Tag Archives: Johnny Rockets

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

SUN CAPITAL PARTNERS HAS HAD ENOUGH WITH THE RESTAURANT INDUSTRY – WHAT CAN WE LEARN?

SUN CAPITAL PARTNERS HAS HAD ENOUGH WITH THE RESTAURANT INDUSTRY – WHAT CAN WE LEARN?

It is 17 years since Sun Capital Partners, a multi-billion dollar private equity firm made their first investment, buying Bruegger’s Bagels, within the restaurant industry. Seventeen years can be viewed as pretty much a complete cycle in terms of up and downs. With only one material restaurant chain left in their portfolio, they have announced their departure from our favorite industry. We’re here to learn, so we spent an unexpectedly long time reconstructing the important elements of thirteen transactions. We stand to be corrected if we’ve missed anything material, but we’re not the library of congress (for $100 annually) and we do our best. At the end of this piece, we will summarize the bottom line.

Bought – Company

2003 – Bruegger’s

2005 – Souper Salad

2005 – Garden Fresh

2006 – Real Mex Restaurants

2006 – Fazoli’s

2007 – Restaurants Unlimited

2007 – Friendly’s Ice Cream

2007 – Boston Market

2008 – Smokey Bones

2008 – Timothy’s Coffee

2010 – Captain D’s

2010 – Bar Louie’s

2013 – Johnny Rocket’s

Let’s look at these deals in chronological order from the time they were initiated.

BRUEGGER’S

Bruegger’s Bagels, founded by our friend Nord Brue and originally based in Burlington, VT was acquired by Sun Capital in 2003 when sales and profits were declining. In the course of the next eight years management, led by CEO, Jim Greco, reduced the Company’s cost base, remodeled nearly all locations, introduced new product lines, and increased store count through the opening of new Company–operated and franchised units as well as  add–on acquisitions. Separately, Sun Capital had bought Canadian based Timothy’s Coffee in March, 2008 (with 106 franchised Timothy’s, 47 mmmuffins, 13 Michel’s Baguette’s) for a reported $100M. In November, 2009, Sun sold Timothy’s to Green Mountain Coffee for $167MM but, immediately prior to that sale, Sun sold the franchised operations of Timothy’s to Bruegger’s. Between the purchase of Bruegger’s in 2003 and 2011, when Bruegger’s and the franchised locations of Timothy’s were sold to Group Le Duff SA, a French company, sales were reported to have grown by 76% from 2003 while EBITDA more than doubled.

Bruegger’s was a very successful investment by Sun Capital, making a reported 13x their investment for a 35 percent annualized internal rate of return. We don’t know whether the reported gain on Timothy’s was included in this calculation, but Bruegger’s/Timothy’s was all very good news.

Postscript: In 2017 Group Le Duff sold Bruegger’s to Caribou Coffee, owned by JAB Holding Co., owner of Panera Bread, Einstein Noah Bagels, Peet’s Coffee, and others including Green Mountain Coffee, which had bought Timothy’s from Bruegger’s in 2009.

SOUPER SALAD

In 1978, the first Souper Salad (SS) was opened by Ray Barshick in Houston, Texas. It was acquired, with about 91 locations, by Sun Capital in 2005. In 2007 Souper Salad added  Grandy’s (with one company store, 4 franchised stores managed by the company and 67 franchised locations, bought out of Spectrum Restaurant Group’s bankruptcy). By the middle of 2008 SS had grown to 151 stores in 17 states. In 2009, the company began selling franchises. However, coming out of the 2008-09 recession, the SS chain had shrunk to 80 units by the end of 2010. In 2011, the parent company filed Chapter 11 bankruptcy and 25 more locations were sold. LNC Ventures, owned by Dan and Jackie Hernandez, bought SS out of bankruptcy in 2012. In the course of 2011, Souper Salad had also disposed of the 65 unit Grandy’s chain, selling to Sun portfolio company, Captain D’s.

