- FAT Brands reported year-end results, showing great progress in spite of pandemic.
- With about 700 locations among their franchised brands, a critical mass has been reached.
- The Company has responded well to the demands of Covid-19.
- The pieces are in place, operationally and financially, to more than double '19 Adjusted EBITDA.
Overview – Multi-branded franchisors have a long term competitive advantage
Our overriding thesis is that, within the highly competitive restaurant industry, franchisors that control more than one brand have an important competitive advantage. As all retailers struggle to gain market share and report strong unit level economics, multi-concept franchising offers benefits to both the franchisee and franchisor.
For the franchisee, expanding within an existing relationship saves time and money as well as strengthens the trust between both sides. This allows for (1) speedier openings, (2) expanding store count more quickly which in turn allows for building out existing territories sooner, (3) the possibility to co-brand in the same building, saving on construction and real estate costs, (4) the opportunity to hedge against economic surprises within certain dining segments, such as QSR and fast casual doing better with the off-premise service vs. larger box full-service dining. Other advantages include sharing of accounting, HR, and other administrative functions, as well as some marketing expenses. With the employment crisis that pre-dated the pandemic of finding and retaining quality people, a multi-concept franchisee can offer more career choices, flexible scheduling, cross-brand training, and meal discounts, to name just a few benefits.
For the franchisor, knowing the franchisees’ track record, both financially and operationally, there already exists a trusted relationship. The franchisor also saves money in terms of shared accounting, HR, and other administrative expenses. Field service, including training, can also be more efficient, as one company representative can visit multiple concepts. Franchisors with multiple concepts also have potentially broader access to geographic markets that otherwise might not be conducive to just one concept.
This brings us to the specific investment attraction of FAT Brands (NASDAQ:FAT). After attending FAT Brands’ impressive presentation at the ICR Virtual Conference this year, it seemed appropriate to take a deeper look into the company.
FAT Brands’ Background
FAT Brands is a global multi-concept restaurant franchisor that features 9 brands, 305 franchisees in 37 countries. It is asset light, generating revenue through franchise fees and royalty streams. This model provides the opportunity for strong profit margins and an attractive free cash flow profile. Their scalable management platform enables the company to add new brands to their portfolio with minimal incremental corporate overhead costs while utilizing the advantages of corporate synergies. Their strategic growth plans focus on developing markets with current concepts and acquiring other restaurant concepts worldwide. These are key to their growth strategy.
FAT Brands’ portfolio of concepts is mainly in the Fast Casual sector which based on a recent report from Datassentials and consumers’ choices during the peak of the Covid crisis, FAT Brands is prime for post-Covid restaurant growth and development; especially since adding off premise channels. Fast Casual patrons typically choose concepts that offer fresh ingredients, freshness, quality, and value – all attributes of FAT Brands’ concepts.
FAT Brands went public in late 2017 with 2 million shares outstanding. On December 11, 2020, FAT Brands agreed to combine with Fog Cutter Capital Group (OTCPK:FCCG); the company’s controlling stockholder. “This merger is intended to provide FAT Brands with increased financial flexibility and simplify corporate structure” according to their press release. Andy Wiederhorn, President and CEO of FAT Brands further stated, “FAT Brands was taking a number of steps in 2020 to bolster their balance sheet and ensure that FAT Brands is as nimble and opportunistic as possible.” FAT Brands/Fog Cutter Capital Group Press Release 12-11-20. As of this writing, the company has not yet filed information regarding the post-merger balance sheet.
Several key advantages of this merger are: (1) FAT gets the use of the tax loss carryforward. (2) FCCG no longer has to own 80% of FAT Brands to maintain its $100,000,000 tax loss; therefore, FAT can use its stock for acquisitions. (3) Inter-company balance sheet items are eliminated. (4) The public float of FAT increases to 46% of the fully diluted shares.
