Business Overview: Crafting a Diversified Restaurant Empire
FAT Brands Inc. (NASDAQ:FAT) is a leading global franchising company that owns and operates a diverse portfolio of 18 iconic restaurant brands, including Round Table Pizza, Fatburger, Marble Slab Creamery, Johnny Rockets, Fazoli’s, Twin Peaks, Smokey Bones, Great American Cookies, Hot Dog on a Stick, Buffalo’s Cafe Express, Hurricane Grill & Wings, Pretzelmaker, Elevation Burger, Native Grill & Wings, Yalla Mediterranean, and Ponderosa and Bonanza Steakhouses. The company’s strategic focus on organic growth, strategic acquisitions, and leveraging its manufacturing capabilities has positioned it as a formidable player in the dynamic restaurant industry.
FAT Brands Inc. was founded in 2017 as a leading multi-brand restaurant franchising company. The company’s initial portfolio included just a few restaurant brands, such as Fatburger and Buffalo’s Express. However, FAT Brands has rapidly expanded its portfolio through a series of strategic acquisitions over the past several years. This aggressive growth strategy has led to the acquisition of numerous well-known restaurant concepts, including Round Table Pizza, Marble Slab Creamery, Johnny Rockets, Fazoli’s, Twin Peaks, Smokey Bones, Great American Cookies, and Hot Dog on a Stick, among others.
The company’s expansion has been nothing short of remarkable, with its footprint growing tenfold over the past three years. FAT Brands now boasts over 2,300 locations across more than 40 countries and 49 U.S. states or territories. A key aspect of the company’s business model is its asset-light approach, with approximately 92% of its locations being franchised.
Despite facing challenges such as the impact of the COVID-19 pandemic and legal proceedings related to actions by its former CEO, FAT Brands has demonstrated resilience and continued to execute on its growth strategy. Notable acquisitions include Twin Peaks and Fazoli’s in 2021, which further strengthened the company’s diverse portfolio of restaurant concepts.
Financial Performance: Navigating Challenges, Maintaining Resilience
FAT Brands’ financial performance in recent years has been marked by both challenges and resilience. In the fiscal year 2023, the company reported total revenue of $480.46 million, down from $407.22 million in 2022, reflecting the impact of the COVID-19 pandemic on its operations. The company’s adjusted EBITDA for the year 2023 stood at $58.09 million, showcasing its ability to navigate the turbulent environment. However, FAT Brands reported a net loss of $90.11 million for the fiscal year 2023, with operating cash flow of -$35.61 million and free cash flow of -$57.11 million.
During the first nine months of 2024, FAT Brands reported total revenue of $447.37 million, a 39% increase compared to the same period in the prior year. This substantial growth was primarily driven by the strategic acquisition of Smokey Bones in September 2023, as well as continued expansion of the company’s existing brands. Despite the revenue growth, the company reported a net loss of $122.43 million during the first nine months of 2024, largely due to increased costs and expenses associated with the Smokey Bones acquisition and higher interest expenses.
In the most recent quarter (Q3 2024), FAT Brands reported revenue of $143.37 million, representing a 31.1% increase year-over-year. However, the company recorded a net loss of $44.76 million for the quarter, with operating cash flow of -$3.22 million and free cash flow of -$11.09 million.
Operational Highlights: Organic Growth, Acquisitions, and Manufacturing Prowess
FAT Brands’ growth strategy is centered around three key pillars: organic growth, strategic acquisitions, and leveraging its manufacturing capabilities.
On the organic growth front, the company has been consistently opening new locations across its brand portfolio, with 62 new units opened during the first three quarters of 2024, and plans to end the year with over 100 new units. The company’s robust development pipeline includes signed agreements to open approximately 1,000 new units in the coming years, which are projected to contribute an incremental $50 million to $60 million in annual adjusted EBITDA once fully operational.
In terms of acquisitions, FAT Brands continues to assess brands with growth potential that complement its existing portfolio, prioritizing franchise-based concepts with strong momentum and proven market traction. The company’s strategic acquisition of Smokey Bones in September 2023 has been particularly noteworthy, as it has enabled the company to fuel the rapid expansion of its Twin Peaks brand through a conversion program that reduces construction time and costs compared to building new locations from the ground up.
FAT Brands’ third strategic priority is leveraging its Georgia-based manufacturing facility, which produces cookie dough and other products for several of the company’s brands. The facility currently operates at approximately 40% to 45% of its capacity, and the company continues to pursue additional third-party manufacturing opportunities to further utilize its excess capacity.
