Tag Archives: Fat Brands

FAT Brands’ FOUNDER AND CEO, ANDY WIEDERHORN, TO STEP ASIDE

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FAT Brands, Inc. announced last week that founder and CEO, Andy Wiederhorn will step aside as of May 5th, transitioning to a new role as “outside consultant and strategic advisor”.

Having followed, and written of, FAT Brands’ emergence as a franchisor of seventeen restaurant brands, the largest, and likely most promising, being Twin Peaks, we are surprised but not shocked.

Wiederhorn, over several years including the heart of Covid related disruptions, creatively assembled a collection of growing franchising brands, including Twin Peaks, Round Table Pizza, Fazoli’s, Johnny Rockets and Fatburger, the brand he started with. This assemblage was accomplished by borrowing over $900M long term, securitized by the royalty streams. The expectation, and the reported results in calendar ’22 ($88.8M of Adjusted Corporate EBITDA), support the Company’s previous estimates that these brands would generate upwards of $90M of Adjusted Corporate EBITDA, once Covid ran its course.

It should be noted that the $88.8M of Adjusted EBITDA in ’22 was after adding back almost $19M of legal expenses, incurred dealing with a variety of legal actions. While management has indicated that some portion of the legal expense reported could be covered by insurance, the Company has accrued them to date. As discussed by Wiederhorn, on the most recent (February 22nd) conference call:

“SEC investigations are never good for shareholders just because of the cost. And we are — we made significant progress in terms of responding to the inquiries that we received related to the government investigation. I don’t think that there’s much more to respond to. I think that, hopefully, we’ll be able to see some sort of resolution as we finish the year. These things go slow. They can take years, as you know. But hopefully, we’ll see the legal expenses shrink here significantly. We do have opportunities for insurance defense coverage and recovery for some of these things but none of that is reflected in our financials. We haven’t seen insurance companies write checks yet, although we firmly believe that we’re covered under our policies. And we are pursuing recovery against those carriers.

“So you know how that goes sometimes where you have to actually file an action or commence arbitration and mediation to get coverage. We have done all those things. And we think that we will move it along nicely because there is also — it is not just the government investigation. We also have 2 derivative cases outstanding. Remember, in Q3 of last year, we settled 1 shareholder class action case which was good to get behind us to save further legal fees. But we’ve had plenty of discovery and things like that in the 2 derivative cases. We hope that those cases will be resolved during this calendar year and to get all this legal expense to go away once and for all.”

The implication we derive from this announcement is that Wiederhorn and his Board of Directors have concluded that his reduced role might facilitate an earlier resolution of the legal matters than would otherwise be the case.

While it remains to be seen what management adjustments will be made, calendar ’23 has already been described as a “consolidation year”, with the major brands performing well and the royalty stream expected to grow nicely. As we have previously described in our update as of February 27th, the cash position seems adequate to service the debt while the major brands expand and the royalty stream grows.

In terms of further risk to FAT stock at this point, we would be concerned if (1) lenders were somehow disillusioned and putting an unanticipated pressure on the Company or (2) there were further legal issues against the Company that would cause expanded, rather than reduced, legal exposure. Regarding (1) there seems to be no indication of that and the Company seems able to continue meeting their obligations to lenders. Regarding (2) from Wiederhorn’s commentary, as provided above, on February 27th, there has been no indication to that effect.

CONCLUSION:

Based on the information available, we do not believe that Wiederhorn stepping aside, should be construed as an important negative at this point and this action appears to have a productive logic behind it. Since he and his affiliates continue to be major shareholders of FAT Brands, in his absence as day-to-day CEO,  his strategic guidance will likely continue to be available, as stated.

Without question, FAT Brands common stock, (FAT), worth about $120M represents an equity “stub” or “option”, compared to the debt of close to one billion dollars. The Enterprise Value, at about 12x the current rounded $100M run rate of Adjusted EBITDA is less than some pure franchising peers with multiples in the high teens or even higher. This can be considered justifiable, in the context of the shorter operating history of the “new” FAT Brands, as well as the legal “hair” on the situation. It is also obvious that leverage works both ways. On the positive side, the business seems to be going well and the pipeline of stores to be developed seems capable of creating an additional $50-60M of Adjusted EBITDA over the next five years. If FAT is generating something like $150M of Adjusted EBITDA, the Enterprise Value at that point could be 15-20x, or $2.2B to $3.0B. If there are still 16M shares outstanding, and the debt were the same, the common stock would be worth $1.2B to $2.0B or $75 to $125/share. From a more conservative standpoint, if free cash flow of $50M were to represent a hefty 10% free cash flow yield, the stock would sell at $30/share, with a 5% free cash flow yield at $60/share. Investors can make their own assumptions in terms of the possibility of the Company accomplishing its projections, and/or the likelihood of more stock or debt being issued. The bottom line remains that the upside possibilities are an order of magnitude larger than the $7.50/share at risk.