Fatburger – (The Last Great Hamburger Stand), was founded in Los Angeles, CA in 1947. It serves a variety of freshly made-to-order, customizable, big, juicy, and tasty Fatburgers, Turkeyburgers, Chicken Sandwiches, Impossible™ Burgers, Veggieburgers, French Fries, Onion Rings, soft-drinks, and milkshakes. Fatburger has counted many celebrities and athletes as past franchisees and customers, and they believe this prestige has been a principal driver of the brand’s staying power. As of December 29, 2019, there were 163 franchised and sub-franchised Fatburger locations across eight states and 18 countries (79 domestic and 84 international). On December 14, 2020 Fatburger opened a co-branded Fatburger and Buffalo Express in Alexandria, LA. Co-Branded Fatburger/Buffalo's Express Press Release 12-14-2020
Buffalo’s Café (and Buffalo’s Express) – Buffalo’s Café was established in Roswell, GA in 1985. It is a family-themed Casual Dining concept known for its chicken wings and 13 distinctive homemade wing sauces, burgers, wraps, steaks, salads, and other classic American cuisine. Featuring a full bar and table service, Buffalo’s Café affords friends and family the flexibility to enjoy an intimate dinner together or to casually watch sporting events. Beginning in 2011, Buffalo’s Express was developed and launched as a Fast-Casual, smaller footprint variant of Buffalo’s Café offering a limited version of the full menu with an emphasis on chicken wings, wraps, and salads. Current Buffalo’s Express outlets are co-branded with Fatburger locations, providing complementary concepts that share kitchen space and result in a higher average unit volume (compared to stand-alone Fatburger locations). As of December 29, 2019, there were 18 franchised Buffalo’s Café locations and 87 co-branded Fatburger/Buffalo’s Express locations globally.
Ponderosa & Bonanza Steakhouses – Ponderosa Steakhouse, founded in 1965, and Bonanza Steakhouse, founded in 1963, offer the quintessential American steakhouse experience, for which there is strong and growing demand in international markets, particularly in Asia and the Middle East. Ponderosa and Bonanza Steakhouses offer guests a high-quality buffet and broad array of affordably priced steak, chicken, and seafood entrées. Bonanza Steakhouses feature a large variety of all you can eat salads, soups, appetizers, vegetables, and breads. As of December 29, 2019, there were 76 Ponderosa and 13 Bonanza restaurants operating under franchise and sub-franchise agreements in 16 states and 5 countries.
Hurricane Grill & Wings – Founded in Fort Pierce, Florida in 1995, Hurricane Grill & Wings is a tropical beach-themed Casual Dining restaurant known for its fresh, jumbo chicken wings, 35 signature sauces, burgers, bowls, tacos, salads, and sides. Featuring a full bar and table service, Hurricane Grill & Wings laid-back, casual atmosphere affords family and friends the flexibility to enjoy dining experiences together regardless of the occasion. The acquisition of Hurricane Grill & Wings has been complementary to FAT Brands existing portfoliochicken wing brands, Buffalo’s Café and Buffalo’s Express. As of December 29, 2019, there were 51 (domestic or international) franchised Hurricane Grill & Wings and 2 franchised Hurricane BTWs (Hurricane’s Fast Casual burgers, tacos, and wings concept).
Yalla Mediterranean – Founded in 2014, Yalla Mediterranean is a Los Angeles based restaurant chain specializing in authentic, healthful, Mediterranean cuisine with an environmental conscience and focus on sustainability. The word “yalla” which means “let’s go” is embraced in every aspect of Yalla Mediterranean’s culture. Yalla offers wraps, plates, and bowls in a Fast Casual setting with cuisine prepared fresh daily using GMO-free, local ingredients for a menu that includes vegetarian, vegan, gluten-free, and dairy-free options. The brand demonstrates its commitment to the environment by using responsibly sourced proteins, utensils, bowls, and serving trays made from compostable materials. Also featured are on-tap selections of craft beers and fine wines. Originally acquired as company operated, two restaurants had been franchised as of December 29, 2019 with the intention of franchising the remaining five existing Yalla locations and expand the business through additional franchising. As of December 29, 2019, there was a total of 7 systemwide.
