The following articles describe the progress made at FAT Brands over the last several years.
The following articles describe the progress made at FAT Brands over the last several years.
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.
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.
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.
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.
FAT BRANDS (FAT) REPORTS FOURTH QUARTER ’21 RESULTS – CONSOLIDATING AFTER MAJOR ACQUISITIONS!
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.
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”.
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
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.
FAT Brands REPORTS THIRD QUARTER RESULTS, PLANS TO ADD FAZOLI’S BY MID-DECEMBER
FAT Brands updated the financial community on its operating results for the third quarter, ending 9/30/21. It should be noted that major acquisitions have been taking place over the last twelve to fifteen months which, combined with the worldwide COVID effects, distort current and comparable results. Corporate management, analysts and investors must therefore look through the GAAP results and gauge the corporate progress and prospects by evaluating the basic health of the major brands.
Recall that Johnny Rockets was purchased in September, 2020. Global Franchise Group (GFG), with 415 unit Round Table Pizzas, closed on July 23, 2021. Twin Peaks, with 83 systemwide units, was acquired on October 1st, 2021 and Fazoli’s (214 units) is expected to close in mid-December. Johnny Rockets, when acquired, was projected by management to bring the “post-COVID, normalized” EBITDA run rate to $15-20M. GFG has been expected to add $30M (bringing the run rate to $45-50M). Management projects that Twin Peaks could add $25-30M (bringing the run rate to $70-80M) and Fazoli’s is projected to add $14.5-15M (for a new “post-COVID normalized” objective of $85-95M). The total portfolio, including Fazoli’s, will consist of about 2,300 units generating over $2 billion of sales.
The third quarter of ’21 was predictably much better than in ’20. Operating Income was $2.376M vs. a loss of $1.296M. The positive operating income was after an increase of $10M due to G&A and professional fees relating to the initial inclusion of GFG. Advertising expense also increased, from $0.8M to $5.5M, “reflecting advertising expenses from GFG and Johnny Rockets and the increase in customer activity as the recovery from COVID continues”. There was also a $2.053M “acquisition cost” item reducing Q3’21 Operating Income. After $7.1M of interest expense vs. only $123k in ’20, there was a pretax loss of $4.8M vs. a loss of $587k in ’20. CFO, Ken Kuick pointed out that the Revenue Run Rate entering ’22, assuming that COVID continues to fade, should be on the order of $340M annually ($85M/qtr.), versus the $29.8M just reported in Q3. Wiederhorn suggested on the conference call that the current quarter should show closer to $15M of Adjusted EBITDA, with the inclusion and synergies at GFG and the effect of Twin Peaks.
Relative to the basic health of the various brands, the earnings release noted that domestic same store sales were up 7% in Q3 vs. ’19 and worldwide same store sales were up 3.5% vs. Q3’19. While the int’l units, primarily Johnny Rockets, have been slower to reopen and rebuild sales, the third quarter improved 7.15% from Q2’21 to Q3’21. Portfolio wide, most notably at overseas Johnny Rockets, the number of closed stores was 52 at 9/30, down from 63 at 6/30 and 107 at 3/31. The franchise sales team “had a record quarter, closing nine deals that account for 166 locations. We expect unit growth to continue increasing in the coming months with plans to open 26 additional stores by the end of 2021 for a total of 85.” Management further described the pipeline of new units, which totals about 700 units within the current portfolio, over 800, including Fazoli’s. CEO, Wiederhorn, refrained from specifying over what period those locations would open but pointed out that new additional deals are being done all the time, and it is not hard to picture somewhere between 100 and 200 new units adding annually to the current 2,100 units (including Fazoli’s.) Wiederhorn again emphasized his expectation that the current $744M of securitized debt can be refinanced with a new rating, saving something like $25M of interest per year. Wiederhorn accurately pointed out that the predictable growth in the various franchised systems is “free” growth. The supporting systems are in place and additional capital is not necessary for the organic progress.
The third quarter results included Johnny Rockets (bought a year ago), GFG from July 23rd, and Twin Peaks only for one week. Adding back to the $2.4M of operating income: the $2.1M of acquisition expense, some portion of the heavy $5.5M of advertising expense as well as the initial larger than necessary G&A at GFG, we would have suggested that the third quarter “normalized” (not yet “post-COVID”) EBITDA might have been in the area of $8-9M. FAT actually reported “Adjusted EBITDA” at $7.2M. Considering that the COVID is still a factor and synergies at GFG are just now being implemented, FAT was not far from the (GFG included) “post-COVID normalized” objective of about $12M quarterly ($45-50M annually). With the impressive new unit pipeline and the encouraging same store sales trends across most of the portfolio, it seems to us that the developing fundamentals are adequately supporting the long term “story”. Our previous reports describing FAT Brands can be accessed by way of the SEARCH function on our Home Page.
