Something like 2,000 stakeholders of FAT Brands’ eighteen individual restaurant concepts attended their two day franchise convention in Las Vegas last week, which we were happy to once again attend.
The agenda included a number of keynote speakers (informative, motivational and sometimes entertaining) as well as unit development, product, operational and brand related workshops and presentations. Just as during the last similar event, eighteen months ago, management of FAT Brands was very much “hands on”; engaged, hospitable and supportive, and their effort seemed to be appreciated by the individual brands’ attendees. While the event no doubt carried a price tag in the low seven figures, a good portion was borne by vendors and suppliers such as Pepsico, Sysco, and many others. Also, as we discuss below, fees from new unit development contracts, signed in the course of the event, will easily exceed FAT’s cost and then generate a material increment of long term cash flow.
TANGIBLE TAKEAWAYS
Incremental Cash Flow from New Unit Development
Just as during the last event, we estimate that new development contracts have been signed for at least 100 units, bringing the overall pipeline to approximately 1,200 locations. If 100 units average $1.0M of annual revenues, without including up front fees which are taken into income over the course of the contract, $5-6M annually in cash flow from incremental royalties will be the result.
Dual Branding Looks Very Promising
While the company has talked before of combining a number of complementary brands, it seems to us that dual branding of Fatburger with Roundtable, in particular, could present a noteworthy opportunity. These two brands seem especially intriguing, especially in California where both are well known and customer consumption patterns do not conflict. Dining rooms for most industry participants, as well as these two, have unused capacity most of the time these days. Furthermore, while pizza has become mostly an off-premise dining experience, that leaves the excess dining room capacity at both units for burger consumers. This increased utilization of the real estate is also complemented by the elimination of a veto vote within a users’ family. From the discussion and enthusiasm within a number of conference panel discussions, it is clear that both “zors” and “zees” will remain alert to this type of opportunity,
Non-Traditional Franchising
A panel discussion in this area presented the pros and cons of locations within airports, theme parks, sports arenas, cruise ships and elsewhere. This type of opportunity, largely untapped at this point for FAT Brands’ concepts, seems to offer material upside. Though admittedly more complex to negotiate leases, construct and operate than typical traditional locations, there is often an above average long term reward. Not discussed, but also offering potential are convenience stores and gas stations, with tens of thousands of locations (in the US alone) increasingly upgrading their food offerings.
Twin Peaks
There have not been any financials released because this (largest and fastest growing) subsidiary of FAT Brands is preparing a registration statement, but the Twin Peaks’ management team was clearly enthusiastic and optimistic about their long term buildout. They reiterated management’s previous disclosures that the system has grown to 112 locations, up 37% since acquired two and a half years ago. The development pipeline now amounts to 110 planned locations, 76 of which have been signed in the same period. Importantly, almost all the new franchised locations are being built by existing, successful franchised organizations. Management referenced a number of recent high volume locations so we conclude that the AUVs are likely building. The top management operating team, led by CEO, Joe Hummel, have been in place for well over a decade, so there is every reason that, combined with an already experienced and successful franchised group, the current trends can be sustained.
It is worth noting that Twin Peaks is attracting plaudits nationally within the industry. To name just a few: (1) At franchising.com Twin Peaks won an award for the “Most Innovative Use of Customer-Facing Digital Tools.” (2) In both 2022 and 2023 was nominated for Black Box Intelligence’s Voice of Customer “Best Practices” award. (3) in 2020, after growing revenue by 186% and unit growth by 100% over three years, was singled out by Franchise Times as their annual Fast & Serious selection. (4) In 2023 Twin Peaks’ flat-bread line extension was named the industry’s best by Nation’s Restaurant News.
Lastly, Twin Peaks has consistently supported local community and national charitable causes, increasingly building upon that effort. Between 2018 and 2020, Twin Peaks raised over $1MM for Folds of Honor. In 2022 they established a partnership with Tunnel To Towers, which has donated over $270k so far.
Overall, last week’s contact with Twin Peaks’ management team provided every indication that Twin Peaks will be favored by the investment community when it becomes publicly held, likely valued as a “Best of Breed” operator.
Roger Lipton