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In a now famous, decade old interview with Fortune magazine, self-styled "Worldwide Wing Commander" of Hooters restaurants Robert Brooks said, "Good food, cold beer and pretty girls never go out of style." With more than 430 locations generating close to $1B revenues, 30 years after the first Hooters restaurant opened in Florida, Brooks' statement looks vindicated. Throughout the majority of this growth however, the retail investment community has been unable to gain exposure to the world famous brand. One company now offers this exposure-Chanticleer Holdings (NASDAQ:HOTR).
Chanticleer is a publicly-traded holding company that not only has a small, 3% stake in Hooters of America, the privately-owned parent company of the Hooters brand, but is also a franchisee of domestic and international Hooters locations. The company is in the early stages of a rapid expansionary strategy that its CEO, Mike Pruitt, expects to make Chanticleer profitable before the end of the year.
International Revenues Comparison
Chanticleer's profitability lies in international expansion of the Hooters brand. The international market remains relatively untapped, yet has proven key to a number of other U.S. fast casual establishments in the past. Yum! Brands (NYSE:YUM), owner of the KFC, Taco Bell and Pizza Hut fast-food chains, generated approximately 25% of its total revenues from international operations last year. McDonald's Corporation (NYSE:MCD) generated just shy of 70% of its revenues internationally during 2012. Burger King Worldwide (NYSE:BKW) generated 42% of its revenues during the first three quarters of 2013 from international locations. Of 430 hooters locations, 58 are located outside of the U.S. With average sales per location (FY 2012) of $2.26M, Hooters generates just 19% of its revenues from international locations on estimated system wide sales (FY 2012) of 971.8M.
Where Is Chanticleer Focusing Its Efforts?
When Chanticleer acquired its 3% holding in HOA, it also acquired the right to expand Hooters into any international market for which the development rights had not yet been sold. The first location in which the company exercised these rights was South Africa. Chanticleer opened a restaurant in Durban, South Africa in December 2009. Between 2010 and 2012 the company opened a further three restaurants, two in Johannesburg and one in Cape Town. During this time, Chanticleer also opened a restaurant in Campbelltown, Australia, and one in Budapest, Hungary. Further, the company expects to open one location in Brazil before summer 2014 in time for the FIFA World Cup, followed by a further six before the 2016 Olympic Games.
Last year, Chanticleer acquired West End Wings Ltd (WEW); owner/operator of a Nottingham, UK based Hooters location. Finally, as far as Hooters locations are concerned, the company acquired two Hooters restaurants in Oregon and Washington State in January 2014. These two acquisitions represent the company's first Hooters locations in the U.S.
Finances So Far
Chanticleer's revenues grew from $1.46 during 2011 to $6.88M during 2012, a 371% year over year increase. The majority of the company's 2012 revenues came from its South African locations, a total of $4.16M across the five restaurants. Next in line was the Campbelltown location, which generated $1.76M revenues during 2012. Finally, the Budapest location generated $698,524 in revenues.
To date, the only gross profitable market for Chanticleer is the South African region, from which the company generated $2.57M gross profit during the first nine months of 2013.
The company's upcoming Q4 2013 10-Q will reveal the finances for the other locations. Investors looking for early insight into how these finances will affect the company's position can gain insight from the WEW statement submitted by Chanticleer following the Nottingham location acquisition. The statement reveals the restaurant generated $2.74M revenues during the 40 weeks ended October 6, 2013, with a net income of $180,777.
Chanticleer's management expects that, in addition to the current locations, the company can open a further ten locations in South Africa, a further 14 locations in Australia, a further 25 locations across Brazil and a further 17 locations across the UK and Europe. Using last year's average sales per location figure of $2.26M, this equates to a total potential market for its Hooters operations of $176M. In short, at the top end of its market potential Chanticleer could account for over 18% of the Hooters brands global revenues. If the company reaches its growth targets, it would put the internationally generated revenues number for Hooters at approximately 27%, which when considered with the comparable figure of McDonald's, Burger King and Yum! does not look unrealistic.
The Hooters expansion does not represent the whole of Chanticleer's growth opportunity. In October last year, the company announced its acquisition of American Roadside Burgers (ARB). ARB is a five-location traditional American burger chain with current locations in North Carolina, South Carolina and New York.
In addition, Chanticleer acquired a 51% majority interest in the Just Fresh restaurant chain in December 2013. Just Fresh is a health-focused, fast casual dining chain with five locations throughout North Carolina.
Finally, on January 15, 2013, Chanticleer announced it had executed an Agreement and Plan of Merger to acquire Spoon Bar & Kitchen through the purchase of all of the outstanding shares of Dallas Spoon, LLC and Dallas Spoon Beverage, LLC. Spoon Bar & Kitchen is a seafood restaurant located in Dallas, Texas.
Before exposing themselves to Chanticleer, investors should be aware that with such aggressive growth, comes extensive risk. The company is not yet profitable, and relies on cash flow to maintain operations. The restaurant and casual dining industry is notorious for its low margins, meaning a small dip in sales across any one of Chanticleers restaurant interests could have an amplified effect on its ability to finance operations. Mitigating this risk somewhat is the fact that Chanticleer has expanded into a variety of different types of restaurants; meaning demand in one concept would likely offset waning consumer demand in another. Having said this, an industry wide fall in restaurant demand would have a serious effect on the company's ability to finance itself.
Further risk lies in the company's share structure. Chanticleer has a current market capitalization of just $20M, with 5.31M shares outstanding and a float of just 4.15M. A low float can create considerable volatility in a company's stock, meaning the holdings of early stage investors could be subject to large swings in value. In addition, chanticleer will need to finance its expansionary strategy, likely through share issues. Any future issue will dilute the holding of investors. If, and when, the company's reaches profitability an increase in share price could offset this dilution but in the short term at least, it is a very real risk.
Finally, a number of assumptions underpin the projected financial potential of the international Hooters market in this piece. The first is the ability of Chanticleer's new locations to generate revenues of at least the brand average. The second is the international acceptance of the Hooters brand to the levels seen with McDonald's, Yum! and Burger King.
The next two years could see Chanticleer transition from an unprofitable franchisee/operator of between 10-20 restaurants to a profitable franchisee/operator of between 30-40 locations. Furthermore, 15-20 of these locations could account for nearly 20% of the total Hooters brand revenues. Unlike many of its household name peers, Hooters is yet to get anywhere near international market saturation and Chanticleer offers investors a two-pronged exposure to its growth potential. Directly, through the company's franchises and indirectly, through its HOA holding.