Elevation Burger – Established in Northern Virginia in 2002, Elevation Burger is a Fast Casual burger, fries, and shakes chain that provides its customers with healthier, “elevated” food options. By serving grass-fed beef, organic chicken, and French fries cooked using a proprietary olive oil-based frying method, Elevation maintains environmentally friendly operating practices including responsible sourcing of ingredients, robust recycling programs intended to reduce carbon footprint, and store décor constructed of eco-friendly materials. Ownership of the Elevation Burger brand aligns with the corporate mission of providing fresh, authentic, and tasty products complementing the Fatburger brand. As of December 29, 2019, there were 45 franchised Elevation Burger locations across nine states and four countries. 45 total systemwide units (27 domestic + 19 international franchised) plus 2 affiliates operating at 12/31/19. There are at least 2 units operating in: ME (4), MD (5), MI (2), NY (4), PA (5), VA (4) (U.S. total of 27), Bahrain (3), Kuwait (8), Qatar (4), UAE (3) (International total of 19). The two affiliated units are in VA.
Johnny Rockets – Founded in 1986 in Los Angeles, originally a 20-stool counter operation, presenting a 1940s vintage style malt shop. The first unit, featuring juke boxes, red vinyl booths and chrome counters, opened with fans such as Bob Hope and Elizabeth Taylor. The chain grew to 200 locations by 2007 when it was acquired by RedZone Capital. By 2013, when Sun Capital Partners bought it, there were 300 locations in 30 states and 16 countries, including more than a dozen in amusement parks and cruise ships. They typically offer lunch and dinner, featuring made to order burgers, crispy fries, chili, hand-spun shakes, and malts, plus sandwiches and other items. Today, under FAT’s ownership there are 322 locations operated by 129 franchisees. Shows 175 domestic units (not including cruise ships or international) (162 franchise and 13 corporate) operating at 12/31/19. Internationally: show 177 international units as of 9/30/20.
CEO – The Founder, CEO, and President is 54-year-old Andrew Wiederhorn. He also founded Fog Cutter Capital Group, Inc. He founded and was CEO of Wilshire Financial Services Group and Wilshire Credit Corporation and has served on numerous philanthropic Boards.
CFO – The CFO is 47-year-old Rebecca Hershinger. She has been with FAT Brands since 2018. Previously, she was an analyst at JP Morgan Chase and was CFO of a publicly traded global children’s media company.
COO Casual Dining Division – The President of the Casual Dining Division is 64-year-old Gregg Nettleton. He has been with FAT since October 2017. Prior to that, he was President and CEO of an international consulting firm. His restaurant experience includes Board membership at Black Angus Steakhouses, Chief Marketing Officer at IHOP, and Interim Chief Marketing Officer at Applebee’s.
COO Fast Casual Division – Jacob Berchtold is the COO of the Fast Casual Division. He joined Fatburger in 2005 as a restaurant manager and member of the new store opening team. He has served in a wide variety of operational management positions with Fatburger company.
SVP of Finance – Senior VP of Finance is Ron Roe, previously with Fog Cutter Capital and Piper Jaffray.
CMO/CDO – The Chief Marketing and Chief Development Officers are Thayer and Taylor Wiederhorn, respectively. Both have spent over 10 years with Fog Cutter Capital, Fatburger, and Buffalo’s Café/Express.
FAT Brands’ Covid Response
FAT Brands has made many adjustments, adaptations, and effective responses demonstrating a resiliency superior to many chains, regardless of their size, to the crisis. All efforts were aimed at helping their franchisees survive and corporate to build on their strategic growth plans.
