CONCLUSION & RECOMMENDATION
The One Group Hospitality has evolved to a restaurant company with two important brands. Benihana represents over 60% of annual revenues and operating earnings, with STK accounting for almost all the rest. The Grill group (the remaining Kona Grills and RA Sushi, acquired with Benihana), while improving, accounts for under 10% of sales, and minimal earnings. We believe that the iconic Benihana brand, purchased just over two years ago has great expansion potential especially in conjunction with its smaller footprint, Benihana Express. The Grill Division consists of the slimmed down Kona Grill division, which was purchased out of bankruptcy about 6 years ago, paid for itself over the next several years, and has now been combined with RA Sushi, which was part of the Benihana acquisition.
Each segment has had its share of distortions over the last several years, Benihana adjusting to new ownership, STK reacting to increasingly value driven diners, Kona slimming down after low hanging fruit had been harvested by Hilario & Co,, but all seem stabilized now, and collectively ready to expand productively. The balance sheet, discussed below, was leveraged in the course of acquiring Benihana, and restructuring is an obvious management priority. In that regard, asset light franchised expansion along with much reduced capex has been implemented. Free cash flow has begun to allow for modest debt repayment, and continued encouraging results should encourage current debt-holders to accept less than the current rate of about 10%. Importantly, the date is rapidly approaching that will allow STKS to get out from under a 13% preferred stock obligation, (originally $160M), which so far has been “paid in kind”.
At this point, as shown below, through Q2’26, STKS seems to be demonstrating “stability” at the least, hopefully the beginning of sustainable traffic and sales progress at all divisions, and continued improvement in profit margins.
Restaurant companies with minimal growth prospects and/or high debt obligations frequently sell at Enterprise Values close to that of STKS. Companies with attractive growth vehicles and/or minimal debt, most often sell at 10-15x Enterprise Value, and some a lot higher than that (such as CAVA, Kura Sushi, Wingstop, Dutch Bros).
While STKS seems statistically inexpensive with two expandable brands, each of which demonstrates impressive unit level economics, and a current Enterprise Value of about 6x the current run rate of Adjusted EBITDA, debt and preferred stock obligations have apparently created a “show me” situation. STKS, the stock, seems to be awaiting a catalyst of some sort, which seems to be most likely to come from accelerating sales, fresh franchising success at Benihana and/or material balance sheet improvement.
We continue to believe that the risk/reward ratio of STKS stock is very attractive. Management has demonstrated an ability to manage through a number of challenging circumstances, stabilize and begin to improve traffic/sales trends, improve store level margins, and adjust capex plans in light of the existing balance sheet leverage. We believe that management can, at the least, stay the course and improve the prospects over time in almost any reasonable macro environment. We view the likelihood as high that the variety of initiatives that are now in place will provide the necessary catalyst(s) for the marketplace to re-rate STKS equity.
THE COMPANY
RESULTS FOR THE QUARTER ENDING 6/30/26 – promising but Revenues were just light enough to require modest reductions within ’26 guidance.
The One Group’s Q2’26 demonstrated tangible progress with each of the corporate priorities: (1) Improving same store sales, traffic and profit margins (2) Most effectively utilizing the existing portfolio of locations. (3) Expanding company operated units with minimal capex (4) Positioning Benihana for franchised expansion — all to be pursued in support of improving free cash flow and deleveraging the balance sheet.
The headlines relative to Q2’26 results were:
GAAP Revenues declining 3.3% to $200.5M.
Consolidated Comp Sales up by 0.9%.
GAAP Operating Income increasing to $6.6M from $.07M.
Restaurant Operating Profit increasing 110 bp to 16.4% of owned locations.
Adjusted EBITDA was $21.1M vs. $23.4M.
Year to Date cash provided by operations increased to $33.0M from $11.3M.
Interest Expense was $9.6M vs. $10.3M, with an average rate of 10.1% vs 10.8%.
The Net Loss attributable to The One Group Hospitality (pre-Preferred Interest) was $2.1M vs. $10.1M in Q2’25.