Postscript: By late 2013, the SS chain was down to 45 locations. In 2014, SS, with 37 locations, was sold by LNC to Brix Holdings, LLC., based in Dallas.[5][6] After the acquisition, Dan Hernandez remained president of Souper Salad until 2016. [7] Grandy’s, still a sister concept to Captain D’s, has not helped anyone in a long time, shrinking from 72 units in 2007 to 38 locations in 2019 and only 27 units by August, 2020.

There doesn’t seem to be any obvious way that Sun Capital could have made any money on this investment.

GARDEN FRESH

Garden Fresh, founded in 1978 in San Diego, CA, amounted to 97 company operated soup and salad restaurants operated as Souplantation and Sweet Tomatoes when purchased for $198M by Sun Capital in 2005. By 2012, when top management was changed, there were a larger total of 118 locations. In October, 2016, now with 123 locations, Garden Fresh declared bankruptcy. It was purchased out of bankruptcy by Cerberus Capital Management in January, 2017.

We have no knowledge of the operational results or balance sheet changes at Garden Fresh while under the ownership of Sun Capital, so dividends paid out of recapitalizations or cash flow from operations, as well as annual fees could have mitigated the losses on this situation, but it was likely not a great investment success.

REAL MEX  RESTAURANTS

Sun Capital bough Real Mex from Bruckmann, Rosser, Sherrill & Co., reportedly for $359M, in August 21, 2006. There were 200 company-owned restaurants operating in more than a dozen States. The primary concepts were: El Torito, El Torito Grill, Chevys Fresh Mex and Acapulco. However, as the economy weakened by late ’08, Sun Capital’s leverage required them to swap majority control for a reduction in the debt burden. My mid-2010, however, Sun Capital was once again majority owner (70%), of the restaurant portfolio, by way of a debt for equity swap, with Real Mex consisting of 183 operated locations plus 26 Chevy’s franchised units.

The situation obviously deteriorated quickly from mid-2010 to late-2011, when Real Mex entered bankruptcy.  A group of noteholders had the winning bid to acquire the assets in the bankruptcy auction.

There does not seem to be any obvious way that Sun Capital succeeded with this investment.

FAZOLI’S

Fazoli’s, with 319 locations, 179 of which were franchised, was bought by Sun Capital in 2006. The plan was to revitalize the menu, improve the food quality and variety, upgrade the décor, refine the marketing and reduce costs. The Company was sold in 2015 to Sentinel Capital Partners (owner of Checkers, Rally’s, Newks, and TGI Friday’s), at which point the Fazoli’s system consisted of 213 locations, 89 of which were franchised.

Since Fazoli’s shrunk by a third in size while owned by Sun, it would be logical to assume that they didn’t do well with it. However, reports are that Sun Capital made three times their investment over nine years of ownership. This was a function of Fazoli’s  poor management prior to Sun’s purchase, therefore a modest purchase price, cash flow improvements while owned by Sun Capital and a more full valuation at sale.

RESTAURANTS UNLIMITED

Sun Capital purchased Restaurants Unlimited (RU) in March, 2007. RU, based in Boca Raton, FL, founded by Rich Komen, operated 29 restaurants in total when acquired under names including Palisade, Cutters Bayhouse, Scott’s, Ryan’s Grill and Fondi Pizzeria. Only months later, in July 2007, Sun added Pacific Coast Restaurants (PCR), operating 27 restaurants under the names of Stanford’s, Newport Bay, Manzana, Newport Seafood Grill and others. In July, 2019, Restaurants Unlimited, at that point down to 35 restaurants in six states, filed for bankruptcy. Landry’s bought RU out of bankruptcy for a reported $37M. Multi-brande, multi-unit restaurant, geographically dispersed chains are difficult to manage.

There is no apparent way that Sun Capital could have done well with this investment.