To mitigate the negative impact on sales from the pandemic, FAT Brands launched multiple initiatives such as: Delivery, Ghost Kitchens, Food Trucks, Online Ordering, Loyalty Programs (e-club), menu reductions, refocused marketing and advertising messaging, and enhanced Digital improvements. While most of these initiatives were fairly common among other restaurant chains, the initiatives FAT Brands launched to assist and aid their franchisees have been the real differentiator and demonstrated the unprecedented extent of FAT Brands’ commitment to its franchise community; considerably beyond what other franchisors offered. Assistance like early response to guide franchisees through the crisis safely, adjusting quarantine practices and procedures to adapt to the endless state, federal and local regulations, developing off-premise model best practices, adapting new sanitation, social distancing practices. Secondly, the operation teams worked relentlessly in implementing new changes to all operational procedures to conform to the demands imposed from the pandemic. Additionally, FAT Brands provided guidance and assistance for their franchisees in obtaining/negotiating government stimulus aid from the CARES Act, PPP, and EIDL loans, negotiated 180-day terms with suppliers, advised on negotiations for deferred rent, and pivoted marketing and advertising to focus on off-premise sales channels, modified in-store dining, created outdoor dining models, and procured personal protection equipment for all franchisees.
During Quarter 3, FAT Brands rolled out Chowly – a new POS integrating system for third-party delivery coupled with HNGR system (an online ordering/delivery service platform) to create a seamless experience for customers and also provide better security and control of customer data. Both systems have proven to increase delivery sales. QTR-3 2020 Press Release 11-10-2020.
Yearend 2020 results were reported last week. There were a lot of operational distortions and financial adjustments because of the pandemic and the acquisition of Johnny Rockets, which doubled the number of franchised stores in FAT’s portfolio, but a great deal of progress was made. In the midst of the worst crisis to ever impact the restaurant industry (Covid-19 pandemic), FAT Brands has been able to make progressive improvements in its cash flow and restructure its balance sheet as well.
GAAP results for the year showed a net loss of $14.9M but that is very misleading, distorted with a whole raft of Adjustments. Adding back major Adjustments such as: impairments, loss from re-franchising, a mismatch of advertising fees received and spent on behalf of franchisees, acquisition expenses, interest expense, depreciation, etc., etc., as shown in the earnings release FAT Q4-2020-Earnings Call, Adjusted EBITDA for the year was $1.4M, admirable in spite of the pandemic.
The balance sheet at 12/27 10-K filing FAT 10-K Filing 12/27/20showed a total of $93M of long term debt, versus just under $30M a year earlier, as a result of debt refinancing earlier in the year for working capital and the Johnny Rockets acquisition. Management has indicated its expectation that most of the current long-term debt can be refinanced during 2021, with a lower interest rate and longer term. While $93M is about 12x the 2019 historical Adjusted EBITDA, the latest 2021 Investor Presentation indicates, with the addition of Johnny Rockets, a full year for Elevation Burger results, and internal growth, the potential to double EBITDA to $18M or more once the Covid pandemic has run its course. Additionally, there should be opportunities to refinance or at least improve terms on their current debt.
Also, according to the January 2021 Investor Presentation FAT Investor Presentation 1/2021, they have opened 62 new locations in 2020 and 24 Ghost Kitchens in 2020, and they stated an additional 200-unit development pipeline. Something like 56 new units have been contracted in recent months alone, spread throughout the world. On balance, steady unit growth appears to be a highly probable expectation for the foreseeable future.
While no one can predict the future, especially in lieu of the Covid-19 crisis, FAT Brands does appear well positioned to continue their strategic growth plans; both organically and through additional M&A’s.
Highlights of CEO Conversation and Yearend Conference Call
Prior to the recent yearend call, we had a “high level” general conversation with Andy Wiederhorn, CEO of FAT Brands, in which he shared additional insights on several topics. Here are some of the highlights.
He emphasized the advantage and value of operating a multi-concept platform; most notably is the one-platform administration infrastructure. Instead of having individual offices for each concept, one principal location is utilized creating a significant savings on G&A. Additionally, having administration departments share responsibilities and duties for each Brand allows better efficiencies of staff. Utilizing this principle, FAT Brands is able to minimize staffing needs for various departments: accounting, human resources, technology, etc.
