FAT Brands Inc. (NASDAQ:FATBP) is a leading global franchising company that has rapidly expanded its portfolio of iconic restaurant brands over the past several years. With a diverse collection of 18 distinct concepts spanning quick-service, fast casual, casual dining, and polished casual dining segments, FAT Brands has established itself as a formidable player in the dynamic food service industry.
Company Background and Growth Strategy
The company’s origins trace back to 2017, when it was founded as a spin-off from Fog Cutter Capital Group. Since then, FAT Brands has embarked on an aggressive growth strategy, fueled by strategic acquisitions and organic expansion of its existing brands. In its early years, the company focused on expanding its initial portfolio through acquisitions, including Fatburger and Buffalo’s Express in 2018, followed by Marble Slab Creamery, Johnny Rockets, and Fazoli’s in 2019 and 2020. These strategic moves allowed FAT Brands to quickly build out its brand portfolio and grow its footprint.
During the COVID-19 pandemic in 2020 and 2021, FAT Brands faced challenges that impacted its restaurant operations. However, the company successfully navigated this period by optimizing its franchising model and centralizing support functions, which allowed it to emerge from the pandemic in a strong position. In late 2021, FAT Brands continued its expansion strategy with the acquisitions of Twin Peaks and Smokey Bones, further diversifying its portfolio and marking an important milestone in its growth.
Current Footprint and Business Model
Today, the company’s footprint encompasses over 2,300 locations across more than 40 countries and 49 U.S. states or territories. FAT Brands’ success can be attributed to its focus on an asset-light franchising model, centralized management platform, and disciplined approach to brand acquisitions. The company has demonstrated an ability to integrate new concepts into its portfolio and drive operational efficiencies through shared services and corporate overhead synergies.
One of the key drivers of FAT Brands’ success has been its focus on franchising. Leveraging its deep expertise in this area, the company has successfully scaled its operations by partnering with experienced franchisees who share its vision for growth. As of September 29, 2024, approximately 92% of the company’s locations were franchised, allowing FAT Brands to minimize capital-intensive restaurant operations while still benefiting from royalty and advertising fee income.
Financials
From a financial perspective, FAT Brands has experienced mixed results in recent quarters. In the third quarter of 2024, the company reported a 31.1% year-over-year increase in total revenue, reaching $143.4 million. This growth was primarily driven by the acquisition of Smokey Bones in September 2023. However, the company also faced higher costs and expenses, leading to a net loss of $44.8 million, or $2.74 per diluted share, compared to a net loss of $24.7 million, or $1.59 per diluted share, in the prior-year period.
For the most recent fiscal year (2023), FAT Brands reported total revenue of $480.46 million, with a net loss of $90.11 million. Operating cash flow for 2023 was negative $35.61 million, while free cash flow was negative $57.11 million. The company’s financial position remains challenging, with a debt-to-equity ratio of -3.18 as of Q3 2024. Cash on hand stood at $16.84 million, with a current ratio of 0.30 and a quick ratio of 0.27, indicating potential liquidity concerns.
In terms of geographic performance, FAT Brands operates primarily in the United States, with $440.00 million (98.4%) of revenue coming from the US in the first 39 weeks of 2024. The remaining $7.40 million (1.6%) of revenue was generated from international markets.
Strategic Priorities and Growth Initiatives
Despite these challenges, FAT Brands remains focused on executing its strategic priorities, which include organic growth, growth by acquisition, and leveraging its Georgia-based manufacturing facility to drive efficiencies. In the third quarter, the company opened 22 new units, bringing its year-to-date openings to 71 units, and it is on track to end the year with over 100 new units.
One of the company’s most promising areas of growth has been its Twin Peaks brand, a polished casual dining concept that has seen exceptional performance. During the quarter, Twin Peaks locations continued to achieve average unit volumes of approximately $6 million annually, with select high-performing markets seeing AUVs as high as $9 million to $14 million. To further capitalize on this success, FAT Brands has begun converting certain Smokey Bones locations into Twin Peaks, a process that the company expects will deliver significant advantages, including reduced construction time and cost savings.
FAT Brands has provided guidance on its expansion plans, stating that it intends to open approximately 40 new units in Q4 2024, ending the year with over 100 new units. The company’s development pipeline remains robust, with signed agreements to open approximately 1,000 new units in the coming years. Once fully operational, these additional units are projected to incrementally contribute $50 million to $60 million to FAT Brands’ annual adjusted EBITDA. Furthermore, the company plans to open another 19 Twin Peaks lodges in 2025, including 7 Smokey Bones conversions, with 5 corporate stores and 14 franchised stores.
Strategic Transactions and Value Creation
In addition to its organic growth initiatives, FAT Brands has also been actively exploring opportunities to unlock value for shareholders through strategic transactions. In November 2024, the company announced that its Twin Hospitality Group subsidiary, which operates the Twin Peaks and Smokey Bones brands, had filed a Form 10 registration statement with the SEC, paving the way for a potential standalone public listing of these concepts.
The proposed transaction, if completed, would allow FAT Brands to deleverage its balance sheet and provide additional resources to fund the construction of new restaurants across its portfolio. The company’s management team believes that this strategic move will enhance shareholder value and better position the Polished Casual Dining segment for continued growth. However, the timing and size of the potential Twin Peaks IPO or alternative transaction are subject to market conditions.
Risks and Challenges
Looking ahead, FAT Brands faces a range of risks and challenges, including ongoing macroeconomic headwinds, potential regulatory changes, and the need to effectively integrate and optimize its growing brand portfolio. The company has also been embroiled in a legal dispute with the U.S. Department of Justice and the SEC related to allegations of improper lending practices and financial reporting issues, which could result in significant fines or other penalties.
Specifically, the company is facing government charges and shareholder litigation related to alleged improper extension of credit to the former CEO and failure to disclose certain related party transactions. FAT Brands is evaluating these charges and intends to vigorously defend itself against these allegations.
Future Outlook
Despite these risks, FAT Brands remains committed to its long-term growth strategy and is working to navigate the evolving industry landscape. With a diverse portfolio of highly recognizable restaurant brands, a focus on franchising, and a pipeline of new unit openings, the company is well-positioned to continue expanding its footprint and driving shareholder value over the coming years.
FAT Brands operates primarily in two main product segments: franchised restaurants and company-owned restaurants. The franchised restaurants segment is the primary driver of the company’s revenue and growth, generating income through initial franchise fees and ongoing royalties from franchisees. This asset-light model allows for expansion with minimal incremental overhead costs.
The company-owned restaurants segment, which includes the recently acquired Smokey Bones brand, generated $99.2 million in revenue during the third quarter of 2024, up from $62.6 million in the prior year period. While the franchised model remains the core focus, company-owned restaurants provide an opportunity to test new concepts and potentially convert locations to franchises as part of refranchising efforts.
As FAT Brands continues to execute its growth strategy, it will need to carefully manage its financial position, address ongoing legal challenges, and capitalize on the potential of its diverse brand portfolio to drive long-term success in the competitive restaurant industry.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.