FAT Brands Inc. (NASDAQ:FATBP) is a leading multi-brand restaurant franchising company that develops, markets, and acquires primarily quick-service, fast casual, casual dining and polished casual restaurant concepts around the world. The company has an impressive portfolio of 18 iconic brands spanning over 2,300 locations worldwide across more than 40 countries and 49 U.S. states or U.S. territories.

Business Overview

FAT Brands' operations have historically been comprised primarily of franchising its growing portfolio of restaurant brands. This growth strategy is centered on expanding the footprint of existing brands and acquiring new brands through a centralized management organization which provides substantially all executive leadership, marketing, training and accounting services. As part of these ongoing franchising efforts, the company will, from time to time, make opportunistic acquisitions of operating restaurants and may convert them to franchise locations. Through recent acquisitions, the company also operates "company-owned" restaurant locations of certain brands.

The company's revenues are derived primarily from two sales channels, franchised restaurants and company-owned locations, which it operates as one reportable segment. The primary sources of revenues are the sale of food and beverages at its company restaurants and the collection of royalties, franchise fees and advertising revenue from sales of food and beverages at its franchised restaurants.

Financials

In fiscal year 2023, FAT Brands generated annual revenue of $480.5 million and reported a net loss of $90.1 million. The company's annual operating cash flow was -$35.6 million, while its annual free cash flow was -$57.1 million.

Quarterly Performance

For the first quarter of 2024, FAT Brands reported total revenue of $152.0 million, up 43.8% from $105.7 million in the prior year quarter. This increase was driven by the acquisition of Smokey Bones in September 2023. The company's net loss for the quarter was $38.3 million, or $2.37 per diluted share, compared to a net loss of $32.1 million, or $2.05 per diluted share, in the prior year quarter. On an adjusted basis, the company's net loss was $32.9 million, or $2.05 per diluted share, compared to a net loss of $23.5 million, or $1.53 per diluted share, in the prior year quarter.

Organic Growth

FAT Brands' development momentum continued in the first quarter of 2024 with the opening of 16 new units across its brands. The company expects to open another 44 units this quarter, keeping it on track to achieve its growth targets for 2024. In total, the company projects to open between 125 and 150 new units this year, a potential 20% increase from 2023.

The company's pipeline remains in excess of 1,100 additional units to be opened in the coming years. Management estimates this robust future unit growth will ultimately translate to approximately $50 million to $60 million of incremental adjusted EBITDA, which will enable the company to naturally delever its balance sheet as it scales the business over time.

Growth by Acquisition

FAT Brands is also actively assessing several new potential acquisitions that would add significant strategic value, similar to its acquisition of Smokey Bones to fuel growth at Twin Peaks. When evaluating acquisition targets, the company ensures the brand is both scalable and synergistic with its existing platform, and when possible, leverages its existing manufacturing capacity.

Manufacturing Facility

FAT Brands' Georgia-based manufacturing plant produces Pretzel mix and cookie dough brands within its portfolio. During the first quarter of 2024, the manufacturing facility generated $9.5 million in sales, a 3.4% increase over the prior year. Additionally, it contributed $3.7 million to adjusted EBITDA. The facility is currently operating at about 45% of its capacity, up from 33% almost 3 years ago when the company purchased the asset. The company sees significant whitespace opportunity within its factory business and is actively involved in several RFPs for various third parties to utilize its excess capacity.

Polished Casual Segment

A key area of strategic focus for FAT Brands in 2024 is driving accelerated growth within its polished casual segment, which consists of its Twin Peaks and Smokey Bones brands.

Twin Peaks, the company's sports lodge concept, continues to produce industry-leading average unit volumes of around $6 million, with some of its highest volume locations in Florida generating AUVs between $9 million and $14 million. During the first quarter, the company opened 3 new Twin Peaks locations and anticipates opening 15 to 18 new Twin Peaks in 2024, closing the year with approximately 125 lodges. This will represent approximately a 51% growth in unit count in just 3 years since the company's acquisition of Twin Peaks.

The company also expanded its polished casual segment with the acquisition of Smokey Bones in the fourth quarter of 2023. Smokey Bones is a full-service restaurant chain that delivers great barbecue, award-winning ribs and perfectly seared steaks. FAT Brands expects Smokey Bones to increase its annual adjusted EBITDA by approximately $10 million net of any conversions to Twin Peak restaurants. The company plans to use the existing Smokey Bones portfolio of restaurants to help fuel the expansion of its Twin Peaks brand, with more than half of the 61 existing Smokey Bones locations identified for conversion into Twin Peak locations.

International Expansion

FAT Brands has a strong network of international franchisees that span across nearly all its restaurant concepts. Earlier this month, the company signed its first international development deal for its Fazoli's brand with Briwin restaurants to bring 25 locations to Canada over the next 10 years, with the first units expected to open in 2025 in the province of Alberta. The company also signed a development agreement for 40 new Marble Sub Creamery franchise locations throughout Canada, in partnership with its longtime partner, Canadian Ice Cream Company Inc.

Co-Branding Strategy

FAT Brands continues to leverage its co-branding strategy, which has proven successful across its portfolio. During the first quarter, the company announced the grand opening of its first West Coast Johnny Rockets and Hurricane Wings co-branded restaurant, following the resounding success of its first Johnny Rockets and Hurricane Wings co-branded restaurant in Washington, D.C. last year. Additionally, in April, the company announced a new development deal to open 40 new franchised Fatburger locations in Northern California inside 40 existing Round Table Pizza locations over the next 10 years.

Liquidity

As of June 30, 2024, FAT Brands had $73.1 million in cash and restricted cash. The company believes it has sufficient liquidity to meet its liquidity needs and capital resource requirements for at least the next twelve months primarily through currently available cash and cash equivalents, cash flows from operations and access to the capital markets.

Risks and Challenges

While FAT Brands has demonstrated impressive growth and diversification, the company faces several risks and challenges. These include the highly competitive nature of the restaurant industry, the potential impact of macroeconomic conditions on consumer spending, the ability to successfully integrate and operate acquired brands, and the ongoing regulatory and legal environment. The company is also subject to risks related to its franchising model, such as the ability to attract and retain qualified franchisees.

Outlook

FAT Brands' multi-brand strategy and focus on organic growth, strategic acquisitions, and manufacturing optimization position the company well for continued expansion and value creation. The company's robust pipeline of new unit openings, international expansion, and synergistic brand integrations provide a clear path for future growth. While the company faces industry-wide headwinds, its diversified portfolio, strong franchisee relationships, and experienced management team suggest it is well-equipped to navigate the challenges and capitalize on the significant opportunities ahead. As FAT Brands continues to execute on its strategic priorities, the company appears poised to deliver long-term value for its shareholders.