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