Those of you who pay attention to stocks, and most of you who haven’t, have seen by now the ridiculous surge in valuations at companies like the games retailer GameStop, the movie theater company AMC and even what’s left of Blockbuster video.
To sum up: Some stock traders in a Reddit group decided together to buy up stock in GameStop, driving up its value, in part to hurt hedge funds that were betting on that stock to go down. They then eyed the other companies, hoping to do the same thing. It worked, though now as we write this both companies have lost much of their value as investors take profits.
So far, no restaurant company has been the subject of such antics, though the financial blogging site Seeking Alpha did mention a few highly shorted restaurant companies like Red Robin and Shake Shack were up on Thursday.
Yet the sudden surge in value of publicly traded companies for reasons other than their fundamental performance—followed by a just-as-quick collapse in their valuations—brings to mind the story of Famous Dave’s, which had a similar situation between 2013 and 2015. The only difference was timeframe (because social media wasn’t involved) as well as the culprits, in this case hedge funders rather than Redditors.
In that case, however, the hedge funders managed to make changes to the company that nearly ruined it.
Dave’s is a casual-dining barbecue chain that lost much of its stock value during the recession as investors rightly grew fearful that consumers had shifted their dining toward takeout options. Its stock largely remained stagnant between $5 and $10 per share in the two years after the Great Recession. It was at around $7 per share in October 2012 and was largely a sleepy small-cap stock that generated little investor attention.
But it did catch the eye of some hedge funds that frequently target small chains in a bid for short-term gain. Four different activist investors would take a position in Famous Dave’s between late 2011 and early 2013 and two additional activists took position in the two years thereafter. Hedge funds and activist investors ultimately came to dominate the company’s stock.
The stock predictably surged over the next 18 months. By February 2014 the company’s shares were trading at over $20 per share, up 210%.
Did the company do anything to earn this surge? Not really. Same-store sales were in a decline, though margins had improved in 2013 thanks to lower food costs, which helped the company’s profits. Yet the same fundamental challenges remained.
Just so we’re clear as to what was driving this surge: Around this time I was presenting to a group of investors in Boston, one of whom was a hedge fund investor. “I’m just looking for something that’s going to go up in a few months,” he said. “I’ve invested in Famous Dave’s.”
And then in February of 2014, Dave’s named former McDonald’s USA CEO Ed Rensi its interim CEO. Rensi was named to the board a month earlier. Activist investors that had been pushing changes at the company won board seats, and the Rensi tenure was the result.
That gave the rally further fuel—it surged to $27 a share by May after Rensi was named permanent CEO. But then it fell down to $20 by July and up again to $26 per share by February 2015.
Rensi, however, would prove a disaster for Famous Dave’s itself. The company removed popular items from its menu and made some weird decisions—most notably, Rensi required managers at company-owned stores to wear suits on the job. Yet barbecue, with its messy, dripping sauces and smoke-filled meats, is a fundamentally informal experience. As a person who smokes meat as a hobby I can tell you that a suit is the absolute wrong thing to wear.
In any event, same-store sales didn’t improve. They got worse. In June 2015 Rensi stepped down as CEO. In July he left the board. In August the company said same-store sales declined 9.2% in that quarter at company restaurants—a 14.7% decline on a two-year basis. Revenues, net income and adjusted earnings before interest, taxes, depreciation and amortization all plunged that year.
The suit requirement wasn’t the cause of the sales decline, but it was indicative of the disconnect between management during the Rensi era and what the chain was about.
It would take years for the company’s sales to recover.
As for the stock, it did what you’d expect it would do: It went right back to where it was and then further down. The stock lost nearly three-quarters of its value between May and November 2015 as investors fled the stock. The price would remain at levels lower than they were in October 2012 for the next three years while the company went through a succession of CEOs to fix the problems.
In the end, the small-time investors that drove up the shares of GameStop and AMC are only doing the same thing hedge funders have been doing for years, albeit in a much, much shorter timeframe. But the hedge funders can get control of a company, and in the Dave’s case the result created far more problems.
In the end, stock rallies based on something other than fundamental performance are bound to come back to earth.
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