FAT Brands (FAT) reported Q1’24, in line with recent expectations. Total revenues were up 43.8% to $152M, largely as the result of the addition of the Smokey Bones company operated locations. Systemwide sales growth was up 4.8%, more modest of course, because the lion’s share of systemwide sales are franchised. Systemwide same store sales were down 4.0% in Q1’24, no doubt affected by the extreme weather in January, which also affected openings (at 16), compared to 44 and 125-150 expected for Q2’24 and full ’24 respectively (per the conference call). Indicated on the conference call; same store sales have firmed sequentially since January, still down but less so.
The net GAAP loss was $38.3M vs. $32.1M a year earlier. Addback of interest expense ($34M vs. $30M) & D&A ($10M vs $7M due to the acquisition of Smokey Bones) created higher EBITDA, at $9.4M vs. $7.7M). Adjusted EBITDA was $18.2M, down modestly from $19.2M, largely because the addback adjustment for Legal Expenses was lower at $3.8M vs. $7.7M. Including the most recent quarter, last twelve months Adjusted EBITDA amounted to $92.9M.
Overall, there was not a lot in the reported numbers to constitute a surprise. Management continues to support franchised operations and openings while building the development pipeline further, preparing Twin Peaks for an IPO and building sales volume at the dough manufacturing facility. Twin Peaks (especially) and the dough manufacturing facility could be substantial sources of liquidity, which would allow for balance sheet improvement. Not to be underestimated in terms of monetization possibilities is the effort to build FAT’s other important brands; Fatburger, Round Table Pizza, Johnny Rockets, Fazoli’s and Smokey Bones, to name their largest brands.
UNIT OPENINGS
As indicated, the extreme weather in January took a toll, holding the unit openings to sixteen. Most noteworthy was the openings of three new Twin Peaks lodges, in Guadalajara (Mexico), in Boardman (Ohio)and Doral (Florida). A total of 15-20 new Twin Peaks should open in the current calendar year. Also noteworthy was Fatburger’s debut in Orlando, with “lines wrapping around the block” on opening day. The rest of the year should be much more active, with 44 openings expected in Q2 and 125-150 for the full year (up 20% from ’23).
THE DEVELOPMENT PIPELINE
An additional 100 units were signed, prior to and as a result of the Summit (franchisee convention) at Las Vegas a couple of weeks ago, and the pipeline remains in excess of 1,100 units. Management estimates that this buildout would increase adjusted EBITDA by $50-60M. At Twin Peaks alone there are over 125 franchise deals signed, not including potential Smokey Bones’ conversions. It is estimated that about half of the 61 current Smokey Bones locations could become Twin Peaks, the first of which could take place in ’24, mostly in ’25 and ’26. Relative to Smokey Bones, expected to generate $10M of incremental Adjusted EBITDA in ’24, management plans to build this chain, with franchising, back to the 120 units at its peak. At other brands: in April a Canadian franchisee (already a Fatburger franchisee) agreed to open 25 additional locations over the next ten years. Also in Canada, a development deal was signed for 40 new Marble Slab Creameries over the next ten years, the first of which to open in 2024, bringing the total in Canada to 140. Round Table Pizza has signed with a new franchisee to bring six locations to Arkansas and ten to Oklahoma, both new states, over the next six years. The Fatburger debut in Orlando referred to earlier is part of a 14 store deal in Florida. The first co-branded Johnny Rockets and Hurricane Wings opened on the West Coast, following a similar success in Washington D.C. last year, and that approach may well be expanded. In April a deal to open 40 new franchised Fatburgers within existing Round Table Pizza restaurants was signed, the first to open in calendar ’24. A similar combination was opened successfully in Dallas last year, and the franchisee network is showing interest in this approach. Also relative to co-branding, there are over 100 locations pairing Fatburger & Buffalo’s Express, as well as over 100 Marble Slab Creameries & Great American Cookie. Another substantial opportunity exists by way of non-traditional locations, with 15 Johnny Rockets locations now operating within cruise liners, and Johnny Rockets along with Fatburger within multiple Six Flags theme parks. Just this morning, FAT Brands announced that Six Flags has agreed to become a franchisee of Hurricane Grill & Wings. Overall, there seems to be no shortage of additional franchising opportunities.
TWIN PEAKS UPDATE
While there are no precise financial details available yet, as a “confidential” IPO SEC filing is being prepared, indications are that the Twin Peaks chain will provide an attractive investment opportunity for the public. With a long established and successful leadership team, led by CEO Joe Hummel, and an already successful group of franchisees who constitute most of their development pipeline, Twin Peaks has AUVs among the highest in full service casual dining (at approximately $6M). With 15-18 new units opened in ’24, 125 locations in total will reflect 51% growth since FAT’s acquisition three years earlier. With 15-20 locations opening each year, even without Smokey Bones’ conversions, another 50% growth seems reasonable over the next three years.
OTHER MONETIZATION CANDIDATES
The company has described their effort to more fully utilize their dough manufacturing plant, which in Q1’24 contributed $3.7M in Adjusted EBITDA on $9.5M in sales while operating at only about 45% of capacity. Not included in the current potential is the ownership of 3.5 adjacent acres, which could double the output again with a suggested modest a $1.5M capital expenditure. Under FAT Brands ownership the last couple of years, utilization has been increased from 33% to 45%, and further buildout is obviously a major focus.
While Twin Peaks and the manufacturing plant are the most likely monetization candidates, which along with higher systemwide royalties and EBITDA will allow for deleveraging of the balance sheet, it should not be overlooked that FAT Brands has seventeen brands other than Twin Peaks. Without detailing the many possibilities, there is substantial value in many of them, and lots of levers to be pulled (admittedly not as large as Twin Peaks) which could help to reduce the debt structure.
CONCLUSION
The first calendar quarter was fairly routine for FAT Brands. Management continues to employ a conservative strategy, managing their 18 franchised brands responsibly, 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. While the cumulative value of FAT’s eighteen brands (and the manufacturing plant) is increasing over time, the equity is obviously leveraged to the balance sheet debt. However, Twin Peaks is the largest (but far from the only) growing asset, with several other brands and/or the manufacturing plant potentially worth hundreds of millions of dollars. As the development pipeline builds out and Adjusted EBITDA grows to approximately $150M over the next five years, if valued at an average of 12-15x, the Enterprise Value would be $1.8B to $2.25B, providing equity amounting to $600M to $1.0B, or $35-$59/share on the current 17M shares outstanding. While 12-15x Adjusted EBITDA could be considered aggressive, the $150M five years from now could turn out to be low, with inflation taking royalties up on the existing store base, new locations contributing higher sales as well, and certain brands such as Twin Peaks could generate above average growth. There are lots of moving parts, to be sure, and lower interest rates would be a big help, but a great deal of potential remains in place.
Roger Lipton