Roger Lipton

FAT BRANDS, INC. (FAT)

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QUARTERLY

The following articles describe the progress made at FAT Brands over the last several years.

https://www.liptonfinancialservices.com/2021/11/fat-brands-reports-third-quarter-results-plans-to-add-fazolis-by-mid-december/

https://www.liptonfinancialservices.com/2021/10/fat-brands-fat-wasting-no-time-in-building-multi-branded-franchised-portfolio/

https://www.liptonfinancialservices.com/2021/09/fat-brands-inc-fat-to-expand-portfolio-systemwide-sales-from-1-4-to-1-8-billion/

 

 

 

FAT Brands REPORTS THIRD QUARTER – THE BRANDS ARE SOUND and OPERATING CASH FLOW IS BUILDING AS PREDICTED – OVER 1000 PIPELINE LOCATIONS WILL ADD TO CURRENT 2300 – NEW UNITS, SALES GROWTH AND MORE DOUGH MANUFACTURING SHOULD PROVIDE MATERIAL FREE CASH FLOW IN ’23.

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We have written extensively about FAT Brands and our reports can be accessed using the SEARCH function on our Home Page.)

All reported results were an order of magnitude larger in Q3’22 vs. a year ago, largely as a result of acquisitions, also influenced by openings, higher same store sales and average unit volumes. Recall that FAT Brands now oversees a 17-brand portfolio of franchised restaurant concepts, comprised of over 2300 locations that generate $2.2B of annual sales. The five largest brands are Fatburger, Johnny Rockets, Round Table Pizza, Fazoli’s and Twin Peaks. Twin Peaks is the only brand with a material number of company operated locations, 28 out of the 92- unit current total, with AUVs above $5M and  compelling store level profits and return on investment.

THE QUARTER

Adjusted EBITDA in Q3’22 was $24.6M (up from $7.2M in ’21) with a GAAP loss of $23.4M. The material reconciling adjustments were addbacks of: Interest Expense of $24.5M, D&A of $6.9M, Share Based Compensation of $2.0M. Additional non-recurring adjustments were Acquisition Costs of $2.0, Provision for Bad Debts of $5.5M and Litigation Costs of $6.9M, the last two of which are expected to be at least partially recoverable

Management has, since late ’21, been guiding to a post-Covid run rate of $90-95M of Adjusted EBITDA with over 100 openings in ‘22, and both objectives are being met. In Q3’22, systemwide sales growth was 57% vs. ‘21, with SSS growth of 7.0% and there were 38 new store openings, the new total for ’22 expected to be 125.  For nine months, Adjusted EBITDA was $69M, and guidance of about $25M in Q4 would take it to $94M for the full year. Importantly, franchisees signed for over 180 new locations during Q3, bringing the development pipeline to over 1,000, “expected to represent a 60% increase in EBITDA over the next several years”.

THE DEBT

While management continues to work to reduce its debt service, anticipating a re-rating and a lower interest rate, a process that was expected to be well under way by now, the current volatility in debt markets has predictably inhibited this effort. While marking time in this regard, $43M of Series B Preferred Stock has been redeemed by the use of one of its securitization facilities that carries a lower rate. The savings will be material and the plan is to convert another $95M in the next two or three quarters. Fortunately: unit growth, sales growth, and efficiencies inherent in operating a multi-branded administrative platform are steadily improving operating cash flow, so the current debt structure can be serviced even if the terms are not improved. Moreover, FAT owns at least five brands that could be monetized over time in a variety of ways to materially reduce the debt. At the same time the factors above, augmented by increased cash flow from dough manufacturing should generate a steadily increasing amount of free cash flow.

THE OUTLOOK

According to commentary on the conference call, more than 90 new locations are currently under construction, with 130-150 due to open in ’23. The portfolio wide pipeline of over 1000 locations represents forty three percent unit growth and an incremental $60M of EBITDA. Regarding Twin Peaks, the single most important brand, there are over 100 locations in the franchise development pipeline, with 15-20 franchised and 3-4 company operated to open in ’23 and in each subsequent year. The newest class of stores is generating about a $6M AUV, and same store sales are running up about 13% through nine months of ’23. In the Fast Casual segment, the pipeline has 350 new Fatburger’s and Johnny Rockets. Within QSR there are over 400 restaurants, including Fazoli’s, Round Table Pizza, Great American Cookies and Marble Slab Creamery. Co-branding is an important focus, which spreads the cost of the physical facility and increases sales per square foot. There are over 100 pairings of Buffalo’s Express and Fatburger, 225 co-branded Great American Cookies and Marble Slab Creamery, and one tri-branded Fatburger, Hot Dog on a Stick and Buffalo’s Express. Non-traditional locations are also a new focus, with 13 opened in the past year.

Another important opportunity is the dough manufacturing facility that was purchased in mid’21. It generated $7.8M of revenues in Q3, $25M for nine months, and is generating about $15M of  EBITDA while operating at only 33% of capacity. The 55 acquired Nestle Toll House Café stores are being converted to Great American Cookies (GAC) and will take the manufacturing facility to 38% of capacity with materially improved cash flow. At the same time, franchisees of Nestle (to become GAC) will be able to purchase dough at 20% less than previously. More broadly relating to FAT’s multi-branded portfolio, based on $600M of total purchasing power, franchisees will be able to save 200-300 bp within their cost of goods.

