We’ve written extensively about The One Group and our reports can be Accessed using the Search function on our Home Page.
Recall that the Benihana chain, purchased by STKS about 18 months ago, by way of its franchising potential provides a substantial opportunity for asset light growth. The One Group continues to expand its STK “vibe dining” steakhouse chain, while a number of Kona Grill locations have been earmarked for conversion to STK or Benihana. At this point Benihana, while setting the stage for franchise growth is already providing over half of corporate revenues and cash flow, with the STK chain an important runner-up and Kona Grill in distant third place. Importantly, the Company is generating about $100M of annual EBITDA, but interest (of about $40M annually) on $334M of long term debt, plus 13% dividends (which can be “paid in kind”) on $150M of preferred stock (which cannot be redeemed until 2027) provides a natural capex limitation.
Within that context, yesterday’s “Q4 Update” is useful, since it highlights the asset light focus with several new developments in that regard, recent successful new openings, and an intensified discipline regarding spending on new units.
Relative to asset light expansion:
A ten unit Benihana Development Agreement has been signed, including 3 franchised Benihanas, 2 joint venture Benihana locations and 5 Benihana Express units. The 2 JVs will open in 2026, with the remainder scheduled over 7 years.
Additionally, “ We have also made significant progress in renewing existing franchise agreements to extend such relationships for the long-term. Combined with our expanded presence in professional sports and entertainment stadiums and innovative product launches, we are well-positioned to drive sustainable long-term value to our shareholders through asset-light opportunities.”
An extended concession agreement was also put in place, in Phoenix, AZ at the home of the NBA Phoenix Suns and WNAB Phoenix Mercury, also providing for STK products. Also secured was a new 3 year Benihana concession at the UBS Arena in Elmont, NY, home of the New York Islanders hockey team.
Another asset light approach involves the pending recent launch, with Flock Foods, of Benihana branded Teriyaki Flavored Crispy Chicken Chips, a first entry into Benihana’s “better for you” snack category.
Relative to new openings: A former RA Sushi restaurant was converted within 8 weeks, at a cost of $1M and is showing “a strong pace of performance”. Another converted STK opened in Oakbrook, IL, in December at a cost of $1.5M and “is similarly showing a strong pace of performance”.
Relative to intensified capex discipline: “New restaurant Company-owned development will be focused on locations requiring $1.5 million or less to open. The Company will also work through its existing pipeline of approximately 12 leases rather than sign new lease agreements, thereby strengthening its balance sheet while enhancing financial flexibility.
“The Company has identified up to nine additional Kona Grill and RA Sushi locations for either Benihana or STK formats through the end of 2026. These conversions are expected to require about $1 million in capital investment and are anticipated be accretive to EBITDA.”
Conclusion:
Yesterday’s announcement should provide shareholders with a renewed confidence that management is responsibly managing their brands, taking advantage of growth opportunities while continuing to deal with a macro environment that is no doubt still challenging. Fortunately, within the limits of the current Balance Sheet, which management indicates has no current restrictive covenants, there are numerous opportunities to build both the Benihana and STK brands. We continue to view Benihana as the “multiple maker” for STKS. The brand remains differentiated and relevant, and we view management as capable of substantially expanding its footprint and profitability.
Roger Lipton