FAT BRANDS (FAT) – CLOSES $250M SECURITIZATION, ANNOUNCES EXPANSION IN MIDDLE EAST, COMPLETES TWIN PEAKS ACQUISITION, WITH FIFTEEN BRANDS SETS STAGE FOR $80M OF POST-COVID 2022 EBITDA.
We last updated our previous reports on FAT Brands (FAT) on September 2nd, all of which can be accessed by way of the SEARCH function on our Home Page. A great deal of progress has been announced in a short six weeks since then. Recall that, including the acquisition of the Twin Peaks sports bar chain, the company, now franchising fifteen brands, has guided to $80M of post-Covid 2022 EBITDA.
We provide below a summary of the group of press releases since September 1st, as well as publicly disclosed remarks relative to the third calendar quarter ending September 30th.
On September 7th, the Company announced a new 200+ unit development deal in the Middle East, including 136 brick and mortar locations plus 70 ghost kitchens. In partnership with Kitopi, the master franchisee of this deal, the expansion over the next five years will cover six FAT concepts, namely Fatburger, Johnny Rockets, Buffalo’s Café, Great American Cookies, Elevation Burger and Yalla Mediterranean. The brick and mortar locations, to be located in the UAE, Saudi Arabia, Bahrain, Qatar and Kuwait, will add to Kitopi’s existing 70 cloud kitchens
On September 15th, the Company priced an offering of $250M of “Series 2021-1 Fixed Rate Asset Back Notes”, which have been used to partially fund the $300M acquisition of Twin Peaks. The weighted average fixed interest rate on the notes is 8.00%. As Andy Wiederhorn, CEO, stated: “This issuance gives us ample time to increase franchised locations of this extremely successful concept…prior to refinancing”. Wiederhorn obviously expects that the interest rate can be renegotiated in a relatively short time, just as he has done with previous securitizations.
On September 27th, the Company announced the opening of the 100th Fatburger, cobranded with Buffalo’s Express, in Arlington, TX. This is the second location for this particular franchisee, whose first location opened in June, 2020. This is the third location in the Dallas/Fort Worth area and the fourth in Texas.
On October 1st, only one month after announcing the planned transaction, the Company closed the deal. As reiterated in the release, the acquisition of Twin Peaks is expected to add $25-30M to FAT Brands’ previously expected post-Covid 2022 EBITDA, bringing the total to about $80M. Twin Peaks is especially notable for its steady unit growth, high average volumes, and impressive recovery (post-Covid) to well above 2019 AUVs and Same Store Sales.
THIRD QUARTER DATA POINTS
The above releases relate to long term growth objectives. In the meantime, The Company has publicly disclosed a number of data points relating to the third quarter, ending 9/30/21.
In the second quarter reported results, the Investor Presentation showed that the first three weeks of Q3 produced a portfolio AUV of $22,674, up 13% from $20,056 in Q2.
Within the Investor Presentation relating to the Twin Peaks acquisition, it was disclosed that, at Twin Peaks, Period 7 (July) annualized at $4.7M and Periods 5 through 7 annualized at $5.1M, compared to $4.5M in 2019 and $4.4M in 2018. Furthermore, Same Store Sales at Twin Peaks, compared to 2019, turned positive by 0.6% in P2,’21, and have increased every month to a positive 17.8% in P7’21.
The data points provided above, along with previously discussed development pipeline and unit openings, indicate that the third quarter should be encouraging to both equity and debt investors.
LD MICRO CONFERENCE on October 12th – WIEDERHORN COMMENTARY
CEO, Andrew Wiederhorn, pointed out that the development pipeline, across all brands is about 300 units, to be developed over the next four to five years, expected to grow the portfolio organically at 5-10% annually. The most recently acquired Twin Peaks, now 84 units, is expected to add eighteen restaurants in the next nine months, two thirds of which will be franchised. There are sixteen different franchisees within the Twin Peaks system. The Twin Peaks locations, without tenant allowances, cost $5-6M each, but sale/leaseback transactions generally reduce the out of pocket investment to approximately $2M, on which the franchisee can earn close to $1M annually, or a 50% cash on cash return. Wiederhorn expects that Twin Peaks can grow from the 100 unit level, to be achieved within a year, to double or triple that number over time.