THE BOTTOM LINE

The run rate of improving EBITDA and free cash flow generation should continue to build quarter by quarter, with contributions in ‘23 as follows: (1) Corporate efficiencies amounting to $2M at least (2) New franchised units open, at the rate of 5-6% per year, generating about $5M of new royalties annually (3) Higher royalty generating sales, from inflation at least, generating an incremental $2M (4) At least 2 new corporate “store years” at Twin Peaks, out of 3-4 planned openings, which should generate $2M of EBITDA, depending on timing of openings (5) Manufacturing facility, improved utilization, $3M. In total, our estimate is that total Incremental operating EBITDA phasing in during ’23 could amount to $14M. The Company has so far made no estimate, and we are not including the effect of “fill in” acquisitions, but our analysis above takes the annualized run rate of EBITDA in ’23 to about $108-110M.

Roger Lipton

FAT Brands (FAT) TO REPORT Q3 THIS AFTERNOON – WITH SEVENTEEN BRANDS – ONE OF EARLIEST LOOKS AT SEPTEMBER QUARTER

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FAT Brands (FAT) TO REPORT Q3 THIS AFTERNOON – WITH SEVENTEEN BRANDS – ONE OF EARLIEST LOOKS AT SEPTEMBER QUARTER

Today at 5pm, FAT Brand will conduct their Q3 (September) earnings conference call. Considering that FAT is the franchisor of seventeen different brands, directing over 2,000 outlets from QSR concepts through full service casual dining, and represents one of the first reporters of September quarter results, this will provide analysts with some interesting data points. The link to the call is provided below.

Analysts will be interested to hear about FAT’s progress in building “post-Covid” Adjusted EBITDA toward the $90-95M run rate objective. Sales trends and unit openings will of course be interesting, as well as further build-out and visibility of the franchised unit development pipeline. Considering the recent rapid rise in interest rates, commentary regarding the strategy and likelihood of reducing debt service will also be of interest.

While there is little doubt that almost all brands are growing, we are particularly interested in hearing about the progress at Twin Peaks, by far their largest brand in terms of contribution to total corporate cash flow. Average volumes at Twin Peaks are approaching $5M and were at last report comping positively over last year and even more so over 2019. With total units approaching 100, public announcements summarized below have indicated that the development pipeline is rapidly building. Since every location, with a 5% royalty, generates about $250k to FAT’s cash flow, the cumulative effect of Twin Peaks’ unit growth is material.

On September 12th, Twin Peaks announced an area development agreements with Music City Consulting to open eight franchise locations in North Carolina and a deal with JEB Food Group to open four more locations in the Louisville area. On September 8th, Twin Peaks announced that the brand has executed an area development agreement with JEB Food Group to open four more locations near the River City. JEB already operates Twin Peaks locations in Beavercreek and West Chester, Ohio, as well as Florence, Kentucky, and owns the iconic Circle M Crawfish Restaurant in East Texas. By extending its previous agreement JEB will now be able to develop and operate a total of 12 restaurants. The plans are to expand more around Cincinnati and Columbus, while also growing in Louisville and southern Indiana.

On August 08, 2022, Twin Peaks CEO Joe Hummel announced that Vice President of Franchise Development Glenn Moon and his team are seeking development opportunities overseas in Brazil, Canada, Columbia, India and more countries throughout the world. After inking multiple development agreements totaling 21 incremental new lodges last year in the U.S., Moon’s team has already eclipsed that number in 2022 with 22 new lodges signed year to date and another 10 to 16 in the final stages of execution.

We will summarize FAT Brands’ Q3 results and conference call commentary in the near future.

Roger Lipton

https://viavid.webcasts.com/starthere.jsp?ei=1574400&tp_key=c3f2777812

ROGER’S 9/15 COLUMN IN RESTAURANT FINANCE MONITOR – INSIDER BUYING AND STOCK BUYBACKS, FRANCHISOR/FRANCHISEE RELATIONSHIPS (and FAT Brands, FAT), SPACs (and FAST Acq.Corp. II, FZT), and IGNORE HISTORY AT YOUR PERIL!

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ROGER’S 9/15 COLUMN IN RESTAURANT FINANCE MONITOR – INSIDER BUYING AND STOCK BUYBACKS, FRANCHISOR/FRANCHISEE RELATIONSHIPS (and FAT Brands)( FAT), SPACs (and FAST Acq.Corp. II (FZT), and IGNORE HISTORY AT YOUR PERIL!

Insider Buying and Stock Buybacks are good leading indicators of better times ahead. In these ongoing difficult times within the restaurant industry, with the stocks selling at historically inexpensive prices, one might expect both insiders and companies to be taking advantage. However:  through the end of August there has been no material insider buying within publicly held restaurant companies over the last six to twelve months.  From the standpoint of stock buybacks, on the other hand, Denny’s and Dine Brands have bought material amounts in this current year. Denny’s spent $37M in the last quarter (6% of the market cap), bringing the YTD total to $46M. The remaining authorization of $168M is about 30% of the current market cap. Dine Brands bought $63M worth in Q2 (about 5% of the market cap), after purchasing $41M in Q1. There is $74M still authorized. It is interesting that both Denny’s and Dine Brands are primarily franchising companies, with free cash flow available even as their franchised operators are fighting to control food and labor while searching for affordable new locations. The absence of buying programs where most stores are company operated may be telling us something about their confidence looking ahead.

