EXECUTIVE SUMMARY
A public offering, with a valuation of approximately $325M is apparently imminent, with twelve month trailing Adjusted EBITDA of about $21M.
GEN Restaurants (GENK) is a 32 unit chain of Korean BBQ Restaurants. The restaurants can be anywhere from 4,000 to 12,000 square feet, averaging about 7,500 square feet. As the chart below (from the S-1 filing) shows, the recent AUVs have been close to $6.0M, representing over $800/square foot of annual sales.
These restaurants deliver an “interactive dining experience”. The extensive Korean and Korean-American offerings, including meat, poultry, seafood and mixed vegetables are provided at an “all you can eat” price. There are embedded grills at each table and the food served family style requires the guests to share their cooking responsibilities. The company believes that this “unique culinary experience appeals to…particularly Millennials and Gen Z”. A strong testimonial to the conceptual appeal is that there is virtually no marketing budget, the recurring strong sales coming from repeat visits and word of mouth.
Our readers know that it is all about unit level economics, so (with our bolded elaboration and/or commentary):
The Average Unit Volumes (AUVs) for the 28 restaurants opened 18 full months prior to 3/31/23 were $6.0M, representing over $800/square foot (admirable). The slight uptick in AUV ($6.0M vs. $5.9M) and sales per sq.ft. ($899 vs. $890) between 12/31/22 and 3/31/23 was apparently due to price.
The average net build-out costs for units opened in ’18 and ’19 (none in ’20-’21) was $1.8 and $1.9M in ’22. The average cash on cash returns for restaurants open for all of ’22 was 88%, providing a payback period of 1.4 years for the 21 restaurants that had covered initial investment costs prior to the COVID-19 shutdown. (The last restaurant of the three opened in ’22 in NYC cost $2.6M, so apparently the first two came in at no more than the previous $1.8M average. The “targeted” cost shown in the table below ($3.0M) may be conservative, along longer payback period (to 2.5 years), AUV (to $5.0M) and cash on cash return (to 40%). The ”adjusted” targeted result, conservative or not, represents attractive unit level economics.
Above numbers: During TTM @3/31/23 and as of May 28, 2023
UNIT LOCATIONS AND EXPANSION PLANS
The 32 restaurants, as of May ’23 were in California (21), Texas (4), Nevada (3), Hawaii (2), and one each in Arizona and New York City.
Prior to the pandemic, 4 restaurants were opened in both ’28 and ’19. No new restaurants were opened in ’20 and ’21. Three new restaurants were opened in ’22, in Webster, Texas, Las Vegas, Nevada and New York, New York, and one (in Cerritos, CA) so far in ’23. Leases are signed for eight other locations, in: Kapolei, Hawaii, Fort Lauderdale, Florida, Chandler, Arizona, Westheimer, Texas, Seattle, Washington, Jacksonville, Florida, Dallas, Texas, Maui, Hawaii. They expect to open six or seven additional locations during the rest of 2023, then eight to ten new restaurants annually.
RECENT OPERATING PEFORMANCE – Q1’23 – see charts below
Revenue grew by 14.7% to $43.9M, with three new units contributing. Net income increased 38.3% to $4.1M from $3.0M (largely due to a decrease in “consulting fees to related party”, which are expect to go away after public offering.)
Restaurant level Adjusted EBITDA increased 3.6% to $8.4M (19.2% of revenues, down from 21.2%) (20% going forward seems reasonable).
Corporate Adjusted EBITDA decreased 10.3% to $5.2M (11.9% of revenues, down from 15.2%). (12.5% shown as “target” above seems reasonable).
CALENDAR ’22 RESULTS – see table above
Revenue increased 16.5% to $140.6M. Net income declined $39.6M to $10.3M, largely due to $22.3M of loan forgiveness and $13.0M from a Restaurant Revitalization Fund. (Subtracting that total of $35.3M, Adjusted Net Income was down $4.3M to $10.3M).
Restaurant level Adjusted EBITDA decreased to $33.6M in ’22 from $34.1M in ’21 (20.5% vs. 24.2%). (The targeted store level EBITDA margin of 20% seems reasonable.)
HISTORICAL ADJUSTED EBITDA – THE BOTTOM LINE THESE DAYS
We provide the complete table from the prospectus just below, including footnotes.
Corporate Adjusted EBITDA declined in ’22, to $21.4M from $25.0M, 13.1% of revenues, down from 17.8%. The 13.1% reported for calendar ’22, along with basically flat results in Q1’23 supports the targeted 12.5% Corporate Adjusted EBITDA in the first table above. We note, however, that Adjustments eliminate “consulting fees” that are going away, and we have no knowledge of services that may have been provided and might have to be replaced. Also: Aborted IPO costs of $4M have been Adjusted away, and no doubt will be partially replaced by public ownership expenses.
CONCLUSION
We have dined at GEN Korean BBQ (in NYC, opened in Dec’22) and can understand the experiential appeal. We were impressed, not only with the unique (for us) dining experience but the hospitality provided by the service staff.
While GEN was founded 12 years ago, and is still going strong, only time will tell whether this dining concept can succeed to the same degree long term, as 32 units grow to 40 in the next twelve months and hundreds down the road. No doubt it will depend largely on whether GEN management can maintain the store level culture and hospitality over the course of the nationwide expansion. It will be that challenge, and its cost, that provide our largest question marks. Within the targeted economics is a modest 7.5% of revenues for G&A, and hardly any growth chains can do the job for that. Shake Shack, for example, runs twice that and Dutch Bros spends three times as much.
We couldn’t find in the prospectus any operating results prior to the pandemic, so we can’t judge the sales trends at some of those locations in California that are now open for ten years. We would love to look over those numbers if available. In terms of sales trends, even over the last couple of years, we only found an unquantified mention of a menu price rise, so we can’t judge the traffic trend.
From what we know at the moment, we find the store level projections generally credible, but have our doubts about expansion taking place on time and on budget, especially including G&A to support the effort. The Company will be expanding twice as fast as ever before, with a very broad geographic scope including several new states. Ahead of our discussion of valuation, recall that Adjusted Corporate EBITDA was down in calendar ’22 and is basically flat in Q1’23, not providing particular comfort to projections of steadily improving results.
In terms of the valuation, at about 16x trailing twelve month Adjusted Corporate EBITDA, GENK will obviously be valued more reasonably than a number of other “new” publicly held restaurant companies. We have no knowledge of the demand for the deal, but suspect that it will trade up, in the wake of CAVA’s great debut. Just as with CAVA, we are not inclined to chase the latest shiny object. Time will tell us a great deal more. There are other companies we like, at lower valuations, that have already shown an ability to produce consistent results with the public as a financial partner.
Roger Lipton