the management ranks at Famous Dave’s.

By David Farkas, Senior Editor -- Chain Leader, 3/1/2005

David Goronkin says there is “absolutely no limit” to Famous Dave’s growth.

Famous Dave’s, a Midwestern barbecue chain with national ambitions, is breaking out of a longtime slump and gaining financial momentum.

Under new management, the 11-year-old company is using limited-time offers to drive sales and manage margins in the wake of rising commodity costs. It introduced a new site model and prototype with full bar last month in Manhattan, Kan., to enhance its brand image. And it’s broadcasting that image of an authentic, down-home barbecue joint on network television for the first time.

One of the chain’s goals, says Chief Executive Officer David Goronkin, is to become the “absolute best in barbecue” using discipline and performance-based measures.

“This year is about accountability, helping people achieve what they have committed to achieve. We are at a point now where we are starting to hit our stride,” he explains.

Before Goronkin joined the chain in July 2003, it lacked a disciplined growth strategy under a succession of CEOs, including founder Dave Anderson. “Here is a classic story about a good concept trying to find its way,” says industry consultant Lane Cardwell, who recently joined Famous Dave’s board.

Maybe it finally has found its way. Goronkin, 42, is a buttoned-down professional manager with one thing on is his mind: running restaurants that provide a return to investors and franchisees.

Few doubt the 22-year restaurant veteran and former chief operating officer for Buffets Inc. is capable of that task. “David has the broad shoulders that can handle a great deal of the pressure that today’s CEOs must face,” declares his former boss at Buffets Inc., Kerry Kramp.

Wall Street pressure isn’t a problem—so far. Investors sent the stock price soaring last year, from $4.61 a share to $12.50 on Dec. 31. In early February a share of DAVE was trading hands for $12.10. Analysts who follow the company and report their estimates to First Call expect the company to post earnings of $26 per share for fiscal 2004 (ended Dec. 31) on revenues of about $97.1 million. Officials plan to release fourth-quarter and year-end results March 2.

Meanwhile, the company inked a five-year, $10 million credit facility with American Commercial Capital, announcing it would use some of the funds to continue a share-repurchase program.

“Investors are recognizing it’s a real consumer brand with Dave on board,” says David Geraty, a restaurant analyst at RBC Capital Markets who has followed the chain for six years and rates the stock an “outperform.”

Goronkin has been slowly transforming the concept, which owns 38 units and franchises 69 across 24 states. “When I came on board,” he recalls, “there were not significant, rapid-fire changes. I spent a lot of time with franchisees and in our restaurants. Through research we determined some things just aren’t working.”

Discounting Discounts
One of those things was discounting, a gambit that increased traffic counts but hurt margins. Combination platters that fed two, for example, sold for $19.99 instead of $29.99. Deep discounts helped boost traffic, but it also gave customers a reason to defer visits until the next coupon.

Famous Dave’s credits its same-store-sales gains in part to less costly limited-time offers such as the Blackened Cajun Catfish.

Profits from catering, about 18 percent of unit-level sales, were also taking a beating. “In the past, it was all about getting the deal. So if someone said, ‘This is what I’ve got to spend,’ people would never turn down the sales. Sometimes you’ve got to say, ‘I can’t do it for that,’” Goronkin says.

Goronkin is trying to stabilize margins, threatened most recently by rising costs for pork and beef, the company’s signature meats. One defensive tactic: launch a series of less costly limited-time offers. During the 2004 Lenten season, for instance, Famous Dave’s prepared salmon fillets in its hickory smokers. Customers embraced the product, which rose to 5 percent of sales in company restaurants, making it one of its most successful product launches. It is now a regular menu item. Officials expect this year’s Lenten LTO—shrimp and catfish po’ boy sandwiches—to rack up about 2 percent of total sales.

The company buys about 85 percent of proteins on contract, says Chief Financial Officer Diana Purcel. “The good thing about that is, you know your exposure. The bad thing is, you know your exposure,” she says. “LTOs give you a chance to manage that.” The chain is likely to promote barbecue just once this year, from May to September, traditionally a popular time to eat the product.

Batting Cleanup
Since its beginning in 1994, Famous Dave’s searched for a similar solution to spark consistent growth. And while the chain expanded quickly after a 1996 IPO, three previous management teams always seemed under the sway of their charismatic chairman, Anderson.

In perhaps the most egregious example, the company poured millions into an arena-like Chicago blues club. Anderson, raised in Chicago, is an aficionado of the music. When the venue failed to make money, management struck a widely publicized joint-venture deal with musical genius Isaac Hayes, who opened a second club in Memphis, Tenn. Famous Dave’s assumed operating losses for the first three years. According to company filings, Famous Dave’s was in a $2.1 million pretax hole by 2002.

Famous Dave’s new TV commercials portray the concept as an authentic, down-home barbecue joint.

A classic mistake? Goronkin isn’t saying. He diplomatically plays down the failings of his predecessors, including Anderson, who resigned from the board late in 2003 when President George W. Bush tapped him as assistant secretary of the interior for Indian affairs. (Anderson quit the post in February.) “Dave left us with a great brand,” Goronkin proclaims.

Still, Goronkin’s management team has had plenty to clean up, including closing five underperforming units and divesting two company markets. He also slammed the brakes on company-store development in ’03 and ’04. Company officials blame the closure of three Dallas restaurants on bad locations. But an industry consultant familiar with Famous Dave’s who dined in the units frequently claims that locations weren’t the problem because dozens of restaurants were nearby. “[Famous Dave’s] couldn’t recreate the dining experience you got in Minneapolis,” asserts the executive, who asked for anonymity.