Relative to Franchisor/Franchising relationships, we spent an educational several days last week at FAT Brands’ multi-branded convention in Las Vegas, with almost 2,000 attendees representing seventeen brands. Management of FAT Brands not only provided a first-class event, top management, administrative staff, and Directors as well, all “walked the talk” throughout, as gracious hosts and, most importantly, appreciative partners of their franchisees. One of the themes enumerated throughout by CEO, Andy Wiederhorn, and his team, is that the purpose of the conference was not to “congratulate ourselves” but to “make ourselves collectively better”. The overriding most important aspect of the event was that management of FAT Brands (and their entire organization) communicated effectively their primary dedication to the long-term success of each franchisee.  There was every indication, including a conversation we had with a supervisor that has been with Fatburger (and Andy Wiederhorn) for seventeen years, that the message provided to franchisees in Las Vegas represents deeply held principles. We’ve previously been critical of some franchisors being relatively unresponsive to franchisees’ problems, Dunkin’ Donuts spending over $1B to buy back stock while Starbucks was “eating the lunch” of their franchisees, and how Restaurant Brands hollowed out their field organization to cut G&A after buying Burger King. Based on everything we observed in Las Vegas, there is no such risk to franchisees at FAT Brands.

The SPAC market is generally moribund, as the shakeout which we predicted continues apace. Hundreds of billions of dollars were raised, as Sponsors of all stripes, including show business and athletic celebrities joined the dance. Today, however, hardly any new deals are being filed and 115 SPACs in registration are still hoping to raise about $19B. Amazingly enough, there are today 566 SPACs, with $148B “in trust”, actively seeking acquisitions with total buying power, including leverage, approaching a trillion dollars. The problem is that the shareholders of those 566 SPACs have to approve the proposed deal. With the stock market down so much, it is very tempting for investors to redeem and redeploy the funds into more well-established situations. The Business Combinations most likely to be approved will be those where the surviving company is profitable and growing. An example would be Getty Image Holdings (GETY), still trading at a 25% premium over the original $10.00 IPO unit price, which no doubt has something to do with GETY’s $74M of Adjusted EBITDA in Q2’22. Within the hospitality industry, the only completed deal over the last couple of years was BurgerFi(BFI) but disappointing results as a public company have produced a stock at $3.00 and change, down from a high in the teens. More to the current point, we have written about Doug Jacob’s and Sandy Beall’s FAST Acquisition II (FZT), their improvement of the typical SPAC structure, and their plans to merge with Falcon’s Beyond, a growing and profitable hospitality/entertainment company. Though historical financials have not yet been filed, current Falcon Beyond operations, according to the Investor Presentation, are cash flow positive (similar to GETY), and available for the development of brick & mortar assets. This feature, along with the banking relationships of joint venture partner, Melia’ Hotels, should allow for growth as planned, even without a broad vote of confidence from current FZT shareholders. The possibility of $150M annualized EBITDA in only about 2.5 years, combined with the potential to build billions of value attached to brick-and-mortar assets makes the current $1B starting point appear reasonable. Time will tell, of course, and we will comment further after historical financials are provided and as fundamentals develop.

Ignore History at your Peril. This publication and this column make a conscious effort to look beyond the headlines and the consensus, hoping to put current economic trends in a longer-term context. Nobody can call every twist and turn, especially in the very short run, but we’ve warned about more than ten years of suppressed interest rates encouraging investors in both equity and debt to reach for “return/yield” and misallocating capital in the process. We’ve discussed with trepidation stocks trading at sixty or seventy times sales, SPACs being pumped out like there is no tomorrow, and twenty thousand different cryptocurrencies, Bitcoin being just one, that amounted to almost $3T of new currency at the top ($1T today). Within the restaurant industry, we’ve warned investors about the ridiculous valuations at the start of trading of new issues including Sweetgreen (SG), Portillo’s (PTLO), Black Rifle Coffee (BRCC) and Dutch Bros (BROS). Sometimes, in the world of investing, it’s about the pitches you don’t swing at, rather than those you do.

Roger Lipton

FAT Brands (FAT) sponsors MULTI-BRAND FRANCHISE CONVENTION – TANGIBLE TAKEAWAYS

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FAT Brands (FAT) sponsors MULTI-BRAND FRANCHISE CONVENTION – TANGIBLE TAKEAWAYS

We attended FAT Brands multi-branded franchisee convention in Las Vegas earlier this week, having recently written how unusual it is for analysts these days to be voluntarily “exposed” to franchisees of publicly held franchised systems. We understand that at least a dozen prominent restaurant analysts were invited, but only a couple (including ourselves) took them up on it. We obviously found the time well spent.

THE INTANGIBLES

There were about 2,000 attendees at the Wynn Hotel, with all seventeen brands heavily represented. The Company has published the long list of presenters, so we need not repeat that here. Suffice to say that the agenda was packed with pertinent, informative information, as well as the predictable uplifting, motivational, and entertaining presentations. From both an entertainment and inspirational standpoint, the highlight had to be Earvin “Magic” Johnson’s hourlong appearance. He had 2,000 people in the palm of his hand as he mingled with the audience and reflected on his athletic and business careers. We’ve been to a great number of conferences but can’t recall a more impressive presentation.

