FOGO DE CHAO – FILES UPDATED IPO PROSPECTUS – OPERATIONAL SYSTEMS ARE GO, WAITING ON THE EQUITY MARKETPLACE!
We wrote, back in November, about the pending IPO for Fogo de Chao, the chain of Brazilian steakhouses and a link to that report is provided here:
FOGO updated their S-1 SEC filing with financials through December, 2021, as well as updating expansion plans which were largely unchanged from the guidance six months ago. Suffice to say that the recent update seems to only enhance the long term prospects for FOGO. We provide below some highlights, and encourage our readers who have an interest in more details to study the SEC filing from the link here:
The prospectus does not indicate how large this offering will be, and the timing depends on the general market. We expect that the offering will be sized to pay off the bulk of the $353 long term debt, and the multiple of the $86M of Adjusted EBITDA in 2021 remains to be seen.
In summary, as of 12/31/21 there were 48 US restaurants across 221 states, DC and Puerto Rico. There were also 14 international locations, 7 of which in Brazil are operated by the Company and 7 franchised in Mexico and the Middle East. The most recent AUV is $9.4M, up 22% from $7.7M in 2019, generating $431M of revenues in 2021. The company “targets” a 40%+ cash on cash return, and the existing system produced an even more impressive 58% in 2021. Prior to the Covid, the stores produced six consecutive years of traffic and same store sales growth, with 2021 and 2022 so far handily beating the 2019 numbers. Corporate Adjusted EBITDA was $86M in calendar 2021, up 34% from 2019.
The consumer appeal of FOGO is evidenced not only by the six-year track record of consecutive year-over-year traffic growth through Fiscal 2019, but the impressive post-Covid rebound in 2021 and early 2022. Revenues, net income and Adjusted EBITDA in 2019 were $350 million, $10 million and $64 million, respectively. In Fiscal 2020, revenue, net loss and Adjusted EBITDA were $205 million, $(57) million and $(9) million, respectively. The rebound in 2021 has been impressive, quarter by quarter, as shown below, with revenue, net income and Adjusted EBITDA of $431 million, $22 million and $86 million, respectively.
The following charts show the annual and quarterly trends in restaurant operating performance and corporate Adjusted EBITDA as well.. Restaurant level EBITDA was 30.3% in calendar ’21, up from 28.1% in 2019, generating $130M, up from $98M. At the corporate level, Adjusted EBITDA was 20.0% of sales in calendar ’21, up from 18.3% in ’19, $86M up from $64M.
The following tables show the adjustments to get from “Income from Operations” to “Restaurant EBITDA Operating Margin”. Also shown is the progression of Restaurant Contribution over the last three years, as well as illustrating the immaterial effect of the Brazilian locations. It is worth noting that the Brazilian component proved to be a significant concern of investors the last time FOGO was publicly held, not the case this time around.
ACTUAL NEW STORE PERFORMANCE HAS SUBSTANTIALLY EXCEEDED TARGETS
The stated third year targeted sales has been $6.6M, which in the past generated a cash on cash return of 40-43% from a prototype sized at 10,600 square feet. However the eight new US locations since 2019 generated annualized (based on the weeks they were open in 2021) at $9.0M, located in different regions of the US and in various types of trade areas. The three locations that were open for the full 2021 year were the best of the bunch, generating $9.4M, and those sales were generated out of a smaller 9,100 square foot prototype. Based on the latest $3.5M cash investment per store, the company states their “confidence that we will achieve our targeted 40% cash on cash return with our new development strategy.” They further point out that “our U.S. cash on cash returns in 2021 were 58% and 13% in Brazil”. (Brazil being relatively immaterial to the total equation.) Since a 40% cash on cash return on $3.5M would be $1.4M, which is only 15.5% of $9M and the restaurant level EBITDA contribution was almost twice that at 30.3%, management’s targeted AUVs and/or cash on cash returns are likely to be exceeded.
CONTROLLED GROWTH IS AHEAD – FOR A LONG TIME
Based on the compelling store level economics as described above and the demonstrated success in opening new locations even in the very difficult last twenty four months, expansion of the current store footprint should not entail too many risks. The plan is to open eight to ten new restaurants in 2022 as well as franchise one or two international locations. The company estimates that there is the potential for 300 total sites in the US plus 250 franchised internationally. We can only add to the above discussion our judgement that the high unit volumes allow for compensation of store level management sufficient to maintain the day to day dedication that produces long term performance.
As we stated last fall, FOGO, if an when it becomes publicly held, and if the valuation is not too extreme, represents an attractive long term investment opportunity.