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FAT Brands REPORTS THIRD QUARTER RESULTS, PLANS TO ADD FAZOLI’S BY MID-DECEMBER

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.

CONCLUSION:

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.

Roger Lipton

FAT Brands (FAT) – WASTING NO TIME IN BUILDING MULTI-BRANDED FRANCHISED PORTFOLIO

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.

CONCLUSION

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.

Roger Lipton

FAT BRANDS (FAT) ANNOUNCES FIRST QUARTER (3/28/21) RESULTS – EMERGING MULTI-BRAND FRANCHISOR CONTINUES TO MAKE PROGRESS

FAT BRANDS (FAT) ANNOUNCES FIRST QUARTER (3/28/21) RESULTS – EMERGING MULTI-BRAND FRANCHISOR CONTINUES TO MAKE PROGRESS

CONCLUSION:

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, INC. (FAT) – REPORTS CALENDAR ’20 RESULTS and UPDATES GUIDANCE!

CONCLUSION:

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.

BACKGROUND

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:

https://www.liptonfinancialservices.com/2021/01/fat-brands-inc-fat-new-research-coverage-established/

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