Management of FAT Brands not only provided a first-class event, which they started planning over a year ago, even before owning Twin Peaks, Fazoli’s, Round Table and others. Top management, administrative staff, and Directors as well, all “walked the talk” throughout, as gracious hosts and, most importantly, appreciative partners of their franchisees. One of the themes enumerated throughout by CEO, Andy Wiederhorn, and his team, is that the purpose of the conference was not to “congratulate ourselves” but to “make ourselves collectively better”. “It’s not about what’s working, but about what we can do to improve.” It’s worth noting that, while FAT Brands provided three days of food and drink and presentations, attendees paid in time and travel expense and seemed uniformly grateful for the experience.

FROM AN INVESTMENT STANDPOINT

A clear objective of the convention was to sell franchises. I think the phrase was “Drive to One Thousand”, with the previously quoted pipeline of stores to be built in the 900s. We don’t know what the tally will turn out to be, but new commitments were clearly taking place.

We didn’t hear any specific reference to short term comp sales, but the mood was clearly upbeat, from franchised operators to the executives at the manufacturing plant, who are optimistic that a great deal of the unused capacity can be put to productive use. The Company has publicly made reference to strong sales trends and openings at the major brands, and we heard no indication of momentum being lost.  We would be remiss not to single out the leaders of Twin Peaks, FAT Brands’ single largest brand, in terms of their confidence and commitment to building Twin Peaks to more than double its 93 store current footprint.

The overriding most important aspect of the event was that management of FAT Brands (and their entire organization) communicated effectively their primary dedication to the long-term success of each franchisee.  There was every indication, including a conversation we had with a supervisor that has been with Fatburger (and Andy Wiederhorn) for seventeen years, that the message provided to franchisees in Las Vegas represents deeply held principles. We’ve previously written about Dunkin’ Donuts spending over $1B to buy back stock while Starbucks was “eating the lunch” of their franchisees, and how Restaurant Brands hollowed out their field organization to cut G&A after buying Burger King. Based on everything we observed in Las Vegas, there is no such risk to franchisees at FAT Brands.

THE TAKEAWAYS

  • The spirit within the portfolio is excellent. We heard no doubt expressed relative to the effort or effectiveness of FAT Brands’ leadership. To the contrary, a number of franchisees were more confident in their new franchisor, in terms of understanding their business and long-term commitment to it, than under previous private equity ownership who are basically financial types and, from the beginning, predictably planning their exit strategy.
  • Comps and the rate of new store openings seem fine.
  • The pipeline of stores to be built is growing.
  • Management has stated their expectation of a $95-100M post-Covid EBITDA run rate. We must first emphasize: There is no indication whatsoever of any downgrade of that expectation. However, it doesn’t matter which month they reach that level. What matters is that the brands are healthy and growing and management is properly building the platform to produce $200M of EBITDA (our “suggestion”, not an estimate) in 3-5 years, and more long term.

 

Roger Lipton

FAT Brands, Inc. (FAT) REPORTS Q2’22 – SUBSTANTIAL PROGESS TOWARD $90-95M EBITDA RUN RATE

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FAT Brands, Inc. (FAT) REPORTS Q2’22 – SUBSTANTIAL PROGESS TOWARD $90-95M EBITDA RUN RATE

FAT Brands, Inc., having absorbed a large number of franchised restaurant systems over the last three years, is now beginning to demonstrate the royalties and EBITDA as projected in the course of assembling their portfolio. (Our previous reports on this subject can be accessed using the SEARCH function on our Home Page.)

Recall that FAT Brands now owns a total of seventeen restaurant brands, the largest of which (in chronological order of ownership) are Fatburger, Hurricane Grill & Wings, Johnny Rockets, Round Table Pizza, Twin Peaks and Fazoli’s. Since Johnny Rockets was acquired in late 2020, and the last three were subsequently acquired in the midst of the Covid, company guidance has consistently been based on the respective pre-Covid performance, projecting growth from that level once Covid has passed. On that basis, the total portfolio of seventeen brands, consisting of over 2,300 locations generating over $2.2 billion of systemwide sales has been projected to generate $90-95M of annual EBITDA. The long-term debt over $900M has been secured by the various royalty streams and carries an average interest rate of about 7%, obviously absorbing a large portion of projected cash flow. However, though rates have risen lately, the Company continues to expect that the debt can be refinanced at a materially lower rate of interest as operating performance is demonstrated. As CEO, Wiederhorn, pointed out on the conference call, the volatility in debt markets may delay this process by 3-6 months, making it a Q1-Q2’23 event, rather than late in ’22, but still has the potential to save approximately 200 bp, or $18-20M annually.

THE SECOND QUARTER OF ‘22

Cutting right to the EBITDA chase: FAT Brands generated $29.5M in Q2’22, naturally up very dramatically from only $2.1M in Covid driven Q1’21, and before owning Round Table Pizza, Twin Peaks, Fazoli’s and several smaller brands. More relevant was the sequential quarterly improvement, almost doubling the $15.1M of Adjusted EBITDA in Q1’22.

