Restaurant Finance Monitor – Follow the Money – March 15, 2025
Financial markets are volatile, and along with news headlines cannot help but affect spending patterns, both by consumers and by way of capital investment. The uncertainty relative to: tariffs, inflation, the direction of interest rates and geo-political tensions, among other items, cannot help but affect the public’s general sense of well-being. Within that context, the stock market has turned sharply downward, which we described here just four weeks ago as a near term possibility.
Our investment approach during this type of downturn, which “takes all the girls”, is to study undervalued situations ignored by large investors that prefer widely followed, highly liquid situations. Low priced stocks can offer outsized upside rewards so, admittedly “talking our book”, we suggest investors consider three sub-$5.00 situations, each down at least 75% from respective highs. Each is a turnaround of sorts. They all have debt, but operating earnings seem capable of debt service as well as supporting the necessary operational “adjustments”. Of major comfort: each of these situations is blessed with highly credentialed management. The three sub-$5.00 suggestions are: Red Robin Gourmet Burgers (RRGB – $4.50), Noodles & Company (NDLS – $1.25) & The ONE Group Hospitality (STKS – $2.55).
Red Robin Gourmet Burgers (RRGB – $4.50) As of 12/31/24 there were 498 restaurants in the US (including 91 franchised units). G.J. Hart, CEO since late ’22, has been on the Board at RRGB since 2019, after CEO positions at Torchy Tacos, California Pizza Kitchen and Texas Roadhouse. He has been “checking the boxes”, improving products and procedures, streamlining the menu, improving digital applications, investing in labor at the store level, reducing discounts & more. Results are starting to come through. Q4’24 showed a 600 bp improvement in traffic from Q1, as guest satisfaction scores improved 8 points from ’23. The Royalty reward program grew by over 10% to 14.9M members in ’24. Adjusted EBITDA started to grow again in Q4’24, up 19% to $12.7M, and the 3.4% positive comp in Q4’24 continued in early ’25. Long term debt of $182M is a manageable 3x estimated $62.5M EBITDA in ’25. At the current $4.50/share, Enterprise Value divided by TTM Adjusted EBITDA is 6.2x and even lower 3.7x Adjusted EBITDA guidance for calendar ’25.
Noodles & Company (NDLS – $1.25) As of 12/31/24 there were 371 company locations and 92 franchised. CEO, Drew Madsen, on the Board since 2017, became CEO early in ’24, previously been President of both Panera and Darden. Noodles came public in 2013 with a great deal of momentum and the stock traded up to $40/share, after which the menu, traffic and cash flow stagnated. Since early ’24, Madsen has led a far-reaching rejuvenation plan, and it is beginning to bear fruit. After positive results from 3 new entrees introduced 6 months ago, and very encouraging testing of an additional nine items, judgement time has arrived. A greatly improved value driven menu was put in place days ago. Previous management’s prediction of $40-50M EBITDA was premature, but the current plan seems more soundly based. The current AUV of about $1.3M, with about 12% store level EBITDA, seems to be a base on which to build and there is a great deal of operating leverage in place. With almost $500M of company store revenues, a 5-10% improvement (or more) could quickly take EBITDA from the $24M TTM in ’24 to $50M or higher (almost $30M of which is D&A, at the same rejuvenating the franchise effort. The Enterprise Value (@1.25/share) is approximately $150M so represents a seductively modest multiple, only 3.0x “potential” EBITDA of $50M+.
The ONE Group Hospitality (STKS – $2.60) As of 12/31/24 STKS operates 30 STK “vibe dining” steakhouses, the latest versions of which do about $11.3M per year and generate a C/C return of about 62%. Purchased in May ’24 was Benihana (the “Game Changer”), the 60-year-old iconic brand with 73 company operated and 11 franchised locations that average about $6.5M annually. Also operated are 27 Kona Grills that do slightly under $5M, and 16 RA Sushi units, purchased along with Benihana, that generate about $3.5M. CEO, Manny Hilario, has a proven track record at STKS, taking EBITDA from $10M in 2018 to over $40M by 2021, and paying for the 2019 purchase of the Kona Grill in about three years. The two primary expansion vehicles are STK and Benihana and there appears to be an especially interesting franchising opportunity at Benihana. While The ONE Group was generating about $40M of Adjusted EBITDA prior to the Benihana acquisition, which now represents about 55% of Company revenues, the enlarged Company is expected to generate over $100M of Adjusted EBITDA in calendar ‘25. Though the purchase of Benihana entailed leveraging the balance sheet to now include $300M of net long term debt and $160M of preferred stock, the operating cash flow seems capable of debt service, growing units and building EBITDA by 15%/yr. The current EV divided by projected ’25 EBITDA is a “show me” modest 5.6x, so re-rating is likely as STK units grow and Benihana is expanded, including franchisee expansion.
Roger Lipton