“We built [units] right, we built them wrong. We really did everything we could to see Famous Dave’s was survivable,” chuckles former board member and CEO Martin O’Dowd, who now runs three Famous Dave’s in Atlanta. Share price nose-dived to $3 during O’Dowd’s tenure, which ended several months before Goronkin joined the company.

The stock rose slightly on news of Goronkin’s appointment. It hovered around $6 a share as sales trends remained negative for the first six months of ’04. Goronkin and Purcel cautioned investors not to expect positive same-store sales until the company ended discounting. Eliminating discounts was “the right thing to do to protect our brand in the long term,” they told investors in a March 4, 2004, conference call.

Last year’s third-quarter proved them right: Comparable sales jumped 5.3 percent at company restaurants compared to negative 3.5 percent for the same quarter last year. Franchise-store comps also climbed, from negative 4.3 percent to negative 1.4 percent.

Goronkin credits limited-time offers, strong marketing and a 2 percent price increase for the gains.

The company has since raised prices again in January about 1 percent across the board. Management has another opportunity to raise them in July during a second menu revision. Goronkin, ever the strategist, wants to change the menu twice a year to keep it interesting and to increase prices if necessary.

Dave’s Sassy BBQ Salad comes with choice of chopped pork, beef brisket or barbecue chicken, topped with bacon, cheddar cheese and diced tomatoes, and tossed with honey-barbecue dressing.

The process is easier, Goronkin says, because the marketing department, led by Vice President of Marketing Lane Schmiesing, has created a development pipeline. “We are starting to get things in the can. We can already speak about our fall promotion and our spring ’06 promotion. That means we can buy better, train better and support growth more effectively,” Goronkin explains.

Building the Brand
Meanwhile, he and Schmiesing hired Minneapolis-based ad agency BBDO to find the right times to run commercials. “We tested cable spots in different dayparts. Higher weights, lower weights,” Schmiesing says. Like other casual-dining chains, Famous Dave’s runs ads during both prime access (before and after evening news, for example) and prime time.

A commercial made in-house boosted sales and traffic in the third quarter. More recently, BBDO produced a series of brand-building commercials featuring unknown blues musicians who play and hum in the 30-second spots. “These guys are authentic blues artists,” Schmiesing says, adding that the ads will translate “nicely to radio and print.” He expects to buy three-week flights that will air in company and franchise markets.

To pay for the ads, Goronkin set up for the first time a national advertising fund that collected $1.5 million last year. Only new franchise restaurants contributed, leaving 30 restaurants exempt. “I didn’t feel comfortable asking the guys who had already been there for that kind of support,” he says of franchisees in the system before he arrived. All franchise and company restaurants will contribute to the fund going forward.

New franchisees are also part of the story. Like other growth-oriented chains, Famous Dave’s is hoping to attract area developers with the means to sign multiunit agreements. This wasn’t always the case. Senior Vice President of Operations Christopher O’Donnell remembers when the company “pulled back from franchising” in the late 1990s. “We had several different franchise strategies,” he recalls. One of them was rewarding “a lot of passionate people in the company we knew were passionate operators.”

At the time, however, the company’s lack of operational focus led to problems in the restaurants. To get sophisticated franchisees, O’Donnell admits, “We need to operate at a level that will garner creditability from our partners. We have to reinvigorate the romance of barbecue—and why we are so special.”

That portion of the story is already written if franchise income is any measure. Analyst Geraty says it will grow roughly 30 percent, to $2.2 million in ’04, “reflecting more units in operation, 67 vs. 54, and the approximate 7 percent from an extra week,” he wrote in a Feb. 7 “Research Comment.” Even so, he adds, comparable sales remain down 1 percent among franchisees due to a variety of factors including less media exposure and per-store productivity levels that outpace company stores.

Full-service franchise-store volumes, for example, average close to $3 million a year, while company restaurants gross $2.4 million on average, according to O’Dowd. Goronkin and Purcel decline to comment on unit economics.

From Shack to Smokehouse
One reason, they say, is the existence of several layouts, varying in size from small “shacks” with only counter service to full-service “lodges,” which seat 175 people. There’s even a “slodge,” a smaller full-service unit.

To get alignment in the numbers, Goronkin has recently overseen development of a prototype, elements of which, including a full-sized bar, were introduced in a franchise restaurant last year in Chandler, Ariz. A full-blown model opened in February in Manhattan, Kan.

The company expects to open its first prototype, dubbed the “Smokehouse”—and first new restaurant in more than a year—in the third or fourth quarter in Chantilly, Va. A second company restaurant will open soon thereafter.

Although Famous Dave’s has released few pro forma details, the 7,200-square-foot, 220-seat building is expected to produce at least a 1-to-1 sales-to-investment ratio and cash-on-cash returns of 20-plus percent.

Franchisees will open 20 or more restaurants, some conversions of existing eateries. Indeed, Famous Dave’s grew quickly via conversions, but Goronkin wants to avoid it. The reason: poor brand-image communication. The company will begin converting a handful of its own “shack”-style units to full-service formats this year.

In the meantime, Goronkin insists the company can finance expansion from cash flow. It has about $10 million on hand as well as $17 million in long-term debt “We’ll open two to four restaurants next year,” he says. “We will continue to fill out existing markets. We have room in the mid-Atlantic region, Chicago and Minneapolis. We’ve got some talented and motivated people on the corporate side. We need to provide opportunity for them.”

It’s clearly not the end of the story.