BBQ Holdings: Revisiting The Investment Thesis (NASDAQ:BBQ) (2024)

Investment Thesis

I wrote about BBQ Holdings, Inc. (NASDAQ:BBQ) for the first time back in September 2021. In that article, I have highlighted a number of catalysts, such as an accretive M&A framework and organic growth initiatives, which were supposed to create value for shareholders. However, the stock didn't go anywhere since September, despite an acquisition and good quarterly results. I still believe BBQ offers a good value relative to its peers at the current valuation and most opportunities highlighted previously are still valid and untapped.

Company Details

BBQ Holdings, Inc. is a multi-brand company engaged in the ownership and operation of casual and fast dining restaurants. It owns brands like Famous Dave's, Granite City Food & Brewery, Real Urban Barbecue, Clark Crew BBQ.

Famous Dave's

As of November 2021, its flagship brand, Famous Dave's had 135 restaurants, out of which 104 were franchised and 31 company-owned. Full table service is available at Famous Dave's and the restaurant serves food from the barbecue genre.

Granite City

Granite City's focus is premium casual dining with a diverse fresh menu prepared daily. In addition to food, the restaurant serves its award-winning line of hand-crafted beers. The firm features a centralized beer manufacturing facility, which helps with the early phases of the brewing process.

Real Urban BBQ

The brand was founded in 2012. Real Urban BBQ is specialized in real, wood-fired BBQ classics such as ribs, brisket, pork, chicken, and sausage. The extensive menu also offers a selection of side dishes and homemade desserts.

Clark Crew BBQ

Clark Crew BBQ is one of the most recent concepts in BBQ's portfolio. The first and only restaurant opened in December 2019 in Oklahoma City. Clark Crew rapidly became one of Oklahoma's top-grossing restaurants, thanks to its quality, slow-smoked meats, and hand-crafted sides. BBQ owns a 20% stake in this project.

Village Inn

The Village Inn brand was founded in Denver, CO in 1958. The restaurant is known for breakfast all day and pancakes. As of November 2021, Village Inn operated 21 company-owned stores and had a franchise network of 110 restaurants, which are primarily located in the Rockies, the Mid West, Arizona, and Florida.

Bakers Square

Bakers Square was founded in Des Moines, IA in 1969. The restaurants offer dine-in and takeaway soups, sandwiches, and pies. As of November 2021, Bakers Square operated 11 company-owned restaurants in the Mid-West.

BBQ derives 80% of its revenue from 3 brands:

• Famous Dave's accounted for 35%.
• Granite City generated 29%.
• The Village Inn brand made 16%.

Recent Developments

In my previous article on BBQ, I have highlighted a number of catalysts that were supposed to drive value creation. These catalysts were as follows:

• The opportunity to scale up the franchise business.
• Refreshing the restaurants and improving the service.
• Enhancing the online experience.
• Operational improvement through the use of ghost kitchens.
• Organic growth, especially internationally.

I was positively surprised by the Q3 FY21 results. The company is growing revenue while increasing profitability. BBQ posted total revenue of $55.4 million vs. $35.5 million and net income of $4.8 million vs. $0.3 million YoY. At the same time, the combined brands' restaurant-level margins stood at 8.6% vs 3.4% last year, driven by a decrease in prime costs from 67.8% in Q3 FY20 to 62.6% in FY21. As a result, EBITDA more than doubled during the quarter. Adjusted EBITDA was $4.4 million vs. $2.0 million in the third quarter of 2020. However, I'm really pleased to see BBQ generating a solid amount of operating cash flow. For instance, the company generated $6.46 million in Q3 FY21 compared to $1.13 million last year. Over the last 12 months, the business has generated a cumulative ~$17 million from operating activities. To put things into perspective, the last time the business generated so much cash was back in 2013. Therefore, I believe things are starting to turn around for BBQ.

Another positive development is the solid comparable sales figures posted by the company. I'm pleased to see that the Famous Dave's brand is performing strongly. Same-store sales are up 12.4% in the company-owned restaurants vs. 2019 and 6.9% in the franchise-operated restaurants. However, it is important to point out that other concepts are not doing as well. Bakers Square, which represents approximately 8% of BBQ's revenue, posted comparable sales down 20.2% vs. 2019, and Village Inn's comparable sales are down 8.1%. Both concepts were acquired in July 2021 and I believe we should give management some time before judging them on these two concepts. In fact, this was the company's strategy from the beginning. They are targeting underperforming restaurants that they can purchase at a very cheap valuation and bring operational efficiencies. As Jeff Crivello, BBQ's CEO puts it:

Management is focused on executing against our three core growth initiatives, including accretive M&A, opening new units, and filling the latent capacity of our current restaurants. During the third quarter, we completed the highly accretive acquisition of Village Inn and Bakers Square. Our goal now is to reinvigorate these brands and drive consistent unit-level improvements as we have at Famous Dave's and other brands.

Another example of this strategy is the recent acquisition of Tahoe Joe's back in October 2021. BBQ snagged Tahoe Joe's through a bankruptcy auction of its parent company, Fresh Acquisitions, and paid $5.2 million for the five-unit chain. The deal also includes the intellectual property of Home Town Buffet, Ryans, Furr's Fresh Buffet, and Old Country Buffet. However, BBQ Holdings has no immediate plans to reopen these buffet chains.

All in all, I believe the company delivered a strong quarter and is on track to achieve its growth targets. That said, I think many of the catalysts mentioned above are still untapped which provides upside to the bullish thesis in my opinion.

Valuation

Management raised its FY21 guidance back in November 2021 as follows:

• Net Revenue of $183 - $188 million
• Net Income from $20.6 - $21.0 million to $22.5 - $23 million
• Cash EBITDA from $14.5 - $15 million to $16.5 - $17 million

Moreover, management expects to finish the year with $30.1 million in cash and approximately $8.8 million in total debt. Given a market cap of $159 million, this results in an enterprise value of ~$138 million. Therefore, BBQ is trading at 9.36x EV/EBITDA, which is slightly higher than when I wrote the first article in September 2021. However, BBQ trades at an attractive valuation compared to other restaurant chains that have a median EV/EBITDA multiple of ~15. Overall, I still believe the business is fairly priced, assuming BBQ will continue to reach its strategic targets.

Key Takeaways

The company is in the middle of a turnaround that started 5 years ago. BBQ continues to be active in the M&A field and recently bought Tahoe Joe's through a bankruptcy auction. Moreover, BBQ delivered a solid third-quarter and is now on track to generate more than $16 million in operating cash flow in FY21, a level not achieved since 2013. In terms of valuation, BBQ is attractively priced relative to its peers, assuming BBQ will continue to reach its strategic targets. BBQ is on my watchlist and I will keep close tabs on it until I find an attractive entry point.

About me:Value-oriented investor, seeking low-risk investments with the potential to deliver high returns. I like to analyze commodities, ETFs, and cash-flow positive businesses that have a moat and growth opportunities.