FAT Brands is improving the quality of acquisitions over time, reflecting the growing level of acceptance from the lending community. Since FAT Brands came public in 2017 each of the major brands that have been added have represented not only an expansion to the portfolio but an upgrade relative to stability and growth. While a number of smaller brands were acquired as well, Hurricane Grill and Wings was followed by Johnny Rockets, followed by Round Table Pizza and, most recently, Twin Peaks. Unit growth potential has been increasingly evident, especially so with Twin Peaks. The near term objective of $80M in EBITDA during post-Covid 2022 has been paid for with $750M of securitized funding at an average of about 7%, or $50M of interest expense. The current portfolio, without considering growth, would therefore be throwing off about $30M of free cash flow in the next year or so, about $2.50 per common share, hopefully more over time. At the same time, the Company has demonstrated an ability to refinance its early securitizations at reduced rates, has indicated an expectation to do the same in the future, which obviously increases the potential free cash flow from the current portfolio. As this strategy comes to fruition, the credibility of FAT common stock could obviously sell at a much higher level.
FAT BRANDS (FAT) ANNOUNCES FIRST QUARTER (3/28/21) RESULTS – EMERGING MULTI-BRAND FRANCHISOR CONTINUES TO MAKE PROGRESS
FAT Brands (FAT) continues to grow its multi-branded system of franchised restaurants, now with 650 franchised stores in their portfolio, and the ability to grow much further. The recently reported first quarter, obviously still affected by the Covid pandemic, was in line with expectations and sets the stage for growth within the current portfolio and the acquisition of additional brands in the near future. As we have written in the past (use the SEARCH function on our Home Page), the Balance Sheet, while leveraged, seems manageable. Based on expectation of normalized post-pandemic cash flow, lenders are prepared to go further. The Enterprise Value of FAT seems high on the surface relative to reported results, but post-pandemic expectations indicate that the Enterprise Value is substantially below larger multi-branded peers. If results come through as expected, the valuation spread should narrow.
THE FIRST QUARTER
FAT Brands reported operating results for the quarter ending 3/31/21, with progress on multiple fronts. It should be noted that gross revenues and bottom line results are heavily influenced by the acquisition in September, 2020 of Johnny Rockets, which substantially increased the total number of franchised locations within the FAT portfolio.
Compared to Q1/20: Total Revenues were up 50% to $6.6M, System-wide sales growth was 35.3%. U.S sales growth was 28.1%, Rest of World sales growth was even higher, at 54.2%, because Johnny Rockets is more developed outside of the US. System-wide same store sales growth was 7.8%, US SSS was 7.8%. Rest of World SSS was up 4.9%. Income from Operations was $104k vs. a loss of $578k in ’20. After higher interest ($2.748M vs. $2.074M) and a couple of minor changes, the GAAP net loss was flat at $2.43M vs. $2.37. Corporate EBITDA was $585k vs. an EBITDA loss of $362k in Q1’20. Adjusted EBITDA was $1.1M vs. $283k. Within the first quarter, advertising expense was $1.2M vs. $.9M, refranchising losses were down 100k to $0.4M, G&A was $4.9M vs. $3.5M, which included increases in compensation and legal expenses, partially offset by lower accounting and T&E. Overall, as expanded upon with commentary from the conference call below, results were consistent with expectations and set the stage for more normalized results as ’21 unfolds.
The balance sheet at 3/28/20 does not reflect the major transaction, with affiliate, Fog Cutter Capital, pending in Q2, but does reflect the completion of an offering of $144M of Fixed Rate Asset-Backed Notes. As the Company has described before, and we have written about, the new financing reduces the average fixed interest rate of the debt from 8.75% to 5.92%. The further availability of similar capital, as well as the merger, set the stage for the addition of more franchising brands.
THE CONFERENCE CALL
As pointed out on the conference call, the strongest brands in Q1 were Fatburger, Buffalo’s and Hurricane Grill, with system-wide sales growth of 18%, 19% and 16% respectively. SSS at those brands were also up: 6%, 26% and 20% respectively. Very importantly, versus Q1’19: Buffalo’s increased 9% and Hurricane Grill was up 10%. The pandemic was still an important influence on results as 107 locations were still closed, primarily at Johnny Rockets’ special venues and within the Ponderosa/Bonanza steakhouse brands.
