BurgerFi: The Future Is Bright, But Hold Off For A Bit
Summary
- BurgerFi is making its foothold on the American landscape through a rapid growth strategy that is fueling double digit revenue growth.
- Operationally, the company is in a stable position with its two main costs: food & labor, and should reach profitability soon.
- Major concerns include no strong competitive advantages, shortages globally in food and logistical nightmares impacting the entire industry.
J. Michael Jones/iStock Editorial via Getty Images
What's your favorite burger? For me, that's a hard pick. With every growing year, another burger chain enters the race, claiming to offer something truly unique, something that will raise the bar completely.
Admittedly, I have a bias towards enjoying a good old-fashioned BurgerFi (NASDAQ:BFI) burger. To me, it just tastes and feels cleaner. With 118 restaurants towards the end of 2021, something tells me there's a large group of people that agree. However, is it a good business? Let's find out.
The Business
Every company has a unique selling proposition. Without one, it would cease to exist. The best propositions are the ones that don't have to be made clear at all (Apple, McDonalds). Unfortunately, BurgerFi isn't one of those. Look at their unique proposition below, verbatim.
BurgerFi is committed to serving fresh food made with responsibly sourced ingredients in an eco-friendly environment. The chef-founded restaurant brand uses 100% natural Angus Beef with no steroids, antibiotics, growth hormones, chemicals, or additives and offers a diverse menu with broad appeal including their award-winning vegetarian VegeFi® Burger, Wagyu Beef Hot Dogs, Cage-Free “Fi’ed” Chicken Tenders and Sandwiches, Fresh-Cut Fries and Beer-Battered Onion Rings, Frozen Custard Desserts, beer, wine, and more
The problem with this proposition is that it's not really unique at all. Many of its competitors follow the same principle. This is problematic because there really is no real competitive advantage in their business. This doesn't mean they are (1) not a good company and (2) can't grow. It simply means that there is a higher probability that in the long term, the forces of competition either drive them out the market or their margins remain razor thin as they are forced to compete on price. In turn, they have to constantly offer differentiated products to truly stand out. It's not to say they haven't been fighting on this foot. Look at the image below.
BurgerFi vs Competitors (BurgerFi)
Against its 4 biggest competitors, BurgerFi does have a few unique concepts, but can the competition emulate this? The answer is yes!
Either way, BurgerFi has made a strong foothold in a few markets so far. The company has most of its locations towards the Southern end of the U.S., mainly in Florida. However, it is quickly entering new markets like Arizona, Alabama and as far as Saudi Arabia.
BurgerFi Locations (BurgerFi)
Anthony's Coal Fired Pizzas
We can't talk about BurgerFi without talking about ACFP. BurgerFi acquired ACFP last year for $156.6 million, comprised of $33 million in common stock and $53 million in new junior non-convertible preferred equity. ACFP follows a similar selling proposition by offering fresh, never frozen, high quality pizza, coal fried wings, meatballs and sandwiches & salads. ACFP has a strong presence in Florida with 28 locations and is growing Pennsylvania and New Jersey.
Management believes the acquisition will allow the company to follow its long term strategy of building a multi-brand platform predicated on high quality offerings. In addition, it believes it will benefit from a number of synergies generated from the acquisition.
The Performance
For the year 2021, BurgerFi generated consolidated revenues of $68 million. This is a 103% increase in revenues over 2020 from the $34 million reported. While I am not using 2020 as an argument for the revenue growth, it is worth mentioning that the performance has not only rebounded to its 2019 level of around $30 million, but doubled it.
Most of this increase was due to the addition of two months of revenue from the ACFP acquisition, but included new store openings, increases in royalties and other, more important factors described below.
1) Systemwide sales grew 31% in 2021 to $166 million compared to $126 million in 2020 and 15% over 2019.
2) Same Store Sales grew 14% for corporate owned restaurants and 15% for franchise owned restaurants over 2020. The growth was accompanied by increases in average check value, much the result of price increases during Q2 2021.
Operating Profitability
There are two main factors that contribute to a healthy operating profit in the QSR industry: food cost and labor cost. Rent and maintenance are usually coupled into its own category but makes up a more predictable, stable percent of sales. These figures must remain below certain percentage of sales in order to allow revenues to trickle down to the bottom line.
As a general rule of thumb, guidelines from White-Hutchinson Leisure and Learning consulting group say that food and labor costs combined should be no more than 60%. With this, labor costs should come in at less than 30% as food cost will always be higher.
