FAT Brands closed out calendar ’23, opening 29 new locations in Q4 while generating 16.5% system-wide growth, with same store sales essentially flat (down 0.6%). Adjusted EBITDA in Q4 was 27.0M versus $19.6M in Q4 ’23. The loss from operations was $3.1M, down sharply from a loss of $32.6M in Q4’23. The GAAP net loss was $26.2M ($1.68 per share) vs. $70.8M ($4.39/share) in Q4’23.
Calendar year 2023 showed revenues up 18.0% to $480M, with 125 new store openings. Income from operations was a positive $22.3M versus a loss of $17.9M. The GAAP net loss was $90.1M, down from $126.2M. Adding back Interest of $117.5M (vs. ($98.4M), Depreciation of $31.1M (vs.$27.0M) and a provision for taxes (a benefit of $6.3M vs expense of $18.8M) provided EBITDA in calendar ’23 of $52.3M vs. $14.5M. Adjustments, provided below, the largest of which were bad debt recovery in ’23 versus expense in “22, and litigation costs of $28.3M vs. $19.0M brought Adjusted EBITDA in calendar ’23 to $91.2M vs. $88.8M.
THE BUSINESS IS GROWING
While interest expense will be addressed by way of partial monetization of Twin Peaks, and litigation expense will hopefully be mitigated by insurance claims, the fundamental business is making progress. As discussed below, the progress is broad, but particularly noteworthy at Twin Peaks, the largest, and most rapidly growing brand. The pipeline of potential new stores across FAT’s portfolio has grown to 1,100 locations, including over 100 @ Twin Peaks, approximately doubling the current 109 stores. The dough manufacturing facility is now operating at about 40% of capacity, expected to leverage its cash flow as products are added to FAT’s portfolio of brands and third-party customers are attracted as well. At the same, other brands are progressing, with Fazoli’s return to Phoenix and Orlando, Fatburger returning to Tampa and Chicago, Roundtable entering Houston, the opening of the 400th Great American Cookie unit, expansion of non-traditional locations and expanded dual branding (Fatburger with Buffalo’s Express & Marble Slab Creamery with Great American Cookie).
THE FOCUS FOR ’24, and BEYOND
As outlined in the year end slide presentation, the emphasis for calendar ‘24 is to (1) accelerate the buildout of the 1100 store pipeline, opening at least another 125 locations in the next twelve months. The total long-term buildout is estimated to generate an additional $60M of Adj. EBITDA, allowing for balance sheet deleverage over time (2) maintain the current balance sheet liquidity (3) build out the 60% excess capacity of the dough manufacturing (4) generate an additional $15M of Adj. EBITDA in ‘24, as indicated above (5) continue to build net asset value of portfolio while preparing for a debt reduction event (6) Realize cost savings for franchisees by way of $600M of purchasing power.
The most important single event in ’24 will likely be the IPO of Twin Peaks, which will allow for partial monetization of FAT Brands’ most substantial asset, likely reducing the long-term debt, perhaps allowing for beneficial restructuring as well. Twin Peaks has grown by 33% in units since being acquired in late 2021, and will open 15-20 locations on the current base of 109 in ‘24. Virtually all the new locations are being being built by existing franchisees, obviously pleased with the AUVs approximating $6M and strong store level economics. The recent acquisition of Smokey Bones’ 60 locations will allow for an as yet indeterminate number of conversions to Twin Peaks. Smokey Bones, on its own, has the potential to grow back toward its high-water mark of over one hundred locations.
In terms of the timing of Twin Peaks’ IPO, it was indicated on the conference call that a confidential SEC filing may be made within the next several weeks, and the IPO could take place sometime during Q3. While management cannot disclose much more with the registration so imminent, the timing and valuation are obviously subject to the general condition of the equity market.
CONCLUSION
FAT Brands is currently employing a conservative strategy, open to acquisitions and still with sufficient liquidity to do so, but requiring a very reasonable purchase price and a predictable immediate cash flow benefit. The recently purchased Smokey Bones is an example, with $10MM of Adjusted EBITDA purchased for $30M, with conversion possibilities into Twin Peaks combined with further possibilities of growth on its own.
The Twin Peaks brand is at least among the very “best of breed” sports bar chains, with substantial growth ahead for both company operated and franchised locations. Twin Peaks’ IPO will obviously be an important step for FAT Brands, comforting both lenders and equity investors. While the Company cannot currently say more, we wrote regarding Twin Peaks, and its potential valuation, on June 9th 2023, which can be accessed within our website. The common stock of FAT Brands is obviously highly leveraged to the balance sheet, in essence an option on the value of the total portfolio. To whatever extent the cumulative value of the eighteen brands (plus the dough manufacturing facility) exceeds the balance sheet debt, it could represent a substantial premium over the current $136M of equity value. Twin Peaks is the largest asset, but far from alone, a number of which could individually be worth hundreds of millions of dollars. For example, if the Adjusted EBITDA builds to approximately $150M over the next five years, valued at an average of 12-15x, the Enterprise Value would be $1.8B to $2.25B, providing equity of $600M to $1.0B, or $35-$59/share on the current 17M shares outstanding. There will no doubt be lots of activity between here and there, but a great deal of potential remains in place.
Roger Lipton
