BBQ Holdings is Sizzling…Is it too Late to Buy?

Fire up the grill! After trading in a sideways pattern for several weeks BBQ Holdings (NYSE:BBQ) stock has surged over 50% in recent days. What stoked the fire?

The micro-cap operator of Famous Dave's restaurants got a late summer boost when corporate insider David Kanen made a couple of large purchases on August 19^th and 20^th. The director bought over $900,000 worth of BBQ shares sparking the highest trading volume the thinly traded stock has seen since late 2017. It makes you wonder what's cooking.

The sudden surge has left investors trying to figure out if the stock is overheated or on the verge of a bigger rally. Let's take a closer look at what the company has been up to and what may lie ahead. 

How has BBQ Holdings Fared During the Pandemic?

The Famous Dave's brand has been around since 1995 when the first restaurant opened in Minneapolis. The barbeque chain offers hickory-smoked meats, salads, beans, corn muffins, and desserts.  It has also expanded into retail by selling its sauces, rubs, and seasonings to grocery stores and other outlets.

Of course, the restaurant industry has been hard hit by the pandemic and has struggled to regain its footing. BBQ Holdings suffered a 23% sales decline in the second quarter as restrictions on in-store dining limited customer traffic. Historically half of the business comes from dine-in sales.

A silver lining was that same store to-go sales more than doubled compared to the prior year quarter. This was driven by an enhanced social media marketing campaign and increased customer use of delivery service providers.

To-go sales were an important pre-pandemic contributor growing 6.9% last year. This outpaced the overall same-store sales growth of 2%.

Since dine-in restrictions have eased, sales have picked up. Most of the restaurants, however, are operating at 50% capacity as per state and local guidelines.

Like most restauranteurs, BBQ management has taken a cautious approach to capital management this year. With $19.9 million in cash it now has nearly 4-times the cash position it had at the end of 2019. However, this has been driven by an increased long-term debt balance which has swelled to over $20 million.

What are BBQ Holdings' Growth Opportunities?

BBQ's restaurant count has increased gradually over the years. It exited the recent quarter with 145 locations across 33 states and three countries - nine more than the year before. Roughly two-thirds of the restaurants are franchise-operated. The continued expansion of its domestic and international footprint will remain a core part of its growth strategy.

The company also leans on catering sales to help generate growth. Catering sales grew 13.7% last year. But with banquets and events put on hold in recent months, the lack of catering revenue has hurt. As government mandates around large group gatherings are loosened expect to see a surge in catering sales stemming from pent-up demand for celebrations and social gatherings.

Earlier this year BBQ acquired the assets of Granite City Food & Brewery, an 18-location restaurant chain that offers a wide assortment of craft beer and a made-from-scratch, chef-driven menu. Although the timing of the acquisition was unfortunate, BBQ should eventually benefit from the trend in craft beer consumption that had strong momentum before the pandemic.

The addition of Granite City diversified the business away from the barbecue model and in turn reduced its risk profile. High margin craft beer sales should anchor bottom-line growth as economic conditions normalize. So far there has been a significant uptick in Granite City sales since restrictions have eased.

Further investment in its digital platform also has the potential to drive growth. BBQ is a bit behind the 8-ball in this regard but has made progress in recent years. Its loyalty app, launched in late 2018, generated $4.6 million of system-wide sales last year and customers sign-ups have been positive.

Is BBQ Holdings a Buy?

The stock crossed over both its 50-day and 200-day moving averages last week which were long term bullish signals. While we may see a near-term pullback as the weak hands take profits, this may present an entry opportunity.

Anytime a large, meaningful purchase is made by a board member, investors should take notice. Its often a signal that better times are ahead for the company.

Aside from the bullish insider activity, BBQ has some merits of its own. As the economy returns to health, dine-in activity should continue to trend upward and drive a more normalized sales pattern. And the reinstatement of large gatherings has the potential to reignite the previously surging catering business.

At 0.5x sales BBQ trades at a discount to its restaurant group average. Investors looking to spice up their portfolio may want to follow the insider lead and throw some charcoal on the grill.