At the same time, sales and traffic, while improving, came in slightly below what management may have expected, sufficient for a modest reduction in expectations for calendar ’26. The new guidance, at midpoints, lowered Revenues by about 5%, Comp sales by 0.5%, Managed Store Operating Margin by 0.5% and Adjusted Consolidated EBITDA by about 5%. At the same time G&A expectations, excluding stock compensation, was reduced by 6% (from $53M to $50M), and Capex by 25% (from $40M to$30M). It is worth noting that G&A of $50M, at 6.1% of expected Revenues in ’26, is admirably modest for a mid-size growth-oriented restaurant company. (As this is written, CAVA Group is reporting Q2, with G&A of 10.8%, and Black Rock Coffee with G&A of 15.6%.) The latest guidance, as provided by management is as follows:
Management noted on the conference call that sales in Q2 were negatively affected by the three-month delay in re-opening STK Downtown NY, elevated temperatures in selected markets, and delayed conversion re-openings. License fees came down by $300k to $3.2M, with the fee in a lost restaurant replaced by the conversion of the former RA Sushi to a company owned STK. On the expense side, operating expenses were up 50bp to 64.0%, affected by marketing expenses to compete with The World Cup, and R&M related to improving the air conditioning at Benihana.
EXPANSION INITIATIVES
As guidance indicates, between 6 and 10 new venues are expected to open this year, spending no more than $1.5M on new facilities and from $1.0 to $1.5M on converted locations. Incremental EBITDA per unit is expected to approximate $1.0M, obviously generating a cash payback in little more than one year.
Relative to franchising the Benihana brand, the emphasis is on Benihana Express, a fast casual version 800-1000 square feet in size, costing $400-500k to build, expected to generate $1.0 to $1.2M in annual volume (based on volume at the company operated prototype), with prime costs (CGS and labor combined) at a modest 45%, and generate a cash payback in under two years. According to conference call commentary, interest is building from potential franchisees and several new locations could open in the short term.
THE BALANCE SHEET, LIQUIDITY, CASH FLOW
The One Group’s balance sheet currently has $17.1M in cash and credit card receivables, as well as $28.7M of revolver available “under certain conditions”. Current total bank debt, after paying back $6M in H1’26, is $338M, carrying an interest rate of just over 10%. Therefore Adjusted EBITDA of about $100M is more than adequate to service cash interest expense now running about $35M annualized, as well as provide the now reduced Capex level of about $30M, and leave $35M for other purposes (reduction of bank debt, dividends, stock buyback or acquisition). The “elephant” on the balance sheet is the original $160M of Preferred Stock put in place when Benihana was acquired in May, 2024, which requires 13% interest that has so far been “paid in kind”. The original $160M Preferred now amounts to $210M, therefore requiring $27M of cash or incremental Preferred Paid in Kind to paid over the next twelve months. Preferred shareholders can ask for cash redemption in May’29, but the more likely development is that the Company call option, from 5/1/27 until 5/1/28 will be exercised. We consider it likely that management is already exploring possibilities to refinance that obligation, as well as the current long-term debt and revolver.
There is an obvious corporate priority here to reduce corporate leverage, and the better operations look going forward, the more productive that effort will be. We suggest that, if management guidance proves accurate during H2’26, funds could be raised with an interest rate of no more than 8%, which would reduce the current interest cash “burn” by $7M per year, and eliminate the equity shrinkage that is taking place as $27M (worth almost $1.00/share), of new Preferred is being issued annually. The combination of bank debt and preferred amounts to just under $600M, and with Adjusted EBITDA growing north of $100M, the total $48M annual interest expense could be carried easily. Moreover that $48M is materially less than the current $61M of combined bank interest and preferred dividend. At that future point, the current total of $600M could have been modestly reduced from operating cash flow, and a more optimistic view of STKS could allow for an equity raise. There could also be some value extracted from one of the smaller brands (KONA, RA Sushi, etc.) There will no doubt be an active effort from investment bankers to be helpful one way or another.
CONCLUSION & RECOMMENDATION: PROVIDED ABOVE