FRIENDLY’S ICE CREAM

In August, 2007, Sun Capital purchased the publicly held Friendly’s Ice Cream Corporation (FIC) for $337M of equity plus $175M of long term debt. At that point there were a total of 515 locations systemwide, plus a distribution system of over 4,000 supermarkets and retail locations. Just four years later, in 2011, FIC filed for bankruptcy protection, at the time with $297M in debt and announcing plans to close 63 of its just under 500 locations and indicating over 7,000 retail points of distribution. It came out of bankruptcy with Sun Capital maintaining ownership while erasing a $75M loan. In 2016, Dean Foods bought FIC’s manufacturing and retail distribution business for $155M. In December 2018, Sun Capital bought back a dozen FIC locations across Massachusetts. Early in 2020, with only 138 locations remaining, FIC filed for bankruptcy once more. FIC has now sold it’s assets for $2M to an investor group affiliated with BRIX Holdings LLC, a Dallas franchising company that owns Red Mango, Smoothie Factory, RedBrick Pizza and Souper Salad (Remember them?). The deal will apparently keep most Friendly’s locations open but cover only a small fraction of the $89 million in secured debt.

We cannot judge the bottom line result of this investment, since we don’t know how the balance sheet was managed during the course of Sun Capital’s ownership, including the sale of the distribution business for $155M in late 2018 to Dean Foods, who happened to declare bankruptcy less than a year later.

BOSTON MARKET

We actively followed publicly held, rapidly growing, unit level profit challenged, Boston Market (BM) in the 1990s. Stock market darling BM raised a lot of capital inexpensively, some of which financed franchisees, grew to over 1,100 systemwide units, then went bankrupt. McDonald’s purchased it out of bankruptcy in 2000 for $173.5M. Sun Capital took it off MCD’s hands in 2007, purchase terms unknown, with 630 locations systemwide. Sun Capital was rumored to put BM up for sale in 2017, seeking $400M, but not to be.  In July, 2019, 45 restaurants were closed, bringing the unit count down close to 400. Engage Brands (owner of Pizza Hut, Checker’s & Rally’s) bought Boston Market (down to 390 stores) from Sun Capital in 2019.

Terms of the purchase from McDonald’s and the sale to Engage Brands were not disclosed but there is no apparent way that Sun could have been successful with this investment.

SMOKEY BONES

Originated by Darden Restaurants in Orlando, FL in 1999, Smokey Bones (SB) was grown to a peak of 128 locations, reduced to 73 locations when Sun Capital bought it from Darden in early 2008. The purchase price was reported to be $80M. As of August, 2015, 66 locations were operating. There have been a number of top management changes within the last 13 years, the most recent of which was the appointment of well regarded James O’Reilly (previously with Long John Silver’s, Sonic Corp, YUM and Pepsico) as CEO in November, 2019. At that point, there were 61 locations in 16 states. Smokey Bones remains under the ownership of Sun Capital. Most recently, James O’Reilly announced the opening of 122 Virtual Restaurants, delivery-only, working out of SB’s ghost kitchen in Chicago and the existing 61 restaurants, featuring a limited menu of burgers and wings.

This investment remains a work in progress.

TIMOTHY’S COFFEE

In March, 2008, when purchased by Sun Capital, Timothy’s Coffees of the World (TC), an operator of a retail chain of 166 store, 70% within Ontario, was an operator of Timothy’s, mmmuffins, and Michel’s Baguette. Timothy’s was also a wholesale distributor of single serve coffee and tea products. Purchase terms were not disclosed. In November, 2009, Sun sold Timothy’s to Green Mountain Coffee Roaster’s for a reported $157M in cash. Immediately prior to the sale, Sun Capital’s Bruegger’s bought the Canadian franchised locations (for an undisclosed price), which remained with Bruegger’s until its sale to Group Le Duff in 2011.

Timothy’s was no doubt a very successful transaction, since it was purchased and sold in a short 20 months, and the franchised Timothy’s that were transferred to Bruegger’s may have also made a tangible contribution to the EBITDA at Bruegger’s which was later monetized.