Financials
FAT Brands’ financial performance has shown both challenges and resilience in recent years. The company reported total revenue of $480.46 million in fiscal year 2023, down from $407.22 million in 2022. However, the adjusted EBITDA for 2023 was $58.09 million, demonstrating the company’s ability to navigate difficult market conditions.
In the first nine months of 2024, FAT Brands saw a significant increase in revenue, reporting $447.37 million, a 39% increase compared to the same period in the previous year. This growth was primarily driven by the acquisition of Smokey Bones and the expansion of existing brands. Despite this revenue growth, the company reported a net loss of $122.43 million during this period, largely due to increased costs associated with the Smokey Bones acquisition and higher interest expenses.
The company’s performance by geographic markets shows a strong focus on the United States, with 98.3% of revenue generated domestically during the first nine months of 2024, while the remaining 1.7% came from international markets.
In the most recent quarter (Q3 2024), FAT Brands achieved system-wide sales of $600.7 million, representing a 6.4% increase year-over-year. Adjusted EBITDA for Q3 2024 was $14.1 million, compared to $21.9 million in the prior year quarter.
Liquidity
FAT Brands’ liquidity position reflects the challenges faced by the company. As of the most recent reporting period, the company had a debt-to-equity ratio of -3.18, indicating a highly leveraged financial structure. Cash on hand stood at $16.84 million, while the current ratio was 0.30 and the quick ratio was 0.27, suggesting potential short-term liquidity challenges.
While the company’s asset-light business model, with approximately 92% of its locations being franchised, contributes to its financial flexibility, the current liquidity metrics indicate a need for careful financial management and potential capital raising efforts to support ongoing operations and growth initiatives.
Navigating Challenges and Unlocking Value
FAT Brands has faced its share of challenges in recent years, including the impact of the COVID-19 pandemic, ongoing supply chain disruptions, and labor shortages. However, the company has demonstrated its resilience and adaptability, implementing cost-saving measures and leveraging its diversified brand portfolio to navigate these headwinds.
One significant development for the company is the planned public listing of its Twin Peaks and Smokey Bones brands. In May 2024, FAT Brands filed a Form 10 Registration Statement with the SEC, outlining its plans to distribute approximately 5% of the Class A Common Stock of Twin Hospitality Group, the operating unit for the Twin Peaks and Smokey Bones brands, to FAT Brands’ common shareholders. This move is expected to unlock value for FAT Brands’ shareholders and provide the Twin Peaks and Smokey Bones brands with the flexibility to pursue their own growth strategies as a standalone public company.
The company has also faced legal and regulatory challenges. In December 2021, the U.S. Attorney’s Office and SEC opened investigations into the Company and former CEO Andrew Wiederhorn regarding certain transactions and compensation. On May 10, 2024, the Department of Justice indicted the Company on charges related to extending credit to Wiederhorn. The SEC also filed a complaint against the Company, Wiederhorn, and other executives regarding related party transactions and internal control issues. A civil securities class action lawsuit was subsequently filed in June 2024 by an investor against the Company and executives. These ongoing government investigations and litigation present risks and potential consequences for the Company, though the outcomes cannot be reasonably estimated at this time.
Future Outlook and Growth Initiatives
Despite the challenges, FAT Brands continues to focus on growth and expansion. The company plans to open approximately 40 new units in Q4 2024, ending the year with over 100 new units. Looking ahead, FAT Brands has a robust development pipeline, with plans to open approximately 1,000 new units in the coming years, which is projected to contribute $50 million to $60 million in additional annual adjusted EBITDA once fully operational.
The company has particularly ambitious plans for its Twin Peaks brand, with 19 new locations scheduled to open in 2025, including 7 conversions from Smokey Bones. Over the coming years, the Twin Peaks development pipeline calls for more than 100 additional restaurants, which could potentially drive system-wide sales to more than $1 billion.
Conclusion: A Diversified Powerhouse Primed for Expansion
FAT Brands’ journey as a multi-brand restaurant franchising company has been marked by strategic vision, operational excellence, and a relentless pursuit of growth. With its diversified portfolio of iconic brands, innovative approach to brand development and manufacturing, and a proven track record of navigating industry challenges, FAT Brands is well-positioned to continue its expansion and deliver value for its shareholders. As the company navigates the evolving restaurant landscape, investors will closely monitor its ability to capitalize on emerging trends, drive organic growth, and identify strategic acquisition opportunities that further strengthen its market position. While the company faces significant challenges, including legal and financial hurdles, its commitment to growth and strategic initiatives suggests a determined effort to overcome these obstacles and build long-term value in the competitive restaurant industry.
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