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Though Hooters of America is a privately held corporation, most investors probably don't realize that an opportunity exists to invest in a franchisee of international Hooters restaurants and a minority ownership in the privately held company. On top of that, Chanticleer Holdings (NASDAQ:HOTR) is busy buying up other restaurant concepts to build an empire while outside the view of investors.
For Q3'13, Chanticleer Holdings only owned an interest in six restaurants that generated $1.6 million in quarterly revenue. Since the close of that quarter, the company made a dramatic push to grow not only the Hooters brand around the world, but also to expand beyond that brand. The company has been busy buying, building, and expanding both internationally and domestically. Chanticleer now has an ownership position in over 20 restaurants after recently closing on domestic Hooters franchises and buying or investing in four other concepts. The company is completely transformed by the start of February leaving tons of opportunities to expand even further.
The stock has lost a lot of gains from last year with investors possibly taking a pause to see the new consolidated numbers. The situation provides an opportunity for investors willing to crunch the numbers with all the new restaurants and share issuance. The company ended Q3'13 with a reported 3.7 million shares outstanding and has issued several million shares and warrants to quickly expand the restaurant concept stable. Compared to other major restaurant valuations, the stock is interesting especially considering the huge growth prospects.
According to the Hooters website, the Atlanta-based operator and franchiser has over 430 Hooters locations in 28 countries. The privately held Hooters of America owns 160 units and Chanticleer owns 3% of that corporation. For more information on how those shares were obtained and the background of Chanticleer, readers can review this previous article with all those extensive details.
As mentioned in that article, Chanticleer owns the right of first refusal to open Hooters in international locations where no existing franchisee exists. In addition, it has worked out deals to partner with local players in Australia and Brazil while buying out the Nottingham location.
At the end of 2013, Chanticleer owned five locations in South Africa and three additional locations, one each in Australia, England, and Hungary. The company plans to soon open another two locations in Australia with its existing partner. Another location should soon open in Rio de Janeiro, Brazil where it is partnering with Wings Brazil Restaurante to develop a total of seven restaurants. The company expects the existing territories to have a market opportunity of at least 75 restaurants. See the below slide from a recent corporate presentation:
Building For A Bigger Future
Chanticleer was not satisfied with the growth potential in Hooters international locations alone so it began snapping up other restaurant concepts over the last several months. The most notable moves were the purchase of a premium burger concept near its headquarters in Charlotte and the move into the domestic Hooters business with the purchase of two locations in the Pacific Northwest. Below is a summary of the significant transactions over the last few months to expand the Hooters holdings and add new concepts into the fold:
- September 30 - acquired American Roadside Burgers based in Charlotte, N.C. for 740,000 shares and warrants to buy 740,000 at $5.00. The restaurant chain operates five stores in the N.C. and S.C. areas with a focus on premium burgers, milk shakes, and beer.
- November 6 - completed acquisition of an existing Hooters location in Nottingham, England, the 15th largest Hooters restaurant in terms of sales. The purchase price was $3.15 million.
- November - made a $500,000 equity investment in the new Beacher's Madhouse in MGM Grand Hotel & Casino (NYSE:MGM) in Las Vegas.
- December 12 - completed acquisition of 56% of Charlotte, N.C. based Just Fresh for $560,000. The restaurant chain operates five company-owned locations in N.C., offering a fresher, more nutritional eating option.
- February 3 - completed acquisition of Hooters' U.S. Pacific Northwest franchise rights and two existing stores in Portland, OR and Tacoma, WA. The purchase price was 680,272 units that include one share of common stock and one warrant. Half of the warrants are exercisable at $5.50 and the other half at $7.00.
- February 3 - completed acquisition of Spoon Bar & Kitchen located in Dallas for 195,000 units. Each unit includes one share of HOTR and one warrant exercisable at $5.50 and $7.00. The company intends to expand the brand taking its healthier seafood menu into a new, fast-casual dining concept.
The below slide showcases the store count growth of Chanticleer:
The big question is where the current valuation should start with all of these deals. In a best estimate, the company is now generating annual revenue close to $20 million. Prior to all of these deals, the company was generating roughly $6.5 million in annual revenue. The American Roadside Burgers added roughly $3 million to annual revenue while the Nottingham location is generating close to $4 million. The best guess based on valuations paid is that the two Northwest Hooters locations are generating around $2.5 million each for a total of $5 million. Those totals bring annual revenues up to $18.5 million without adding the new South Africa restaurant, the Just Fresh concept, and the Spoon Bar & Kitchen.
Based on these rough revenue estimates, the stock trades at roughly 1x revenue with an estimate of around 6.1 million shares outstanding. The warrants add up to around 2.4 million at prices around $5 and above. If they were all exercised, the company would add over $10 million in cash to the balance sheet to finance future deals. Also, the company owns 3% of Hooters of America that isn't included in the valuation multiples.
Other Restaurant Valuations
The restaurant industry averages valuations in the 2 to 3x revenue ranges depending on the quality of the company. The rapidly expanding Chanticleer Holdings is difficult to value considering the different variety of restaurant chains now owned. Darden Restaurants (NYSE:DRI) makes for one quick comparison due to the variety of restaurants owned, but it has mostly mature concepts dominating its holdings. Maybe one of the better comparisons especially with the Hooters portion would be Buffalo Wild Wings (NASDAQ:BWLD) due to the focus on the sports bar concept. Besides the attractive waitresses, one of the main reasons to visit Hooters is to watch a sporting event.
A couple of other examples would be Jack In The Box (NASDAQ:JACK) with a focus on multiple restaurant concepts in Jack In The Box and Qdoba. Another comparison could be made with Red Robin Gourmet Burgers (NASDAQ:RRGB) that focuses on premium burgers and has a bar setup to draw in a mix of the crowd that would visit Hooters and American Roadside Burgers.
The unfortunate major difference in using these more developed restaurant concepts is that they are more appropriate for the domestic Hooters operation and not Chanticleer. Due to the fast growth rate, Chanticleer has the ability to grab higher multiples if it executes and can add new locations without diluting existing shareholders.
The stock made some significant gains back in early 2013, but it has since flat lined. The retail environment in the U.S. and especially in some of the emerging markets where Chanticleer operates is not helping investor confidence. Investors need to keep in mind that despite the focus on Brazil and South Africa, the majority of the revenue will now come from developed countries with the Nottingham and Pacific Northwest Hooters purchases and the American Roadside Burgers deal.
The below chart shows a stock that has plunged since the start of 2014:
With most of the deals for warrants completed in 2013 with the stock trading closer to $5, the company is not likely to cash in the roughly 2.4 million warrants issued at prices around $5 and above any time soon. Worth noting is that outside sophisticated investors and owners of restaurants were willing to make a portion of the selling price in warrants at prices higher than the current stock price. These investors won't be able to take advantage of those positions with the stock trading lower than $4 now.
The biggest risk to investing in Chanticleer Holdings at this point is the typical problem corporations face in integrating multiple brands. If the CEO focuses too much on Hooters, than the new concepts will never flourish. Another major risk until the company reports updated financials is that the calculations involving the revenues and shares outstanding aren't accurate. With so many moving parts it can be difficult to accurately grab all of the appropriate numbers making that much more important to dig into the financials over the next couple of quarters. Not to mention, the company must prove that these new restaurants will be enough to overcome extremely high administrative costs.
Despite these risks, Chanticleer offers an intriguing valuation in the restaurant sector mostly overlooked by investors. The numbers point towards a stock trading at the lower end of typical price to sales multiples.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.