CONCLUSION
The third calendar quarter was again fairly routine from an operational standpoint, with yearly comparisons negatively affected by higher interest, recent weakness at newly acquired Smokey Bones and the on-the-ground reality of a challenging consumer economy. The weather, also, was not helpful. Management continues to employ a conservative strategy, managing their 18 franchised brands, 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 continues to be leveraged to the balance sheet debt.
The single most important current financial objective is to create “price discovery” for the value of Twin Peaks, their largest and most valuable brand, which will serve to keep track of the fundamental performance and provide a valuation that can help to delever the balance sheet. Within the last quarter, the necessary steps have been taken to establish Twin Peaks as an independent publicly held entity, now expected by year end. Our review of the SEC Form 10, which precedes the pending spinoff is provided at the link just below.
There are several other growing brands, as well as the dough manufacturing plant, each of which could be potentially worth hundreds of millions of dollars. Listening to Chairman, Andy Wiederhorn, describe the intent to refinance Fazoli’s securitized debt, it appears to us that there are brands (in addition to Twin Peaks) within FAT’s portfolio (e.g. Fatburger, Round Table Pizza, Fazoli’s, Johnny Rocket’s) that could be presented for public ownership. Just as with Twin Peaks, this would ease the capital raising process for both the parent and the subsidiary brands.
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.
As the monetization or price discovery of FAT Brands’ Twin Holding moves forward, the parent company in essence becomes a “closed end fund”, building value within its brand portfolio by presumably buying low, building over time, and liquidating (in part or as a whole) in an opportunistic fashion. It is more than possible that an individual brand, such as Twin Peaks, publicly visible and strongly growing, could achieve a valuation far higher than the FAT Brands’ portfolio as a whole. We can picture a time when Twin Peaks is not FAT’s only majority held publicly trading subsidiary. Two or three subsidiaries, each raising capital on their own within the public marketplace, could more rapidly build the underlying value for both the subsidiary and parent.
THIRD QUARTER SUMMARY
FAT Brands (FAT) reported their June quarter last week. The most important aspect of the FAT Brands situation is their pending public offering of their Twin Holdings subsidiary, an analysis of which we provide at the end of this 3rd quarter review.
Results were generally as expected, with eighteen brands and a leveraged balance sheet operating within a challenging restaurant industry. Within the numbers, as shown by the supplemental information below, systemwide sales growth was 6.4% with 22 new store openings in Q2, same store sales down 2.6% and system-wide sales up 6.3% YTY at $601M.
As the tables below show, Revenues were up $34M (31%), largely driven by the acquisition in Q4’23 of the Smokey Bones chain, though royalties were $1.6M lower (6.6%), affected as elsewhere by four major southeast storms in Q3, also by customers trading down from fast casual chains like Fazoli’s. The $19M greater YTY pretax loss was primarily the result of $3.7M of additional D&A from Smokey Bones, $5.8M of additional interest expense, and $10M of additional G&A, including $1.4M of additional legal expenses, $3.0M of bad debt expense, and consolidation inefficiencies relating to the addition of Smokey Bones. Adjusted EBITDA, as shown by the second table below, was about $14M, down about $8M from $22M a year earlier.
CONFERENCE CALL SUMMARY
There are about 800 franchisees with about 2,300 restaurants, including those under construction. The Company now owns and operates almost 200 restaurants across four brands, the largest of which is Twin Peaks (now with 115 locations, up from 83 when acquired 33 months ago).
In terms of new store development in Q3, 22 new locations were opened, bringing the total through September to 62. Nine more units have opened in Q4, expecting to end the year in excess of one hundred. The signed pipeline of franchisee development continues to approximate 1,000 additional units, expected to generate $50-$60M of incremental royalties.
Twin Peaks continues to open locations annualizing at about 6M, with “select high performing” markets doing $9-14M. During Q3 the 4th location opened in South Carolina, the 10th in Texas, and the first in Nevada. In September, the first of what is expected to be 30 or more Smokey Bones conversions opened, initially annualizing at $8.3M vs. $3.6M previously. Seven additional conversions are planned for 2025, five corporate and two franchised. The current base of 115, will be increased by nineteen in 2025, twelve from scratch and the seven conversions, five of which will be corporate. Management discussed Smokey Bones further, which we have included in our writeup that follows this Q3 report.
Management discussed at length their co-branded effort. There are now over 160 Great American Cookie and Marble Slab Creamery combinations and a new digital customized ordering app has been been successfully introduced. Fatburger and Buffalo Express have been co-branded now for years and are steadily expanding, with a new 10 unit deal for Puerto Rico. Hot Dog on a Stick has made a couple of Los Angeles “Cookie/Slab” locations tri-branded.
Management discussed the less than planned sales and cash flow at Smokey Bones, as well as particular sales weakness at Fazoli’s, both of which are being addressed. Management continues to view Smokey Bones as a brand building opportunity and especially a conversion asset, highly encouraged by the first opening in Florida. Relative to SSS elsewhere in the portfolio: Twin Peaks’ SSS have been improving through the year and have been positive recently, while Round Table Pizza was described as positive with the burgers chains flat YTY.
Management continues to expect to add throughput to the Atlanta dough manufacturing facility. It is operating at 40-45% of capacity, versus 33% when purchased three years ago and generated $3.5M of EBITDA in Q3 on $9.5M of revenues. Additional capacity can be added inexpensively so this facility continues to have substantial upside.
Management discussed the refinancing of Twin Peaks debt, in anticipation of the spinoff, as discussed in our Twin Peaks report provided below, and said they are planning to refinance Fazoli debt in a similar manner within the next twelve months. This Fazoli’s related reference may have provided insight into consideration of monetizing certain other brands in a similar fashion to Twin Peaks.
CONCLUSION: Provided above
LINK to RECENT FULL REPORT REGARDING FAT Brands’ SPINOFF OF TWIN HOLDING CORP. – below