CAPTAIN D’S

Captain D’s (CD), originated in 1969, and built under the ownership of Shoney’s, was comprised of 539 locations across 25 states when Sun Capital bought it in 2010. Captain D’s, in turn, acquired Grandy’s in 2011 from bankrupt Spectrum. Grandy’s has not helped anyone in a long time, shrinking from 72 units in 2007 to 65 locations when CD purchased it in 2011, to 38 locations in 2019 and 27 units by August, 2020 (long after Sun’s departure from CD), still a sister concept of Captain D’s. Sun sold CD in December, 2013 (with 521 restaurants systemwide, fewer than the 539 when purchased in 2010) to Centre Partners. Through a combination of initiatives EBITDA had reportedly gone from $12M to $25.5M over less than four years of Sun’s ownership and Sun made 8x their investment, a stunning 105% internal annualized rate of return. Ain’t leverage grand ?

Captain D’s was an obvious grand slam home run. It’s interesting that Centre Partners “flipped” Captain D’s (with the similar 530 stores systemwide) five years later, saying “We are very proud of our successful investment in Captain D’s”. Only in America (worldwide, actually) with zero percent interest rates.

BAR LOUIE’S

Bar Louie’s (BL), started in Chicago in 1991, was purchased by Sun Capital in June, 2010. At that point there were 36 company operated and 8 franchised units systemwide. We have no knowledge of the operating history in the ten years since purchase, but no doubt a great deal of debt was in place, typical of private equity ownership, as the chain was expanded from 36 to 110 company operated locations, providing a substantial burden on corporate cash flow. Even before the pandemic, the traffic declines at shopping malls, where many of the 110 corporate units were located, penalized sales and profits.  In early 2020, after closing 38 of its 134 locations restaurants and arranging to sell its remaining locations to lenders, Bar Louie’s filed for chapter II bankruptcy protection. Creditors were apparently owed $110M.  On April 27, 2020 the court approved the sale to secured lender, GE Capital affiliate, Antares Capital LP and the chain emerged from bankruptcy in early June.

There is no indication that Sun Capital emerged with any post-bankrupt equity but there might have been at least a  partial recovery of capital in a recap while owned.

JOHNNY ROCKET’S

Johnny Rockets, founded in 1986 by Ronn Teitelbaum, consisted of 300 locations, almost all franchised, in June, 2013 when purchased by Sun Capital, reportedly for about $80M. It’s interesting that Sun Capital bought it from RedZone Capital (backed by billionaire Dan Snyder, owner of the Washington Redskins football team) who had bought it in 2007 from Centre Partners/Apax Partners. Earlier in 2020, after seven years of ownership, Sun Capital sold JR (with 325 stores, including 9 company operated) to publicly traded FAT Brands (FAT) for $25M.

Based on the $80M or thereabouts that Sun Capital paid for Johnny Rockets, and the $25M that Sun Capital received, it seems likely that this deal didn’t provide a great outcome for Sun’s investors.

THE BOTTOM LINE

Bruegger’s – a grand slam home run – supposedly 13x their investment

Souper Salad – not good

Garden Fresh – not good

Real Mex – not good

Fazoli’s – a reported 3x return

Restaurants Unlimited – not good

Friendly’s – not great, might have gotten out whole

Boston Market – not bankrupt, but not good

Smokey Bones – work in progress

Timothy’s Coffee – an apparent grand slam, especially over only 20 months

Captain D’s – a grand slam home run – supposedly 8x their investment

Bar Louie’s – not good

Johnny Rockets – can’t make much if you receive a third of what you pay

SUMMARY

Three out of the twelve closed out positions were grand slam successes (Bruegger’s, Captain D’s and Timothy’s), and one (Fazoli’s) was a triple, so that offsets the losses on the majority of the portfolio. Losses for both the sponsor and limited partners  can also be mitigated somewhat by fees for the sponsor and recapitalizations that can benefit both.