Income from Operations grew sequentially from $485K in Q1 to $13.2M, driven by higher royalties, higher sales and lower expenses at company operated locations (primarily Twin Peaks), lower corporate G&A, and modestly higher sales with lower expenses at the dough manufacturing factory. The GAAP net loss was $8.2M, down sequentially from $23.7M in Q1’22. The improved results were a function of 5.6% same store sales in Q2, on top of 26 new locations opened in Q2. The total new units through the end of June was 53 and 9 more opened during July. In this regard, it is important to note that there are over 900 locations represented by long term development agreements, bought and paid for by over $20M of deferred franchise fees on the balance sheet. Management has reiterated that 120-122 new locations are in the planning stage for the current year, and the 900 long term additions could add 50% to EBTDA.

The reconciliation from GAAP Net Loss to Adjusted EBITDA adds back Interest Expense and Depreciation to get from $8.2M Net Loss to $22.0M of EBITDA. The material additions from there are $1.9M of Share Based Compensation Expense and $4.3M of Litigation Costs, bringing Adjusted EBITDA to $29.5M in Q2.

Relative to the litigation expense, the lawsuits and investigations (“L&I”) relate almost entirely to FAT’s relationship with its previous majority stockholder, Fog Cutter Holdings, and the fairness of the merger between them. As described in the quarterly 10-Q, the pertinent L&I “do not assert any claims against the Company” and “we believe that the Company is not currently a target….”. Because the Company indemnifies officers and directors, legal fees are accrued since “an unfavorable outcome may exceed coverage provided under our insurance policies….”. FAT management has made it clear that they are vigorously defending themselves, at the same expecting that such costs are expected to decline from this point forward and that insurance should ultimately reimburse a large portion of the expense. We obviously cannot predict legal outcomes but, even if the legal expense continues, the apparent exposure does not seem to change the long-term reward/risk equation of this investment situation.

OPERATIONAL PROGRESS

In addition to the progress relative to same store sales and unit growth, the Company is working to create synergy between the platform and the brands. Dual branding is starting to take place, combining Round Table Pizza with Fatburger, Johnny Rockets with Hot Dog on a Stick, or Mable Slab Creamery and Great American Cookie. The dough manufacturing facility (operating at 30% of capacity) has begun to grow sales and generate EBITDA, while supplying FAT’s various brands with products 20% cheaper than possible elsewhere.  A “bolt-on” relatively small acquisition of 85 Nestle Toll House Café by Chip stores will be rebranded as Great American Cookies, the first to open in September. With over $600M of portfolio purchasing power, franchisees have been able to save 2-3% of Cost of Goods. From a financial standpoint, planned is the redemption of $135M of Series B Preferred Stock, which will reduce FAT’s cost of capital. It is worth noting that the quarterly dividend was increased from $0.13 to $0.14, creating a current yield of over 6%, implying a confident outlook by management and the Board of Directors. Lastly, a multi-brand national convention, taking place in late August in Las Vegas is going to bring together all seventeen of FAT’s franchised systems. About 2,000 attendees will spend almost three days, getting “charged up” and, from the franchisor’s standpoint, bringing best practices more broadly to the portfolio.

THE OUTLOOK

FAT Brands (FAT) seems well on their way to an EBITDA annual run rate of $90-95M by the end of calendar ’22. Unit growth of 110-120 new locations in ’22 will amount to about 5%, on top of which there should be same store sales progress. Though the most recent quarterly Adjusted EBITDA obviously annualizes to well over the projected $90-95M run rate by the end of ’22, the macro-economic uncertainty justifies maintenance of the previous guidance. At the same time, it appears that fundamentals are set up to generate well over $100M of Adjusted EBITDA in calendar ’23.

CONCLUSION:

The long-term vision of FAT Brands’ management has been supported by the results of the last six months. The 16.5M fully diluted shares, at $8.75/share, only amount to $145M of equity value, very modest relative to the $900M of long-term debt and $135M of Preferred Stock. The $100M of projected Adjusted EBITDA in calendar ’23 would obviously pay the interest and leave $20-30M of free cash flow, and that’s why about $11M. representing over 6% yield, can be paid on the common stock. The potential upside comes into play with the prospect of unit growth accompanied by same store sales, and potential acquisitions as well. If the current debt can be re-rated, the near-term cash flow could immediately become more than 50% higher. Over five years or so, the 900-store development pipeline, implying an additional $50M of incremental EBITDA, would obviously change the world for FAT investors. Long term debt on the order of 10x EBITDA is substantial, to be sure, so investors correctly look for signs that management is up to the (leveraged) task. For those who correctly question the wisdom of operating under the burden of debt that is 10x the operational cash flow: within this multi-brand portfolio are at least a few brands with solid long-term records and excellent prospects. It is always a possibility for management to monetize one brand or more, in the process deleveraging the balance sheet. Management at FAT Brands has demonstrated sufficient financial creativity that we can expect them to react accordingly as strategic and operational alternatives present themselves.

