An Opportunity For International Exposure To An All-American Institution

Sep. 4.13 | About: Chanticleer Holdings (HOTR)

In an era of economic uncertainty and overly tentative growth, one industry seems to be bucking the trend. The restaurant industry currently employs a little over 10% of the entire US workforce, and is set to increase its employment by a further 2.4% this year, compared to an overall employment growth of 1.5%. Globally, the picture is even more impressive. The global restaurant industry is expected to grow at a compound annual growth rate (OTCPK:CAGR) of 7.2% over the next 2 years.

A major driver behind the global restaurant industry growth is the increase in the middle classes in emerging markets. Between 2010 and 2020, the number of people categorized as middle class in South America is expected to grow by 34%. In Sub Saharan Africa, the same study forecasts growth of 84%. In Eastern Europe, 85%. The expansion and maturing of these markets represents an opportunity for restaurants. A few of the big names recognize this opportunity, and are moving to take advantage of it.

In February this year Darden Restaurants (NYSE:DRI) announced that it had struck a deal with International Meal Company, a leading, multi-brand restaurant operator in South and Central America, that will see the development of 57 Red Lobsters, Olive Gardens and Longhorn Steakhouses across Brazil, Colombia, the Dominican Republic and Panama. In July, McDonald's (NYSE:MCD) announced it would be opening its first store in Vietnam next year. Burger King (BKW) recently opened its first outlet in South Africa, and has undertaken an aggressive expansion over the past 6 months in China. The model that all these companies use to facilitate this expansion is overwhelmingly a franchise model. History shows that international expansion can be difficult to run efficiently and at a profit without local ownership and the local market knowledge that comes with it, and franchising offers these companies that benefit.

One new franchiser on the emerging market block is Chanticleer Holdings (NASDAQ:HOTR). As the ticker suggests, HOTR's main focus is on Hooters, the world famous sports bar restaurant chain. Hooters is owned by Hooters of America, Inc., a private company in which chanticleer holds a minority stake.

A little history

The first hooters restaurant opened in 1983 in Clearwater, FL. Three years later Robert Brooks, the founder of Eastern Foods, invested in Hooters, secured the franchise rights and created Hooters of America, Inc. By 1991 the company was generating more than $100M in revenue from just over 50 units, which doubled to 100 units and $200M by 2003. Today there are more than 430 Hooters units in 28 countries.

Where Does Chanticleer Fit In?

In April 2006, Chanticleer made a convertible note investment in Hooters of America to the tune of $5M. As part of the agreement Robert Brooks gave Chanticleer the first right of refusal to buy the company, and also the opportunity to development rights in any country for which the development rights had not yet been sold. Chanticleer, along with a group of investors that included H.I.G. Capital and KarpReilly, LLC, acquired Hooters of America.

Management

The Chairman, CEO and President of Chanticleer is Michael Pruitt. He founded Avenel Financial Group, a technology investment and business development company. He has a strong record of assisting companies in their IPOs, and gained CEO experience at publicly traded level with RCG companies, Inc. The company's CFO is Eric Lederer. Lederer initially served as Chanticleer's chief accounting officer from February 2011, and was later appointed CFO in June 2012. He also bringspublicly traded company experience to the table.

Strategy

Chanticleer's strategy is primarily rooted in a somewhat aggressive international expansion. It seeks emerging markets with a growing middle class that have not yet been developed, and uses a combination of central management and partnership with local franchisees to open restaurants.

Chanticleer's Growth To Date

The company decided to exercise its developments rights in South Africa, and opened its first Hooters restaurant in Durban in December 2009. Six months later, it opened a second in Johannesburg, and a third in Cape Town a year after that. Chanticleer opened three more restaurants during 2012, in Campbletown, Australia; Emperor's Palace, South Africa; and Budapest, Hungary. Most recently, chanticleer partnered with Nash Group to open its first restaurant in Brazil. The company expects to open a further three restaurants in various locations across Brazil before the end of this year, aiming to be in full swing for the 2016 Summer Olympics in Rio.

On August 3 the company announced its acquisition of a Hooters restaurant based in Nottingham in the UK for a little over $3M, and on August 14, Chanticleer announced its acquisition of American roadside burgers, a Charlotte based casual dining chain with five restaurants.

Recent Financials

In its latest statement Chanticleer reported a revenue increase of 6.5% from $3.1M to $3.3M for the 6 months ended June 30th 2013, compared to the same period last year. Gross profit margin during this period also improved, from 58.1% to 68.5%. The company reported a total net loss for the six months ended June 30, 2013 of $1.4 million or $0.39 per share, compared with $1.5 million or $0.62 per share during the same period last year.

With current cash of $2.9M and a quarterly loss of $700K and shrinking by the quarter, there is enough cash to float without financing for the next year. If the company is not profitable by then, either debt or equity financing is inevitable. Debt looks more likely as the amount of long term debt on its balance sheet is a miniscule $36,000, (0.2% of market cap) and Chanticleer may want to take advantage of its extremely light debt load and current interest rates to bring it through 2016. Accumulated deficit is still quite small despite the aggressive expansion tactics at just over $10.7M.

Opportunity

The biggest near-term opportunity, in terms of potential upside for Chanticleer stock, is the FIFA World Cup that is taking place in Brazil in the summer of 2014. Hooters is renowned for its sports bar status, and its combination of widescreen televisions, food, beer and sex appeal could fuel supernormal revenue growth for the duration of the tournament. The four units that Chanticleer aims to open by next summer are all on the match schedule, and people traffic will likely be huge. After that, it looks to be more of a buy and hold stock until the 2016 Rio Games.

American brands have prospered when exported internationally in the past. The difference now is that Chanticleer offers investors the chance to expose themselves to the brand, something that for many years has not been possible. The company's current market cap of just of $17.6M is tiny and makes the company very risky, but if (spurred by a revenue kick next summer) Chanticleer can navigate its way into profit this current valuation could be set for adjustment.

Conclusion

Chanticleer is in the process of implementing an aggressive expansionary policy that will see it more than double its mid-2012 size by the end of this year. Its main offering, Hooters, is already internationally renowned, and if the company can leverage this to gain a footing in the emerging markets into which it is expanding then it could grow to become a leading, foreign operating, US restaurant brand. For now at least, all eyes are on June and July 2014.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.