FAT Brands REPORTS THIRD QUARTER RESULTS, PLANS TO ADD FAZOLI’S BY MID-DECEMBER

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FAT Brands REPORTS THIRD QUARTER RESULTS, PLANS TO ADD FAZOLI’S BY MID-DECEMBER

FAT Brands updated the financial community on its operating results for the third quarter, ending 9/30/21. It should be noted that major acquisitions have been taking place over the last twelve to fifteen months which, combined with the worldwide COVID effects, distort current and comparable results. Corporate management, analysts and investors must therefore look through the GAAP results and gauge the corporate progress and prospects by evaluating the basic health of the major brands.

Recall that Johnny Rockets was purchased in September, 2020. Global Franchise Group (GFG), with 415 unit Round Table Pizzas, closed on July 23, 2021. Twin Peaks, with 83 systemwide units, was acquired on October 1st, 2021 and Fazoli’s (214 units) is expected to close in mid-December. Johnny Rockets, when acquired, was projected by management to bring the “post-COVID, normalized” EBITDA run rate to $15-20M. GFG has been expected to add $30M (bringing the run rate to $45-50M). Management projects that Twin Peaks could add $25-30M (bringing the run rate to $70-80M) and Fazoli’s is projected to add $14.5-15M (for a new “post-COVID normalized” objective of $85-95M). The total portfolio, including Fazoli’s, will consist of about 2,300 units generating over $2 billion of sales.

The third quarter of ’21 was predictably much better than in ’20. Operating Income was $2.376M vs. a loss of $1.296M. The positive operating income was after an increase of $10M due to G&A and professional fees relating to the initial inclusion of GFG. Advertising expense also increased, from $0.8M to $5.5M, “reflecting advertising expenses from GFG and Johnny Rockets and the increase in customer activity as the recovery from COVID continues”. There was also a $2.053M “acquisition cost” item reducing Q3’21 Operating Income. After $7.1M of interest expense vs. only $123k in ’20, there was a pretax loss of $4.8M vs. a loss of $587k in ’20. CFO, Ken Kuick pointed out that the Revenue Run Rate entering ’22, assuming that COVID continues to fade, should be on the order of $340M annually ($85M/qtr.), versus the $29.8M just reported in Q3. Wiederhorn suggested on the conference call that the current quarter should show closer to $15M of Adjusted EBITDA, with the inclusion and synergies at GFG and the effect of Twin Peaks.

Relative to the basic health of the various brands, the earnings release noted that domestic same store sales were up 7% in Q3 vs. ’19 and worldwide same store sales were up 3.5% vs. Q3’19. While the int’l units, primarily Johnny Rockets, have been slower to reopen and rebuild sales, the third quarter improved 7.15% from Q2’21 to Q3’21. Portfolio wide, most notably at overseas Johnny Rockets, the number of closed stores was 52 at 9/30, down from 63 at 6/30 and 107 at 3/31. The franchise sales team “had a record quarter, closing nine deals that account for 166 locations. We expect unit growth to continue increasing in the coming months with plans to open 26 additional stores by the end of 2021 for a total of 85.” Management further described the pipeline of new units, which totals about 700 units within the current portfolio, over 800, including Fazoli’s. CEO, Wiederhorn, refrained from specifying over what period those locations would open but pointed out that new additional deals are being done all the time, and it is not hard to picture somewhere between 100 and 200 new units adding annually to the current 2,100 units (including Fazoli’s.) Wiederhorn again emphasized his expectation that the current $744M of securitized debt can be refinanced with a new rating, saving something like $25M of interest per year. Wiederhorn accurately pointed out that the predictable growth in the various franchised systems is “free” growth. The supporting systems are in place and additional capital is not necessary for the organic progress.

CONCLUSION:

The third quarter results included Johnny Rockets (bought a year ago), GFG from July 23rd, and Twin Peaks only for one week. Adding back to the $2.4M of operating income: the $2.1M of acquisition expense, some portion of the heavy $5.5M of advertising expense as well as the initial larger than necessary G&A at GFG, we would have suggested that the third quarter “normalized” (not yet “post-COVID”) EBITDA might have been in the area of $8-9M. FAT actually reported “Adjusted EBITDA” at $7.2M. Considering that the COVID is still a factor and synergies at GFG are just now being implemented, FAT was not far from the (GFG included) “post-COVID normalized” objective of about $12M quarterly ($45-50M annually). With the impressive new unit pipeline and the encouraging same store sales trends across most of the portfolio, it seems to us that the developing fundamentals are adequately supporting the long term “story”.  Our previous reports describing FAT Brands can be accessed by way of the SEARCH function on our Home Page.

Roger Lipton