Restaurant Finance Monitor
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We wrote for the first time about the “new” Fogo De Chao thirteen months ago when they filed their preliminary IPO prospectus. Readers can use the SEARCH function on our Home Page to access our previous updates. Suffice to say that the new and improved FOGO is, by any objective measure, one of the best positioned casual dining chains; a differentiated dining experience with best of breed (see discussion below) unit level economics. The valuation of the stock remains to be seen, as the Company awaits the re-opening of the IPO window.

Fogo recently updated their results through September, 2022, which reflected six months more of operating results than we discussed within our May update.

The bottom line, as Fogo continues down their 15% unit growth trajectory, is: AUVs continuing to track above $10M per location, higher store level cash flow, higher corporate cash flow and after tax earnings, and comparably higher Adjusted Corporate EBITDA.

For thirty nine weeks, ending September, EBITDA at the restaurant level was $102.0M vs. $85.0M, up 20%. Adjusted Corporate EBITDA was $63.1M vs. $54.5M, up 16%. Net Income After Taxes was $17.9M vs. $9.6M, up 86%. Same Store Sales for thirty nine weeks were up 16.4%, with traffic up 12.3%. Higher food cost reduced store level margin by 210 basis points, reducing corporate operating margin 60 bp to 10.6%. Most impressively, Average Unit Volume was $10.1M, up from $7.9M a year earlier and $7.7M in calendar 2019.

The fourth calendar quarter is the Company’s strongest, having generated about $31M in calendar ’21 out of $86M for the full year. With $63M of Corporate Adjusted EBITDA banked for nine months of ‘22, and running 16% ahead of ’21 in the last nine months, we estimate that Adjusted EBITDA will be in the ballpark of $100M for all of calendar ’22.

Readers can access our previous reports for more detail, the most important features being:

(1) in excess of a 40% cash on cash return on the unit level

(2) seven years of consistent annual traffic growth

(3) 68 company operated restaurants today (53 domestic and 15 international)

(4) 15% targeted annual unit growth with whitespace for more than 550 restaurants (300 US + 250 int’l)

(5) Unit expansion during calendar ’22 will amount to 10 domestic and 1 int’l location. The newest prospectus provides an objective of 10-12 domestic plus 5-7 international franchised locations in ’23, with 15% annual company restaurant growth plus continued international franchise development.

“Best of Breed” store level economics is not too strong in this case. The latest cash investment per store is about $3.5M. With a U.S. systemwide AUV holding above $10M  (including a number of the smaller prototypes doing in the $8-9M annualized range), and US store level EBITDA margins in the high 20’s, US store level EBITDA  is averaging close to $2.5M per location per year.  This represents a 71% C/C return, even higher than the 58% quoted as the C/C return for US locations in ’21, which makes sense since traffic and comps are higher in ’22 vs. ’21. It seems likely therefore that results on new locations will prove to be higher and sooner than the stated 40%+ target in year three.

There is a great deal more that can be described about Fogo de Chao, and we, as usual, will not be shy in terms of critiquing the valuation, when that aspect becomes clearer. It is hard to picture, in this environment, a valuation that would be aggressive enough to discourage long term ownership, but we’ve been around long enough not to dismiss any possibilities. Stay tuned.

Roger Lipton