Roger Lipton

FAT BRANDS (FAT) REPORTS FOURTH QUARTER ’21 RESULTS – CONSOLIDATING AFTER MAJOR ACQUISITIONS!

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FAT BRANDS (FAT) REPORTS FOURTH QUARTER ’21 RESULTS – CONSOLIDATING AFTER MAJOR ACQUISITIONS!

CONCLUSION:

FAT Brands (FAT) provided a promising update relative the progress within their multi-branded franchised portfolio. The pipeline of additional units to be added to the 2,369 December total allows for about 33% growth in units and approximately 50% incremental EBITDA on top of the $90-95M EBITDA run rate that is expected “post-COVID” by the end of ’22. The most important brands are providing the most impressive sales results and rate of openings. While the reported GAAP numbers have yet to “normalize”, the Adjusted EBITDA results showed progress in Q4 and quarterly results in ’22 promise to improve clarity and long-term credibility. While the risk of litigation, discussed below, overhangs the valuation at the moment, that noise would fade away quickly if the fundamentals come through and the current valuation will have provided a buying opportunity. We have written extensively about FAT in the past and those reports can be accessed by way of the SEARCH function on the Home Page.

THE FOURTH QUARTER

FAT Brands (FAT) announced their fourth quarter ’21 and full year financial results yesterday.  Recall that four acquisitions, including eight brands, were made during the year, three of which were in Q4. There were therefore a large number of non-operating expenses flowing through reported results, as the Company was positioned to build on a base of 2369 locations (mostly franchised) that generate over $2B of systemwide sales. FAT Brands’ portfolio looks as shown below as of yearend ’21. Management has reiterated that the ’21 acquisitions are expected to generate an incremental $45-50M of incremental post-COVID EBITDA in ’22, to a total run rate by late ’22 of $90-95M.

Q4’21 comparisons, in terms of revenues were predictably strong vs.’20 in terms of revenues, due to the easing of COVID, acquisitions during the year, and strong unit level sales. Most impressive was the 5.6% SSS growth against Q4’19 from the “legacy” (prior to 2021 acquisitions) brands and the 8.5% SSS growth, vs ’19, if the newly included brands are included.

The summary of fourth quarter ’21 vs.’20 results includes:

Total revenues up 1,042%, systemwide sales growth up 308%, US sales growth of 432%, Rest of world sales growth up 61%, systemwide same store sales growth of 12.4%, US SSS growth of 15.8% and Rest of world SSS growth of 2.0%. Thirty new franchised locations opened during Q4’21, a total of 115 locations for the full year.

The GAAP net loss was $19.6M in Q4 ($1.38/sh.). The Adjusted Net Loss was $16.5M ($1.16/sh.). EBITDA was a positive $1.9M (vs. an EBITDA loss of $7.9M in ’20). Adjusted EBITDA was $10.4M vs. $1.7M in ’20. The following table shows the reconciliation from the GAAP net loss to Adjusted EBITDA.

THE BALANCE SHEET and EBITDA EXPECTATIONS

Management indicated on the conference call that the balance sheet had approximately $55M of cash on hand at 12/31/21. The total securitized debt was $938.2 million with a weighted average interest rate of 6.98% and a stated term of 30 years. “It doesn’t amortize heavily for another four plus years, a little bit starting in 1.5 years…we want to call and reissue it either on a rated basis or just at a lower interest rate…..that’s more reflective of paying for long-term financing,,,,,,that’s really a Q3 and Q4 activity more than anything just because the debt was issued beginning last April and then in July and then in October and December……but we’re actively working on it…..we can save a couple of hundred basis points….another $20 plus million in free cash flow….”.

Also on the conference call, management discussed the expected buildup of EBITDA. “I think Q1 will be much more in line with trying to get to that $90 million to $95 million run rate. I don’t think we’ll be there yet but we have some synergies that we will realize over the coming couple of quarters like getting rid of some office leases, some redundancy and things like that we’ve already put in place for certain executives that we have to just run out those costs. But we’re really making huge leaps forward. And the top line revenues just continue to impress us…..Q1 will be a significant increase over Q4 and so on. Those synergies just kick in and also as we add 120 new stores this year, I think we have 20 of them opened — 19 or 20 opened so far through March, but we have just a very, very big backlog on schedule to open going throughout the year and then a very strong pipeline for next year. So, we’re growing significantly every month by new unit count across most of the brands. And it’s not every single brand that has hockey stick growth, but we’ve got five or six of them that really do.”

The following tables, from the supplemental company materials, provide more detail on Q4 and calendar ’21 results.

The development pipeline consists of approximately 850 locations, “mostly been paid for in full by our franchise partners”. There are more than 470 units between Fatburger, Johnny Rockets, Buffalo’s Express and Elevation Burger, plus 157 new locations for Global Franchise Group which includes Round Table Pizza, Great American Cookie, Marble Slab Ice Creamery, Pretzelmaker and Hot Dog on a Stick. There are 144 sports lodges for Twin Peaks and 114 drive-through locations for Fazoli’s. As of the end of the fourth quarter of 2021, 23 locations across the system, eight domestic and 15 international, excluding the recently acquired concepts, remained temporarily closed due to COVID-19 compared to 52 units at the end of the third quarter. Therefore further re-openings will add to growth in ’22 vs. ’21. It is expected that 120-125 new units, across the portfolio, will open in calendar ’22, twenty of which have already opened. Among the largest contributors will be 20 or more Twin Peaks locations plus 20 Fazoli’s, with both brands having far more long term potential. It is expected that Twin Peaks can add $30M to EBITDA in ’22 vs. ’21, with Fazoli’s adding $14-15M, these two brands alone providing a large portion of the ’22 vs. ’21 comparison.