BurgerFi's food and labor costs for both of its brands are well within these ranges. BurgerFi's food cost for 2021 was 30.3% and labor cost was 27.1%. ACFP's food cost was 28.6% and 29.8% respectively. Other operating expenses made another 20% of operating expenses, leaving an operating margin of 12.8%. It's also important to note that over previous years, food & labor cost numbers have not risen much. This is good to see as the company scales and requires more food & labor. This means that the added revenues from opening new stores are contributing positively to maintaining that margin.
Liquidity
The company had roughly $14 million in cash at the end of 2021. However, had a net loss of $125 million for the year. It's important to note here that the exuberant number originated from an $114 million impairment charge on the balance sheet after some goodwill with the ACFP acquisition. However, accounting figures like depreciation & amortization and G&A resulted in an additional $20 million retraction to the bottom line.
In 2021, the company spent roughly $10 million to open 10 corporate owned stores. With $14 million in cash and a debt-to-equity ratio of roughly 33%, the company has room to use its cash and take on new revolving lines of credit to continue its growth expansion.
I expect the company to both reduce its operating costs and G&A expenses as the company improves its operational efficiencies. But, how will it do this?
There are a number of ways the company will both improve its revenues, operating margin and reduce its other corporate costs as it grows.
Technology & Innovation: Value Adding Propositions
There are a number of prototype developments that can greatly improve operational efficiencies in BurgerFi.
In the field of digital innovation, BurgerFi is using a data driven loyalty program and mobile app. The mobile app allows for an enhanced customer data platform to analyze guest data and market them with personalized incentives. In addition to this, the mobile app also offers a new revenue stream with online ordering by giving guests the options of pick-up or delivery. Lastly, the loyalty program allows BurgerFi customers to be acquired into the BurgerFi ecosystem, locking them into an addicting program whereby spending more equates to spending less in the future.
I expect these two things to also reduce marketing costs over time as the marketing expense is concentrated to two areas: 1) incentivizing new customers to become entrenched into the ecosystem and 2) market existing customers on their ecosystem rather than third party channels (which is cheaper)
In the field of improved restaurant efficiency, the company has begun introducing self-ordering kiosks. These are currently in a pilot program in four stores but early data suggests a 16% uptick in average check and roughly 50% of in-store orders flowing through the kiosk. Where will this contribute to the most? It's hard to tell, but it does likely free up at least one POS system at the frontline, leaving an extra team member to help with the backline. But as an argument for lower labor costs, it would need to be scaled to see that picture fully.
Another labor cost reducer is the robotic food server that is still in its pilot program. The most value adding proposition for this is its ability to help combat labor shortages (which are still rampant in the US). It's a very exciting concept, one that I hope becomes adopted in the industry.
Robotic Food Server (BurgerFi)
Future Growth Strategy
According to the company, its future growth strategy is to:
1)Grow its presence on Eastern seaboard and other important markets in Southeast, Mid-Atlantic and Northeast for BurgerFi & Anthony’s Coal Fired Pizza & Wings
2) Start with 2-3 company-owned restaurants in key “cluster cities” such as Tampa, Jacksonville, Atlanta & Nashville, then add current and future franchisee growth
All together, these should drive brand awareness to grow in both North America and eventually more internationally. Consequently, this will increase revenues through both corporate owned restaurants and royalties through franchisees.
Risks & Bottom Line
The stock IPO'd in 2020 around $10/share. Today, the stock is at its lowest level ever. Is this warranted? Maybe so.
Despite growing revenues and great future outlook, there is one very large risk factor for this company other than the meager competitive advantages it now possesses. Luckily, the entire industry is facing it; Shortages.
Food shortages are one of the most prevalent issues in 2022. It is reaching a point where the supply can't keep up with the demand. To further complicate things. Logistically, everything is a nightmare. Even when there are short bursts of supply in certain food products, logistically, shipping companies are facing massive delays in the realms of container inefficiencies. These inefficiencies range from delayed shipping from backlogs of orders to not enough containers globally to match the demand. What's the consequence of this for BurgerFi?
Well, there is only one rule in supply chain: don't run out of supply. I'm sure BurgerFi is facing this challenge, like everyone else. Therefore, if it fails to have products to accompany its growth, lost revenues will be on the table.
Management has issued guidance for 2022:
- Annual revenues of $180-190 million.
- Mid-single digit same-store sales growth.
- 15-20 new BurgerFi brand restaurant openings, most of which will be franchised locations.
- Adjusted EBITDA of $12-14 million.
- Capital expenditures are expected to be approximately $4 million.
If it achieves these numbers I would be extremely happy, but the current climate may force their hand. Longer term, I expect the markets to return to some level of efficiency and BurgerFi to have the products readily available to meet its growth strategy, but for now, I'd rather sit on the sidelines until these issues ease.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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