The total store count was 651 system-wide at 3/31, with 5 locations opened in Q1, 3 more since then, and another 36 to come in ’21. FAT still has 107 temporarily closed locations, expected to reopen in Q2/Q3. In addition to previously announced multi-unit deals in France, Kuwait and Africa, new development agreements have been signed in California, Arizona and Mexico.
Management reiterated, and updated their previous guidance, including the acquisition of Johnny Rockets, in a normalized post-Covid environment. Expectations are based on demonstrated results from calendar ’19, with the addition of a full year from Elevation Burger (acquired in mid ’19) and the most important contribution from Johnny Rockets. As presented by CEO, Andy Wiederhorn, had the pandemic not come along, revenues without Johnny Rockets would have been $23.5-$24.0M in ’20 and Johnny Rockets would have added $10-12M, for normalized total Revenues of $34-$36M. 2019 Adjusted EBITDA in ’19 was $7.9M, a full year from Elevation Burger would have brought that close to $9M and Johnny Rockets would have added an additional $9-10M. Total normalized EBITDA would therefore be $18-20M once the pandemic is out of the way. Management best guess seems to be that results will normalize by Q4’21 or Q1’22.
Relative to growth in units, management suggested that the expected 40-50 new locations in ’21, while gratifying, has no doubt been reduced by the pandemic. Therefore, with sales steadily improving as the worldwide pandemic winds down, a normalized environment should at least match that pace in ’22 and beyond.
Lastly, management reiterated their active consideration of further acquisitions, and the expectation that a transaction will be concluded in a matter of months. More capital is available from lenders, so cash, the common stock, and the 8.25% preferred stock, could all be potential currency.
CONCLUSION: Provided at the beginning of this article
FAT BRANDS, INC. (FAT) – REPORTS CALENDAR ’20 RESULTS and UPDATES GUIDANCE!
FAT Brands (FAT) reported calendar ‘20 results last week, including an update on trends to date in Q1’21. Calendar 2020 was substantially distorted by Covid-19, but management of FAT Brands managed well, operationally and financially, completing a major acquisition, productively merging with their affiliated parent company, and enlarging the balance sheet to allow for further expansion. As the post-pandemic restaurant world unfolds, FAT Brands will have over 700 franchised locations among their current nine brands, planned positive same store sales with about 10% new unit growth, normalized annual EBITDA approaching $20M and ongoing acquisition opportunities. The current leveraged balance sheet is manageable based on projections and management seems to have credibility with the lending community. In terms of valuation, current Enterprise Value approaching $200M is admittedly expensive relative to history, but compared, to estimated post-pandemic EBITDA from the current portfolio of brands, it is only about half of its larger peers.
One of the best performing restaurant stocks in calendar ’20 was FAT Brands (FAT), approximately tripling from $2.00 to $6.00. From the low of about $1.00 in late March’20, it has been above $10.00 recently, and a ten bagger from low to high within twelve months is likely worth studying, at the very least. We established coverage of FAT Brands (FAT) in January, and our basic report is accessible by SEARCHing for FAT on our Home Page or clicking through the link just below:
California based FAT Brands (FAT) has established a franchising platform that supported, as of 12/31/20, 679 locations. The most important of the nine brands, in terms of current size and expected growth, are Fatburger and Johnny Rockets. Also growing, though smaller, are Buffalo’s Café (and Buffalo’s Express), Hurricane Grill & Wings, Yalla Mediterranean, and Elevation Burger. Currently least important, with admittedly unreliable prospects, are Ponderosa and Bonanza. The briefest summary is that FAT Brands has emerged as a diversified franchisor, with a post pandemic normalized EBITDA that should, according to management, approach $20M. The balance sheet, though leveraged relative to historical results, seems manageable once general economic conditions normalize and current sales improvement supports that expectation. Moreover, most of the $93M of long term debt may be renegotiated with a lower interest rate.
THE RESULTS, AND THE EXPECTATIONS
We will summarize below (1) The operating results for calendar ’20. (2) The progress in terms of systemwide unit growth (3) The balance sheet expansion over the last twelve months (4) The significant merger with previous affiliate, Fog Cutter Capital (5) The current situation in terms of same store sales and indications of organic growth (6) Management guidance relative to balance sheet improvement, further acquisitions and post-pandemic corporate EBITDA.