Same store sales growth within the portfolio should also be augmented by delivery sales, even as dining rooms reopen, facilitated by the rollout of OLO and Captain, formerly known as Hunger, both of which are online ordering providers. Chowly, a third-party online POS system aggregator, is also streamlining the multi-channel delivery process.

Management expects the growth within the current portfolio to generate, on top of the $90-95M EBITDA run rate by the end of ’22, an additional 33% in units and $50M of EBITDA over the next five years or so.

BRAND MANAGEMENT

FAT Brands management stated months ago that the primary focus in ’22 is to consolidate the multiple acquisitions made over the last twenty four months. While not eliminating the possibility of modest sized “bolt-on” synergistic additions, CEO Wiederhorn wants to ensure that maximum effort is pointed to realizing the growth and synergy opportunities within the current portfolio. The major brands are thought to be very capably led by their existing management teams, so there will not be potentially disruptive “efficiencies” imposed. There is no need to “fix” systems that are not “broke”.

POTENTIAL LITIGATION

We would be remiss to ignore possible investigations and litigation that involve principals of FAT Brands, even if apparently aimed at CEO, Wiederhorn, rather than FAT Brands itself. We focus our analysis on FAT Brands, the Company, its positioning and prospects and provide below Andrew Wiederhorn’s statement regarding this matter.

“I’d like to take a moment and address the pending government investigations and pending or threatened litigation. Being a public company and a public figure attracts its share of visibility. As previously disclosed, the company’s directors were named as defendants in the shareholder derivative action last summer brought by the same shareholder that had been a part of prior lawsuits against the company after the company’s IPO in 2017. None of those lawsuits prevailed as a court’s denied certification, yet the company spent considerable money defending itself in resolving matters. The most recent derivative suit is based upon the merger of Fog Cutter Capital Group into FAT Brands, a transaction is transformative for FAT Brands and led to its growth by more than 500% since the merger at the end of 2020.

“It’s important to note that this derivative action case does not assert claims against FAT Brands, but seeks recovery on its behalf, meaning any monetary settlement goes to FAT Brands, not paid by FAT Brands.

“Given my personal history, it does not surprise me that the government will look into allegations also raised in the derivative complaint. And as previously disclosed, the government is now formally seeking documents concerning these matters from the company and me. The government’s affidavit should not have been made public when it was a subject of the sealed court order.

“Nonetheless, the United States Attorney’s Office has indicated that the company is not presently a target of the investigation and that the investigation primarily focuses on me and my family. The LA Times article that published characterizations of the government’s position has many factual errors and conflates the different entities and my family as if they were one. I categorically deny the allegations raised in the L.A. Times article and look forward to the opportunity for our legal team to demonstrate that all transactions were properly documented, reviewed, approved and disclosed and that multiple independent professionals were involved including the Boards of both Fog Cutter and FAT Brands, outside counsel, outside auditors and my and FAT Brands’ tax adviser.”

CONCLUSION: Provided at the beginning of this article.

FAT Brands (FAT) PROVIDES STRATEGIC UPDATE AT ICR CONFERENCE

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FAT Brands (FAT) PROVIDES STRATEGIC UPDATE AT ICR CONFERENCE

FAT Brands has been aggressively adding to its multi-branded franchising portfolio throughout the two-year course of the Covid pandemic. We have previously chronicled (accessible by way of the SEARCH function on our Home Page) the details of that process and we present below a number of slides in the Investor Presentation released yesterday that provide an update. Most importantly, the Company has strategically pivoted, concentrating over the next year or so on consolidating and building upon the recent acquisitions from an operational standpoint, reaping the substantial organic growth and synergistic rewards, which will simultaneously allow for re-rating of the existing debt and allow for $20-30M per year less debt service. Management has stated that “tuck in” opportunistic acquisitions may still be made, such as the recent purchase of Native Grill Wings but the primary focus will be as stated above.

The slides below (1) summarize the acquisition timeline of the last two years (2) provide a summary of FAT’s portfolio as it stands today (3) updates operating results through Q3’21 (4) and provides a summary of the most important cash flow “levers” that management expects to demonstrate over the near term.

The slide just below shows the sequence of acquisitions, starting with Johnny Rockets in the fall of ’20. It is important to note that the most recently reported quarter, Q3’21, did not yet reflect a full quarter of Global Franchise (with Round Table Pizza, acquired 7/22/21), nor any contribution from Twin Peaks (acquired 10/1/21), Fazoli’s (12/16/21) or Native Wings (12/17/21). The third quarter therefore did not reflect about 35% of the $2.23B of (2019 based) systemwide sales among the current 17 brands.