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MINNETONKA, Minn. – Famous Dave's of America announced a shakeup of its officers and board members late last month. At the corporate officer level, it has appointed new board member Ed Rensi as its chief executive officer, replacing John Gilbert III. Richard A. Pawlowski replaced Diana Purcel as chief financial officer, effective June 2. Two members of its board of directors were also swapped.
That's a lot of shaking and moving among the top ranks.
Restaurant unit economist John Gordon of Pacific Management Group thinks the turnover of leadership is due to activist investor Blue Clay Capital. "You can bet Blue Clay, the 12 percent owner, muscled their way on the board and displaced Gilbert and the other directors," says Gordon. Former CEO John Gilbert III has been president of Romano's Macaroni Grill since March. Gordon thinks new CEO Rensi is the public face for that activism.
Owning 54 restaurants and franchising 140 more in 34 states, Famous Dave's has fallen upon tough times. Franchised restaurants have had a dismal performance in same-restaurant sales. Famous Dave's best year was 2011, two years after the end of the U.S. economy's contraction in June 2009. With such poor restaurant performance and little to show prospective franchisees with its restaurant business model, Famous Dave's has been hard pressed to sell new franchise units (see chart).
Traffic in the casual dining restaurant segment that barbecue resides in has been sagging for years. Visits to casual dining restaurants were at a 6-year low in the year ending February 2014, according to a food researcher the NPD Group. Since 2009 casual dining traffic has been declining at a rate of two percent each year. Major casual dining chains have held up better than smaller chains long-term because of their ability to advertise and deal more than the smaller chains and independents. Visits to major casual dining chains have been flat for the last five years compared to visit declines of 3 percent for small chains and independents, according to NPD's foodservice market research.
Despite such grim restaurant unit economics, amazingly Famous Dave's has been able to sell enough in 2013 to grow its net franchise base by a handful (see franchised unit chart).
Famous Dave's franchised restaurants' average unit volume has been down 0.4 percent by compound annual growth rate from 2009 to 2013. That's according to restaurant researcher Technomic Inc. Compare that to competitor Sonny's BBQ, a private franchising firm headquartered in Florida with restaurants throughout the Southeast. Its franchises had an average unit volume growth of 4 percent. But all is not rosy for Sonny's. According to Technomic, the number of Sonny's casual dining restaurants have shrunk slightly from 130 in 2009 down to 124 by the end of 2013.
Dickey's Barbecue, a chain of 362 fast-casual franchises, had a drop in average unit volume growth of 1 percent, compounded annually from 2009 - 2013.
Famous Dave's franchises are struggling to make even slim profit margins, estimates John Gordon. "Franchise margins aren't revealed but using company store margins as a base, I would estimates 6 percent for EBITDA margin around 6 percent for a Famous Dave's franchise," says the restaurant unit economist. That is what's left over for franchise owners to pay back capital expenditures on their businesses.
The going is tough in the barbecue segment. "The barbecue space is only so big," says analyst Gordon. He speaks of barbecue as having a regional market demand with five regional tastes. But Famous Dave's is spread like a thin brush of rib sauce from East to West Coast.
Rensi replaces ex-CEO John Gilbert III, who had been its chief executive for almost 18 months. "In early February 2014 I was notified by our former CEO John Gilbert of his intent to resign," wrote chairman of the board Dean Riesen in Famous Dave's just released annual report. Gilbert left the company to serve as president of Romano's Macaroni Grill in March. "This came as a complete surprise to the entire organization," added Famous Dave's chairman.
Interim CEO Rensi has seven years of experience as president and CEO of McDonald's U.S.A. After leaving McDonald's he started his own chain, Tom & Eddie's. "He has significant experience in operations, franchise organization as well as new product development and concept development," added Riesen.
The franchising firm's chief operating officer and president Christopher O'Donnell was terminated by the company on March 31, so his $400,000 severance package kicked in.
Famous Dave's emphasizes Pawlowski, Purcel's replacement, has experience in restaurant turnarounds and acquisitions, particularly with regard to restaurant companies. Richard Pawlowski was most recently CEO and co-founder of Capitol C Holdings, LLC, a restaurant development, acquisition and operating company. He also worked with Bain & Company. The firm's new CFO has an MBA from Harvard Business School and an undergraduate degree in engineering in metallurgy, economics and management from the University of Oxford.
"Diana has demonstrated outstanding leadership during her 10 plus years with Famous Dave's," said Ed Rensi. "I have great respect for her talents and on behalf of the management team and the board, I want to thank Diana for her contributions and dedication and wish her every success in her future endeavors. Additionally, we welcome Richard to the team as we prepare for our next chapter of growth."
Shakeup at the board too
Famous Dave's also announced the resignation of two board members, Richard Monfort and Lisa Kro, effective May 21, 2014. They served on the company's board of directors since 1996 and 2009, respectively. Concurrently with the resignations, the company announced the addition of two new board members, Jonathan Lennon and Brett D. Heffes.
Mr. Lennon is the founder and portfolio manager of Pleasant Lake Partners, a global concentrated equity investment fund with a 12.8 percent investment in Famous Dave's. Prior to founding Pleasant Lake Partners, he was an analyst at JAT Capital, and prior to that he was in the Investment Banking division of Goldman Sachs & Co.
Mr. Heffes, the new audit committee chair, is currently president of Winmark Corporation, a franchisor of five value-oriented retail store concepts and a technology equipment leasing company focused on middle market customers. During the past 12 years he has served in numerous positions for Winmark, including president of finance and administration, chief financial officer and treasurer.
"Both Dick and Lisa have made significant contributions to Famous Dave's over the years, and their insights and expertise have been invaluable. We thank them both for their years of service and will miss them," said Dean Riesen, Famous Dave's chairman of the board. "Our company continues to evolve, however, and as such, we welcome new members Jonathan and Brett to our board. I look forward to their contributions and working with them in building and growing this brand."
What's the plan, Dave?
High on the priority list is the creation of a new prototype to escape the doldrums of casual dining and explore the sizzling fast-casual segment. It's a hot restaurant space that competitor Dickey's occupies yet Dickey's finds its barbecue store sales slumping.
"We will continue to evolve our new prototype to respond to the customer's increasing desire for a 'quick casual' format," stated chairman Riesen. He recognized that Dave's business model for its franchises was challenged and blamed the regulatory environment. Riesen wrote, "I must recognize the continuous efforts and support of the franchisees that make Dave's famous in every way. They face significant head winds with an economic and regulatory environment that continues to challenge their business model."
Although its company-owned stores have managed to have less traffic and same-store sales hemorrhaging than the franchised stores, franchisor Famous Dave's must protect its own financial interests first. Faced with challenges and low same-store sales, Famous Dave's naturally is hungry to refranchise its company-owned restaurants to receive cash and transfer risk to others. New CEO Rensi says he has a strategic plan to address the franchisor's problems, including "providing exceptional franchisee support, building a franchisee sales organization, and transitioning corporate stores to franchisee-owned stores."