FAT Brands (FAT), for Q3’23 reported YTY systemwide sales growth of 0.8% with 30 new store openings and same store YTD sales growth of 1.3%. Same store sales systemwide were down by low to mid-single digits. With lower G&A expense ($24.5M vs. $28.7M ($2.1M of the reduction from lower litigation expense) Income from Operations was $6.6M (up from $1.0M). However, since the Employee Retention (tax) Credit of $7.2M reduced expenses (“Cost of Goods”) in Q3’22, Income from Operations, adjusted for ERC, was $6.6M compared to a loss of $6.2M.
Below the operating line heavier interest expense ($25.3M vs. $19.5M) and a non-cash Net Loss on Extinguishment of Debt ($2.7M) were the biggest factors in producing a net loss of $17.1M In Q3’23 vs. $16.3M in Q3’22.
Adjusted EBITDA was $21.9M in Q3, down from $24.6M in Q3’22, However, since ’22 included the $7.2M of employee retention tax credits, adjusted for the ERC, EBITDA was up by $4.5M (26%).
On the first day of the fourth quarter, sixty-one Smokey Bones BBQ locations were purchased, for $30M, reportedly currently generating annual EBITDA of about $10M. While all locations are currently company operated, it is expected that most locations will be converted to Twin Peaks sports bar/lodges, FAT’s most productive and rapidly growing brand.
THE NEW STORE PIPELINE
The 30 store openings in Q3 brought the year-to-date total to 96 and the company still points to 150 in total for all of calendar’23, though admittedly some of those could fall into Q1’24. Most importantly, development commitments for over 200 units were signed in ’23, providing a pipeline over the next 3-5 years for over 1,100 new units. The Company reiterated their expectation that the existing contractual pipeline can increase the current $2.4B run rate of systemwide sales by 50%, and increase Adjusted EBITDA by at least that amount.
Of greatest import, the Twin Peaks brand should end calendar ’23 with over 110 lodges, a 35% increase since it was purchased in late ’21, with over 125 additional franchise development commitments in place, and the additional opportunity for conversion of about 40 recently purchased Smokey Bones locations.
THE DEBT & POTENTIAL LIQUIDITY EVENTS
While the 10Q has not yet been filed, the conference call discussion disclosed that unrestricted cash at the end of Q3 was $88M, $30M of which was applied to the Smokey Bones acquisition. At the end of the third quarter, the securitizations outstanding were $1.158 billion. It is noteworthy that, in addition to the $58M remaining after acquiring Smokey Bones, the Company has $218M face value of marketable securitizations (the asset and liability netted out) on the balance that can be liquified when useful. According to the discussion on the conference call, the net proceeds would currently be on the order of $200M, providing material financial flexibility pending a buildup of EBITDA and/or a liquidity event.
While FAT Brands owns eighteen separate brands, a handful of which could be at least partially monetized with material proceeds, the two most significant prospects are the Twin Peaks chain of sports bars and the Dough Manufacturing Facility. See our discussion of Twin Peaks, and its potential value, within the article we published on 6/9/23 – the link provided just below.
https://www.liptonfinancialservices.com/2023/06/fat-brands-announces-potential-1b-monetization-plan/
Our discussion concludes that Twin Peaks could be worth something like $1B at some point within the next several years. The timing and extent of monetization remains to be seen, but even partial disposition of FAT’s stake would provide a serious balance sheet improvement.
The second most likely source of hundreds of millions of dollars within the next several years would be the dough manufacturing plant in Georgia, purchased in ’21. Operating then at only 33% of capacity, it was apparently generating about $15M of EBITDA, perhaps higher now, since the capacity is now over 40% utilized. As currently configured, the EBITDA potential, with 2-3 shifts operating, has been thought to be something like $30M, but, as stated on the recent conference call: “for somewhere between $1 million and $1.5 million, we can basically double the capacity of our existing facility before we even knock down the wall and take advantage of the 3.5 adjacent acres that we have.” As the plant is more fully utilized to service FAT’s portfolio of brands and/or third-party customers, the cash flow potential here should provide a material value, one way or another to FAT Brands’ shareholders.
CONCLUSION
Management of FAT Brands appears to be managing their portfolio of eighteen restaurant brands productively, and coping with the leveraged balance sheet as well as can be expected. Hardly anyone expected interest rates to ratchet up this far this fast, but the business is tracking reasonably close to plan and, one way or another, the balance sheet should improve over time. The common stock, with about $100M of market value, has become a “stub” or an “option” on the growth prospects for the business, and represents a leveraged way to participate in the further growth of the FAT Brands’ portfolio.
Roger Lipton