Two of the concepts, Garden Fresh and Souper Salad were concepts that just got old, so reinvention was a huge challenge. Real Mex and Restaurants Unlimited were always going to hard to monetize: multiple brands spread over many geographies. With Boston Market they should have called me.  (I think there could still be some potential there. The product used to be good and bone-in chicken serves today’s off-premise customer because it travels so well ! Look how well El Pollo Loco has survived the pandemic.) Back to Sun Capital: They might have gotten out of Friendly’s “whole”, largely by stripping and selling the distribution business for $155M. Fazoli’s worked out because the chain had been so poorly run by the previous owner. Johnny Rockets’ franchise operation might have worked, given more time, with good management, but Sun paid a full price in 2013 and ran out of patience after this year’s pandemic.

It is especially noteworthy that the three or four most successful investments were franchising situations; Bruegger’s, Timothy’s & Captain D’s & Fazoli’s. Franchise systems have to be supported by reinvesting some of that supposedly free cash flow, but at least the balance sheet leverage predictably employed by the private equity sponsors won’t kill you if the economy turns down for a year or two.

CONCLUSION

Don’t give up on the restaurant industry as an investment, just because Sun Capital has had enough. From what we have read Karp/Reilly, Catterton, Roark, Bruckmann/Rosser/Sherrill and others have had better batting averages. I guarantee that there are lots of strong concepts incubating that are equipped to please the public who will always be interested in good food prepared away from home. For our readership that is perhaps managing a small number of privately owned restaurants: consider that a restaurant generating $100k annually pretax is more challenging day to day but financially equivalent to $20M invested in presumably safe short term US Treasury securities. It’s best to protect that cash flow because you may not be able to easily find $20M after taxes.

Roger Lipton

FAT BRANDS INC. (FAT) TO ACQUIRE PRIVATELY HELD JOHNNY ROCKETS – WHY AND HOW??

FAT BRANDS INC. (FAT) TO ACQUIRE PRIVATELY HELD JOHNNY ROCKETS – WHY NAD HOW, AND WHAT IS THE OUTLOOK?

FAT BRANDS INC (FAT), led by CEO, Andrew Wiederhorn, has assembled a group of internationally franchised brands, some better known than others but all of them challenged to varying degrees in recent years. The theory is to leverage operating expertise, marketing power, purchasing scale and administrative costs over independent brands, using an asset light franchising approach (zero company operated locations). Wiederhorn is the controlling shareholder of Fog Cutter Capital Group, Inc., which owns 81% of the common stock of FAT.

The liberal use of debt and preferred stock, as outlined just below, has allowed for the current ownership of:

Fatburger, a burger chain, founded in Los Angeles in 1947, now 168 locations, including 101 co-branded

Buffalo’s, casual dining, wings and classic American platters, GA founded in 1985, now 18 locations

Ponderosa & Bonanza steakhouse, founded in 1960s, now 83 locations

Hurricane Grill & Wings, casual dining, chicken wings, FL  founding in 1995, now 49 locations

Yalla, fast casual, healthy Mediterranean, now 7 locations

Elevation Burger, fast casual with grass fed and organic burgers, 2002 founding, now 41 locations

Systemwide sales in 2019 of these 366 locations (@ 6/30/20) was $395M.

BALANCE SHEET DISCUSSION:

As of 12/31/2019 shareholders’ equity was $5.4M (including goodwill and intangible assets of $55M). Preferred A stock obligation amounted to $15.3M. The current portion of long term debt was $24.5M and the remaining long term portion was $5.2M. Due from affiliates was $26M. The current ratio consisted of $10.5M of current assets and $45.6M of current liabilities.