Another area discussed is FAT Brands Franchise Business Consultants Model. This model is designed for the FBC to function on a regional basis; being responsible for each different concept in their area. This method eliminates any FBC overlapping, reduces travel expense, and the number of FBC’s needed to manage the franchise relationship – another cost savings. Additionally, we discussed FAT Brands culture – an environment that is committed to the success of their customers, their franchisees, and open mindedness that values other perspectives. These are more than nice sounding words as evident by the efforts FAT Brands went to during the height of the pandemic to ensure their franchisees had every possible resource to weather the crisis.
Lastly, there was a brief discussion on acquisitions. Mr. Wierderhorn believes the future for FAT Brands to acquire more concepts and increase individual unit growth for most of their concepts is very promising. He mentioned several potential situations under consideration that would double FAT Brands current enterprise value in 2021.
On the formal conference call, management talked about the continued recovery of same store sales throughout Q1’20, after rising steadily from the low of Q2’20 through Q4’20 when they were only down 9.4%. Based on his conference call statements, and weekly sales shown in the latest Investor Presentation (improving from about $7.9M/week in January to $9.6M per week in mid-March) positive first quarter comps seem to be a possibility. Wiederhorn reiterated his expectation to refinance and enlarge the current debt structure, complete a major acquisition or more in ’21, and establish a run-rate of EBITDA north of $18M/year once the pandemic ends.
Conclusion, including Risks
For an investor, despite the impact the pandemic has had on revenues, earnings, and cash flow, FAT Brands has been able to focus attention on growth. First with the acquisition of Johnny Rockets and on new store openings among most of its brands. Also, orchestrating the balance sheet to meet their long-term growth plans.
Other multi-brand restaurant franchising companies such as publicly held YUM Brands (YUM) and Restaurant Brands International (QSR) and privately held Inspire Brands, and Focus Brands are more mature in their business cycle and thus have less opportunities for unit expansion, therefore relying more on M&A for growth. On the other hand, FAT Brands is much younger in its cycle and offers more favorable opportunities for unit growth as well as M&A. One result of the pandemic is more and more smaller restaurant concepts are looking for opportunities to sell seeing that circumstances are favorable to “cash-in”. While bigger chains tend to overlook concepts less than 100 units for M&A, these groups are ideal for FAT Brands.
For franchisees seeking to grow further when their individual territories, as well as survive hard times, FAT Brands can provide a more personalized support system, especially helpful in crisis situations such as the last twelve months. Additionally, when franchised operators are considering expansion, they can add other brands within the FAT portfolio, which by their smaller nature have more open available territory than brands with thousands of units all over the world.
Investors have an active interest in franchising companies, the key attractions being the “free cash flow” nature of the franchise royalty stream, and the “asset light” ability to grow because it’s the franchisee that builds and maintains the store, The greater percentage growth opportunity in FAT, on top of the impressive progress so far, provides a potentially lucid investment opportunity. Based on the company’s guidance in their most recent Investor Presentation FAT Investor Presentation 1/21, FAT should be able to generate a post Covid Adjusted EBITDA north of $18M annually. This means the enterprise value, including debt, is approximately $200M, or eleven times multiple on the $18M, and that is a 40-50% discount from the EBITDA of the larger publicly held franchising companies. The promise here is that the valuation of FAT will catch up with that of their larger publicly held peers.
We can’t ignore the risks, which exist in any investment situation. FAT management must “put the numbers on the board”, and there are always uncertainties in that regard. FAT management might prove to be not as good as they expect at supporting many brands, the pandemic might go on longer than expected, there can be competitive intrusions in certain of the brands, operating costs could rise unexpectedly for the franchised operators which would inhibit their growth. We view these possibilities as fairly generic in nature, not too specific to FAT, and the 700 locations among seven brands provide diversification that would preclude widespread collapse.
In our opinion, FAT Brands is well postured for growth in acquiring new concepts, as well as same store sales and unit growth within its current brands. If FAT delivers the results as planned, there seems to be substantial appreciation potential for FAT common stock.
This article was written by
Analyst’s Disclosure: I/we 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.
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