Restaurant Finance Monitor
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FAT Brands, Inc., having absorbed a large number of franchised restaurant systems over the last three years, is now beginning to demonstrate the royalties and EBITDA as projected in the course of assembling their portfolio. (Our previous reports on this subject can be accessed using the SEARCH function on our Home Page.)

Recall that FAT Brands now owns a total of seventeen restaurant brands, the largest of which (in chronological order of ownership) are Fatburger, Hurricane Grill & Wings, Johnny Rockets, Round Table Pizza, Twin Peaks and Fazoli’s. Since Johnny Rockets was acquired in late 2020, and the last three were subsequently acquired in the midst of the Covid, company guidance has consistently been based on the respective pre-Covid performance, projecting growth from that level once Covid has passed. On that basis, the total portfolio of seventeen brands, consisting of over 2,300 locations generating over $2.2 billion of systemwide sales has been projected to generate $90-95M of annual EBITDA. The long-term debt over $900M has been secured by the various royalty streams and carries an average interest rate of about 7%, obviously absorbing a large portion of projected cash flow. However, though rates have risen lately, the Company continues to expect that the debt can be refinanced at a materially lower rate of interest as operating performance is demonstrated. As CEO, Wiederhorn, pointed out on the conference call, the volatility in debt markets may delay this process by 3-6 months, making it a Q1-Q2’23 event, rather than late in ’22, but still has the potential to save approximately 200 bp, or $18-20M annually.


Cutting right to the EBITDA chase: FAT Brands generated $29.5M in Q2’22, naturally up very dramatically from only $2.1M in Covid driven Q1’21, and before owning Round Table Pizza, Twin Peaks, Fazoli’s and several smaller brands. More relevant was the sequential quarterly improvement, almost doubling the $15.1M of Adjusted EBITDA in Q1’22.

Income from Operations grew sequentially from $485K in Q1 to $13.2M, driven by higher royalties, higher sales and lower expenses at company operated locations (primarily Twin Peaks), lower corporate G&A, and modestly higher sales with lower expenses at the dough manufacturing factory. The GAAP net loss was $8.2M, down sequentially from $23.7M in Q1’22. The improved results were a function of 5.6% same store sales in Q2, on top of 26 new locations opened in Q2. The total new units through the end of June was 53 and 9 more opened during July. In this regard, it is important to note that there are over 900 locations represented by long term development agreements, bought and paid for by over $20M of deferred franchise fees on the balance sheet. Management has reiterated that 120-122 new locations are in the planning stage for the current year, and the 900 long term additions could add 50% to EBTDA.

The reconciliation from GAAP Net Loss to Adjusted EBITDA adds back Interest Expense and Depreciation to get from $8.2M Net Loss to $22.0M of EBITDA. The material additions from there are $1.9M of Share Based Compensation Expense and $4.3M of Litigation Costs, bringing Adjusted EBITDA to $29.5M in Q2.

Relative to the litigation expense, the lawsuits and investigations (“L&I”) relate almost entirely to FAT’s relationship with its previous majority stockholder, Fog Cutter Holdings, and the fairness of the merger between them. As described in the quarterly 10-Q, the pertinent L&I “do not assert any claims against the Company” and “we believe that the Company is not currently a target….”. Because the Company indemnifies officers and directors, legal fees are accrued since “an unfavorable outcome may exceed coverage provided under our insurance policies….”. FAT management has made it clear that they are vigorously defending themselves, at the same expecting that such costs are expected to decline from this point forward and that insurance should ultimately reimburse a large portion of the expense. We obviously cannot predict legal outcomes but, even if the legal expense continues, the apparent exposure does not seem to change the long-term reward/risk equation of this investment situation.


In addition to the progress relative to same store sales and unit growth, the Company is working to create synergy between the platform and the brands. Dual branding is starting to take place, combining Round Table Pizza with Fatburger, Johnny Rockets with Hot Dog on a Stick, or Mable Slab Creamery and Great American Cookie. The dough manufacturing facility (operating at 30% of capacity) has begun to grow sales and generate EBITDA, while supplying FAT’s various brands with products 20% cheaper than possible elsewhere.  A “bolt-on” relatively small acquisition of 85 Nestle Toll House Café by Chip stores will be rebranded as Great American Cookies, the first to open in September. With over $600M of portfolio purchasing power, franchisees have been able to save 2-3% of Cost of Goods. From a financial standpoint, planned is the redemption of $135M of Series B Preferred Stock, which will reduce FAT’s cost of capital. It is worth noting that the quarterly dividend was increased from $0.13 to $0.14, creating a current yield of over 6%, implying a confident outlook by management and the Board of Directors. Lastly, a multi-brand national convention, taking place in late August in Las Vegas is going to bring together all seventeen of FAT’s franchised systems. About 2,000 attendees will spend almost three days, getting “charged up” and, from the franchisor’s standpoint, bringing best practices more broadly to the portfolio.


FAT Brands (FAT) seems well on their way to an EBITDA annual run rate of $90-95M by the end of calendar ’22. Unit growth of 110-120 new locations in ’22 will amount to about 5%, on top of which there should be same store sales progress. Though the most recent quarterly Adjusted EBITDA obviously annualizes to well over the projected $90-95M run rate by the end of ’22, the macro-economic uncertainty justifies maintenance of the previous guidance. At the same time, it appears that fundamentals are set up to generate well over $100M of Adjusted EBITDA in calendar ’23.


The long-term vision of FAT Brands’ management has been supported by the results of the last six months. The 16.5M fully diluted shares, at $8.75/share, only amount to $145M of equity value, very modest relative to the $900M of long-term debt and $135M of Preferred Stock. The $100M of projected Adjusted EBITDA in calendar ’23 would obviously pay the interest and leave $20-30M of free cash flow, and that’s why about $11M. representing over 6% yield, can be paid on the common stock. The potential upside comes into play with the prospect of unit growth accompanied by same store sales, and potential acquisitions as well. If the current debt can be re-rated, the near-term cash flow could immediately become more than 50% higher. Over five years or so, the 900-store development pipeline, implying an additional $50M of incremental EBITDA, would obviously change the world for FAT investors. Long term debt on the order of 10x EBITDA is substantial, to be sure, so investors correctly look for signs that management is up to the (leveraged) task. For those who correctly question the wisdom of operating under the burden of debt that is 10x the operational cash flow: within this multi-brand portfolio are at least a few brands with solid long-term records and excellent prospects. It is always a possibility for management to monetize one brand or more, in the process deleveraging the balance sheet. Management at FAT Brands has demonstrated sufficient financial creativity that we can expect them to react accordingly as strategic and operational alternatives present themselves.

Roger Lipton