By 6/30/2020, the balance sheet reflected shareholders’ equity of negative $3.5M (including goodwill and intangible assets of $37M). The Preferred A stock amounted to $15.5M. The current portion of long term debt was reduced to $661k, with the long term portion amounting to $43.9M. Due from affiliates was $34.7M. The current ratio had improved to reflect $10M of current assets against a much reduced $21M of current liabilities. The previous Long Term Debt had been replaced by a face amount of $40M of “Securitization Notes”, netting $37.3M after expenses and discounts, to be repaid from royalties as received. The blended average cash interest rate is 7.75%, which reduces the total weighted average cash cost of debt to 8.49%, decreasing annual interest expense by almost $2M per year.  There is also an “Accordion” feature, allowing for additional acquisition related borrowing.

Post the second quarter, on 7/13/20 FAT raised $8.2M from the sale of 8.25% Series B Preferred Shares and warrants exercisable at $5.00/share. Subsequent to this offering FAT entered into an Agreement to redeem and cancel the remaining Series A Preferred shares. The result was equity increased by $15M, with insiders converting $3M of Series A and accrued dividends into Series B Preferred. Also retired was warrants, exercisable at $7.20, to acquire 554,065 shares.

A VERY QUICK OPERATIONAL LOOK

The first half of calendar ’20 is obviously distorted by the effects of the Coronavirus Pandemic, and the Adjusted EBITDA was a negative $361k. More importantly, the Adjusted EBITDA in calendar ’19 was $7.7M. The Company’s recent presentation talks about 41 additional Fatburger locations since acquisition, integration of Elevation Burger onto the the Fatburger operating platform, a turnaround in Hurricane Grill, from a negative 4.7% comp prior to acquisition to +6.4% in calendar ’19, including +8.3% in Q4’19. The overall portfolio store count has increased from 286 in calendar 2017 to 374 by 12/19 (including acquisitions). Most importantly, demonstrating the efficiency of the multi-brand platform, Total Costs and Expenses as a % of Revenues has come down from 97.7% in ’17 to 62.4% in ’19. It is on this basis that the Company raised $40M with their Securitization and, most recently in Q3, the additional $8.2M.

THE JOHNNY ROCKETS DEAL

This “iconic brand”, as FAT management now terms it, has over 300 locations, spread over 129 individual franchise owners, which will bring the FAT portfolio to over 700 units in total. The new systemwide expectation of over $700M implies that the Johnny Rockets locations are expected to annualize at something like $1M per store. The purchase price is $25M, which will paid for by cash on hand plus the Accordion feature of the recent securitization. FAT management stated that they expect this acquisition to allow them to double their current (in calendar ’19) Adjusted EBITDA of $7.7M. The brief audio “conference call”, with no Q&A, described how FAT can leverage their operating platform with new purchasing power of $250M annually (about 30% or so of $700M), marketing (produced and booked internally at FAT), virtual restaurant offerings, dual branding and FAT’s knowledge of “the burger business”.

WHY WOULD SUN CAPITAL SELL ?

It is reasonable that Johnny Rockets, which is, indeed, a well known brand, could be reincarnated, even if reduced in size after the pandemic, under the right leadership. However, if it is so promising, why would Sun Capital let it go for $25M, especially when FAT management says it is capable of generating $7 or $8M of EBITDA.

Our guess is that Johnny Rockets is generating no more than a couple of million dollars for Sun Capital, perhaps not much more than breaking even. Sun bought it from RedZone Capital in 2013, who had bought it in 2007. After thirteen years in private equity hands, you can bet that the energy provided by early management is long gone. It is “just a name” to Sun Capital, to be bought and sold, and the $25M can be applied elsewhere. Private equity firms always have liquidity concerns as well, so that might come into play here. If Johnny Rockets is breaking even to earning perhaps $2M for Sun Capital, Fat Brands could probably “adjust” that to a current million or two, and believe they can leverage that over a couple of years to six or seven million of EBITDA. Even if it takes longer, and amounts to only $5M, it would be a worthwhile ROI for FAT. A lot more than their cost of capital. So…..the seller is tired…..and the buyer is optimistic….and liquid enough….and that’s how deals get done.

Let’s watch.

Roger Lipton