FAT Brands Inc. (NASDAQ:FATBB) is a leading global franchising company that has successfully built an impressive portfolio of 18 iconic restaurant brands. Over the past three years, the company has executed an ambitious growth strategy, expanding its footprint tenfold to encompass over 2,300 locations across more than 40 countries and 49 U.S. states or territories.
Business Overview FAT Brands was founded in 2017 as a leading multi-brand restaurant franchising company. The company's mission is to develop, market, acquire, and manage quick-service, fast casual, casual dining, and polished casual dining restaurant concepts around the world. Since its inception, FAT Brands has pursued an aggressive growth strategy through strategic acquisitions, significantly expanding its brand portfolio and market presence.
In 2018, FAT Brands acquired Elevation Burger, a fast-casual restaurant brand known for its organic, grass-fed burgers. This acquisition allowed the company to expand its presence in the better-for-you dining segment. The following year, FAT Brands further diversified its portfolio by purchasing Yalla Mediterranean, a fast-casual restaurant concept specializing in Mediterranean cuisine.
Despite the challenges posed by the COVID-19 pandemic in 2020, FAT Brands demonstrated its resilience by acquiring Fazoli's, a fast-casual Italian restaurant chain. This move strengthened the company's position in the Italian food segment and showcased its ability to navigate difficult economic climates.
In 2021, FAT Brands made a significant strategic move by acquiring Twin Peaks, a rapidly expanding polished casual dining brand known for its sports lodge atmosphere and made-from-scratch American fare. This acquisition diversified the company's portfolio and capitalized on the growing demand for elevated dining experiences.
Throughout its history, FAT Brands has faced various challenges, including navigating the complexities of the restaurant industry, managing a diverse portfolio of brands, and adapting to changing consumer preferences. However, the company's commitment to innovation, brand development, and strategic acquisitions has allowed it to overcome these obstacles and emerge as a leading player in the restaurant franchising space.
The company's asset-light franchising model has been the cornerstone of its growth strategy. FAT Brands generates revenue primarily through royalties, franchise fees, and advertising fees from its franchised restaurants, while minimizing the capital-intensive operations of company-owned locations. This approach has enabled the company to scale efficiently and maintain healthy profit margins.
Financial Performance In fiscal year 2023, FAT Brands reported total revenue of $480.46 million, representing a robust year-over-year increase of 17.9%. The company's net income, however, remained in the red, with a loss of $90.11 million, largely due to elevated interest expenses and one-time charges. Despite the net loss, the company's adjusted EBITDA, a key metric for franchise-based businesses, reached $52.30 million in 2023, up 260.8% from the prior year.
For the most recent quarter, FAT Brands reported revenue of $143.37 million, representing a strong year-over-year growth of 31.1%. However, the company's net income for the quarter was -$44.76 million, reflecting ongoing challenges in profitability. Operating cash flow (OCF) for the quarter was -$3.22 million, while free cash flow (FCF) stood at -$11.09 million.
The company operates in two primary sales channels: franchised restaurants and company-owned restaurants. Revenue is derived from several key sources:
1. Royalties: In the first three quarters of 2024, royalty revenue was $67.62 million, making up around 15% of total revenue.
2. Restaurant Sales: Company-owned restaurant sales reached $312.59 million in the first three quarters of 2024, accounting for approximately 70% of total revenue. This represents a significant increase of 66.5% year-over-year, driven by the acquisition of the Smokey Bones brand in September 2023 and new company-owned restaurant openings.
3. Advertising Fees: Revenue from advertising fees was $29.57 million in the first three quarters of 2024, contributing about 7% to total revenue.
4. Factory Revenues: The company's dough factory generated $28.60 million in revenue during the first three quarters of 2024, representing around 6% of total revenue.
5. Franchise Fees: Initial franchise fees accounted for $5.17 million in revenue during the first three quarters of 2024, making up just over 1% of total revenue.
6. Other Revenue: Miscellaneous revenue sources contributed $3.50 million in the first three quarters of 2024.
Liquidity The company's financial position has been strengthened by its successful debt refinancing efforts. As of the latest reporting period, FAT Brands had $1.38 billion in total debt, with a net debt position of $1.12 billion. While the debt load remains substantial, the company has been proactively managing its capital structure, including the refinancing of its Twin Peaks securitization debt, which is expected to optimize its infrastructure ahead of a potential public listing for that business segment.