(1)There was obviously a great deal of pandemic-related “noise” in calendar ’20, continuing into early ’21, as well as operating Adjustments relating to financing progress and acquisitions. Accordingly, we will describe the GAAP results, as well as the Adjustments leading to Adjusted EBITDA for the year. The Net Operating Loss for the year was $14.9M. Working toward Adjusted EBITDA: add major Adjustments such as: impairment of goodwill and other intangible assets of $9.3M, a net loss of $3.8M from re-franchising, $1.7M from a mismatch of franchise advertising expenses vs. receipts, acquisition costs of $1.2M, depreciation of $1.2M, and interest expense of $4.9M, partially offset by income tax benefit of $3.7M, a change in fair value of derivative liability of $0.9M and a gain on contingent consideration payable of $1.7M, and a few less material addbacks, works down to an Adjusted positive EBITDA of $1.4M for the year.
The year’s results were substantially affected, not only by the pandemic but by the acquisition in September of Johnny Rockets, which almost doubled the number of locations under the FAT franchising umbrella, so fourth quarter revenues were easily the best of the year. Most important, as presented in the year end Investor Presentation, companywide same store sales, for stores open during both periods and owned for over a year, steadily improved from a low of minus 30.1% in Q2 to a negative 9.4% in Q4. Management indicated on the conference call that sales have continued to improve in Q1’20 and the Investor Presentation shows system wide sales growing steadily from $7.9M weekly in January to $9.6M in the week ending 3/14.
(2) Unit growth proceeded in calendar ‘20, in spite of the pandemic, with 62 new openings in the year, 29 in Q4 alone, both of which include Johnny Rockets prior to ownership. In recent months new multi-unit development deals in France, Kuwait , Congo, Illinois, D.C., California, Arizona and Alabama call for up to 56 new locations, and the total pipeline is over 200 units. Management indicated on the conference call that 34 locations are currently under construction and 10% annual growth (about 70 stores) is the objective.
(3)The balance sheet was substantially expanded, as a new $40M facility (with a weighted average interest rate of 8.75%) was put in place in September, for working capital and to fund the acquisition of Johnny Rockets. Long Term Debt, including $19M within current obligations, is $93M. A year earlier, that total was just under $30M. There is a total of $38M in Preferred Equity as well. Management indicated their expectation of refinancing a major portion of the total of $85M in notes with substantially better terms. As we said above, the debt, while substantial based on historical results, is manageable relative to normalized post-pandemic EBITDA, and current sales improvement supports that expectation.
(4)The recent merger with Fog Cutter Capital Group was a significant corporate event. It increased the FAT public float to 44% of the fully diluted shares. By merging the entities, FAT stock becomes available for acquisition, because Fog Cutter no longer needs at least 80% of ownership to maintain their $100M of tax loss carryforward, which protected their share of FAT income. Critically, that NOL now protects FAT income from future taxes. Fog Cutter Capital, now owns 58.4% of voting power of common stock.
Full disclosure: as disclosed in the 10-K filing, there are a handful of litigation items, none of which involve restaurant operations. Per the 10-K, “the Company does not believe that resolution will result…material adverse effect….but has accrued $5.68M for the matters mentioned above..”
(5) As mentioned above, same store sales have been steadily improving, there is a strong development pipeline, and new store growth is guided to about 10% annually. As indicated on the conference call, most of the unit growth is coming from the two largest brands, Fatburger and Johnny Rockets. The notable laggards, as the pandemic runs it course, are Ponderosa and Bonanza.
A particular highly successful operational focus at Fatburger/Buffalo Express has been the use of Chowly (a POS integrator for third party delivery) and well as HNGR for native online-ordering and delivery-as a service. Total Delivery and To-Go Sales at Fatburger moved from .95M in January ’20 to $1.3M in August, popped to $1.8M with Chowly and HNGR in September, and hit a new high of $2.1M in December.
(6) Management continues to move expeditiously to expand their platform, by way of organic growth (a 10% unit growth objective) as well as acquisition of other brands. To that end, a further expansion of the balance sheet is planned within the next six months, raising more capital as well as reducing the interest rate. Systemwide sales were over $107M in Q4, and, based on the numbers through 3/14/21, as shown in the Investor Presentation, should be $120M or higher in Q1’21. In terms of EBITDA guidance, management continues to use 2019 pre-pandemic, pre-Johnny Rockets, Adjusted EBITDA as a base run rate, and that was $7.7M. Elevation Burger was largely absent from that base, which would add about $1.3M more, The addition of about $9.0M from Johnny Rockets provides a base case of $18M of Adjusted EBITDA once the pandemic has run its course.
CONCLUSION: Provided at the beginning of this article