Diversified Restaurant Holdings, Inc., the largest franchisee for Buffalo Wild Wings and creator and operator of Bagger Dave's Burger Tavern, announced results for its second quarter ended June 26. The company also announced in a separate release that it intends to split into two separate, publicly traded companies through the tax-free spinoff of its Bagger Dave’s business to DRH stockholders. 

Michael Ansley, chairman, president and CEO, says, "Following a comprehensive analysis of various strategic alternatives for Bagger Dave’s, the board and management team concluded that the separation of our BWW and Bagger Dave’s businesses is the best alternative for the Company and our shareholders.  The separation recognizes that the BWW and Bagger Dave’s concepts are distinct in many respects: BWW is a franchise brand, whereas we own the Bagger Dave’s brand. BWW is a mature brand, while Bagger Dave’s is still in its early stages. Bagger Dave’s has a much more complex menu and, therefore, more complex food preparation processes. And, we have learned that Bagger Dave’s complexity requires different management and personnel. Separating these two very different businesses will enable each to better pursue their strategies and growth plans independently.” 

The company to be formed with the proposed spinoff of the Bagger Dave’s business will own and operate 19 Bagger Dave’s restaurants, which had revenue of $10.7 million in the first half of 2016. It will trade in the over-the-counter market. DRH will continue to own and operate its 64 franchised BWW restaurants and be listed on the NASDAQ exchange.

DRH is currently developing a comprehensive separation plan for the proposed spinoff. The separation plan, including transaction structure, timing, composition of senior management and the boards of directors, capital structure and other matters, will be subject to approval by the DRH board of directors and customary regulatory requirements.  The Company expects to complete the spinoff in the fourth quarter of 2016.  Additional information will be provided as the separation process moves forward. 

Ansley concludes, “Over the last year, we invested considerable resources and time to improve the Bagger Dave’s concept, which included rationalizing underperforming locations, making changes in management and improvements in operations while enhancing our customer touch points.  The greater focus on our BWW business and its significantly larger size, limits the attention and resources we can apply to Bagger Dave’s, which ultimately restricts our ability to build on the recent success of its redefined concept.  As an independent company, we believe Bagger Dave’s will be in a much better position to leverage its redefined concept to drive growth.”

Second Quarter 2016 Performance (compared with prior year period, unless otherwise stated) 

Achieved 25.8 percent revenue growth to $46.4 million.

BWW comparable-store sales decline 2.7 percent against strong 4.1 percent increase in prior-year period; Bagger Dave’s average weekly sales up 5.1 percent to $22,600.

Generated operating income of $961,536, a $6.5 million improvement.

Revenue grew with the addition of 15 net new restaurants and increased menu pricing. The company had 83 total restaurants at the end of the quarter.

Comparable-store sales for BWW were down 2.7 percent largely due to macro factors affecting the casual dining sector nationwide including over saturation, growing consumer preferences for value priced options and challenging comparators. This trend was magnified by warmer than normal weather diverting customers to more outdoor activities and fewer sporting events of interest to customers in the company’s markets. There were 59 comparable BWW restaurants for the period and a total of 64 BWW at the end of the quarter, up 22 from the prior-year period. 

Average weekly sales volume for the 19 Bagger Dave’s restaurants was $22,600, up 5.1 percent, or $1,100, validating the success of concept adaptations and the benefit from one new opening during the quarter.

The acquisition of 18 St. Louis BWW locations in July 2015 drove many operating expense lines higher  Other major components of the change in operating expenses include: 

Food, beverage, and packaging cost as a percentage of revenue declined 50 basis points to 28.1 percent primarily due to some overall commodity price relief and menu price increases.

Compensation costs as a percentage of revenue were up 20 basis points to 26.7 percent due to investments in personnel in the acquired restaurants and labor inflation. 

General and administrative expense was down 930 basis points to 6.1 percent as a percent of revenue. Closure of under-performing locations, cost reduction initiatives and favorable variances relative to $2 million of atypical expenses in 2015 drove G&A expenses down $2.9 million.

Operating income increased measurably over the prior-year quarter due to significant cost savings from the closure of underperforming locations and operating leverage from higher sales. 

Interest expense was up $0.9 million to $1.4 million, reflecting increased debt from the St. Louis BWW acquisition and higher interest rates.

Balance Sheet Highlights

Cash and cash equivalents were $5.5 million at June 26, 2016 compared with $14.2 million at December 27, 2015. Capital expenditures were $11.7 million during the first six months of 2016 and were for new restaurant development, restaurant refreshes and revamping four BWW restaurants to the Stadia design. There are now 28 Stadia concepts of the 64 restaurants and all will be converted by 2020.

Total debt decreased $4 million to $122.3 million at the end of the second quarter from December 27, 2015. The company has been making additional discretionary principal payments with available cash.