FAT Brands' current liquidity position includes a cash balance of $16.84 million. The company's debt-to-equity ratio stands at -3.18, reflecting the significant debt load relative to shareholders' equity. The current ratio of 0.30 and quick ratio of 0.27 indicate potential short-term liquidity challenges that the company will need to address.
Growth and Expansion FAT Brands' primary growth drivers include organic expansion, strategic acquisitions, and the development of its manufacturing capabilities. During the first three quarters of 2024, the company opened 62 new units, and it expects to end the year with over 100 new locations across its portfolio.
The company's development pipeline remains robust, with signed agreements to open approximately 1,000 new units in the coming years. This substantial pipeline is expected to contribute an incremental $50 million to $60 million in annual adjusted EBITDA once fully operational, helping to organically reduce the company's leverage over time.
FAT Brands has also placed a strong emphasis on its co-branding initiatives, such as the successful pairing of Great American Cookies and Marble Slab Creamery, which now has over 160 co-branded locations worldwide. The company's recent launch of a co-branded online ordering platform for these two brands has further enhanced the customer experience and driven higher average order values.
Additionally, the company's manufacturing facility in Georgia, which produces cookie dough and pretzels for several of its brands, continues to operate at only 40-45% of its capacity, presenting significant opportunities for future growth and profitability.
Risks and Challenges FAT Brands faces a range of risks, including increased competition in the highly fragmented restaurant industry, the potential for macroeconomic headwinds to impact consumer spending, and the ongoing legal challenges stemming from government investigations and shareholder litigation.
The company is currently facing government investigations and shareholder litigation related to allegations of improper extension of credit to the former CEO and other accounting/disclosure issues. FAT Brands is cooperating with the investigations and defending the shareholder lawsuits. These legal issues could result in fines, penalties, or other adverse consequences for the company.
The company's substantial debt load and the associated interest expenses also pose a risk, although the recent refinancing efforts have helped to improve its capital structure. Additionally, the potential public listing of the Twin Peaks business segment, while a strategic opportunity, introduces additional risks and uncertainties.
Market and Industry Trends FAT Brands operates primarily in the United States, with approximately 97.9% of its revenue coming from domestic operations in the most recent quarter. The company has a small international presence, contributing around 2.1% of total revenue.
The overall restaurant industry has faced headwinds in 2024 due to macroeconomic factors like inflation and recessionary concerns. The quick-service and fast casual segments have generally outperformed the casual dining space. FAT Brands' portfolio is weighted more towards the quick-service and fast casual categories, which may provide some resilience, but the overall industry environment remains challenging.
Recent Performance and Outlook FAT Brands' recent performance has been mixed, with some brands like Twin Peaks performing very well, while others like Fazoli's and Smokey Bones have struggled. In the third quarter of 2024, system-wide sales grew 6.4% year-over-year to $600.7 million. However, adjusted EBITDA for Q3 2024 was $14.1 million, down from $21.9 million in the prior year quarter.
Looking ahead, the company plans to open approximately 40 new units in Q4 2024, ending the year with over 100 new units. For 2025, FAT Brands plans to open 19 new Twin Peaks locations, including 7 conversions from Smokey Bones. The company is also working to refinance the Twin Peaks securitization debt and the Fazoli's debt facility in the coming months.
Furthermore, FAT Brands is pursuing a potential IPO or alternative transaction for the Twin Peaks and Smokey Bones brands, which they view as a strategic opportunity to unlock value for shareholders. This move could provide greater financial flexibility and accelerate the company's deleveraging efforts.
Conclusion Despite the challenges, FAT Brands' diverse brand portfolio, asset-light franchising model, and strong development pipeline position the company well for continued growth. The company's focus on menu innovation, digital transformation, and strategic co-branding initiatives are expected to drive increased customer engagement and operational efficiencies.
Overall, FAT Brands' resilience, adaptability, and strategic vision make it a compelling investment opportunity in the dynamic restaurant franchising space. However, investors should carefully consider the company's ongoing financial challenges, legal risks, and the broader economic environment when evaluating the stock.