GEN Restaurant Group, Inc. (GENK) is a rapidly growing casual dining concept that has captured the hearts and tastebuds of Korean BBQ enthusiasts across the United States. Founded in 2011 by two Korean immigrants, the company has since blossomed into a 41-restaurant strong operation, with plans to continue its aggressive national expansion.

Business Overview

The company's unique business model revolves around an immersive dining experience, where customers are provided with built-in grills at their tables, allowing them to cook their own meat, seafood and vegetables. This interactive approach has proven to be a major draw, attracting diners seeking a hands-on, communal dining adventure. GEN's journey began with the opening of its first GEN Korean BBQ restaurant in September 2011 in California. Since then, the company has expanded its presence across multiple states, including Arizona, Hawaii, Nevada, Texas, New York, Washington, Florida, and Oregon.

The COVID-19 pandemic in 2020 significantly impacted the company's operations, temporarily halting its expansion plans in 2020 and 2021. However, GEN Restaurant Group demonstrated resilience by resuming its growth strategy in 2022, opening 6 new restaurants that year. In June 2023, the company completed its initial public offering (IPO), raising $46.2 million in net proceeds, which provided additional capital to fuel its ambitious expansion plans. Throughout its history, GEN has faced industry-specific challenges such as fluctuations in food and labor costs, which it has addressed through strategic menu price adjustments and operational improvements. The company also received approximately $16.8 million in Restaurant Revitalization Fund grants in 2021, providing crucial financial support during the pandemic.

Growth Strategy

GEN's journey has been one of steady, strategic growth. In 2023, the company opened 6 new locations, expanding its footprint to 36 restaurants by the end of the year. This momentum has only accelerated in 2024, with the company opening an additional 5 restaurants as of the end of the third quarter, bringing the total number of GEN restaurants to 41.

Financials

The company's financial performance has been impressive, although recent quarters have shown some challenges. For the full year 2023, GEN reported total revenue of $181.01 million, a 10.5% increase over 2022. Net income for the year came in at $8.41 million, with an operating cash flow of $22.16 million and free cash flow of $5.01 million. The company's restaurant-level adjusted EBITDA margin for 2023 was a healthy 11.9%.

In the third quarter of 2024, GEN reported revenue of $49.105 million, representing a 7.8% year-over-year increase. However, net income declined to $0.399 million, and operating cash flow decreased to $1.449 million, with free cash flow turning negative at -$6.826 million. These declines were primarily attributed to higher operating expenses, including increased general and administrative costs to support the company's growth, as well as higher pre-opening costs related to new restaurant openings.

For the first nine months of 2024, revenue for the restaurant operations segment reached $153.73 million, up 13.1% from $135.90 million in the same period of 2023. This growth was driven by the addition of new restaurant locations, partially offset by a 5.7% decline in comparable restaurant sales. Food costs increased 14.9% to $50.11 million, while payroll and benefits grew 12.0% to $47.49 million. The overall restaurant-level adjusted EBITDA margin was 18.0% in the first nine months of 2024, down from 19.3% a year earlier, reflecting the impact of inflationary cost pressures.

Net income for the first nine months of 2024 was $5.93 million, down from $11.63 million in the same period of 2023. Adjusted EBITDA was $14.68 million, or 9.5% of revenue, compared to $17.21 million, or 12.7% of revenue, a year earlier. The decline was attributed to inflationary pressures on costs as well as increased general and administrative expenses related to operating as a public company following the June 2023 IPO.

Liquidity

As of September 30, 2024, GEN had $22.05 million in cash and cash equivalents on its balance sheet, with no long-term debt outside of $4.4 million in government-funded EIDL loans. The company also has access to a $20 million revolving line of credit. As of December 31, 2023, GEN had a total debt of $121.07 million and a total equity of $37.52 million, resulting in a Debt/Equity ratio of approximately 3.23. The company's current ratio stood at 0.91, with a quick ratio of 0.87.

Expansion Plans

GEN's expansion pipeline remains robust, with 17 additional locations lined up and leases in various stages of negotiation for 15-20 more. The company is targeting the opening of 10-11 new restaurants by the end of 2024, a pace that would bring its total footprint to over 50 locations. Looking further ahead, GEN aims to have 75 to 80 total locations opened by the end of 2026.

Central to GEN's growth strategy has been its focus on identifying high-potential markets and securing prime real estate. The company's restaurants are typically located in high-traffic commercial areas, ranging from 4,500 to 12,000 square feet in size. This formula has proven effective, with new restaurants generating average payback periods of just 1.4 years prior to the company's IPO in 2023.

Recent Performance

GEN has demonstrated its ability to navigate macroeconomic headwinds, although not without challenges. During the third quarter of 2024, the company faced a variety of obstacles, including the impact of hurricanes in key markets, extreme heat waves, and cannibalization from new restaurant openings. Despite these factors, GEN was able to maintain a restaurant-level adjusted EBITDA margin above 18%, meeting their expectations for the quarter.

The company exceeded its own guidance for Q3 2024, reporting $0.2 million in net income or $0.01 of diluted earnings per share, and $0.9 million in adjusted net income or $0.03 of adjusted diluted earnings per share, despite initially expecting to incur a loss for the quarter.

Strategic Initiatives

One of the company's most promising initiatives has been the launch of its GEN gift card program at Costco locations. This partnership has been a resounding success, with the GEN gift cards becoming the top-selling items at participating Costco stores. The company is now in discussions to expand the program to Sam's Club, further bolstering its brand visibility and customer acquisition efforts.

Outlook

For the full year 2024, GEN is reiterating its expectation to open 10 to 11 new restaurants, helping them achieve total revenues between $200 million and $205 million, and a restaurant level adjusted EBITDA margin approaching 18% for the year.

While the restaurant industry has faced its share of obstacles in recent years, GEN Restaurant Group has consistently proven its ability to adapt and thrive. With a differentiated dining experience, a focus on operational excellence, and an ambitious growth strategy, the company appears well-positioned to continue its ascent as a dominant player in the Korean BBQ segment.

The broader restaurant industry, particularly the casual dining segment, has experienced a compound annual growth rate (CAGR) of around 5-7% over the past 5 years. This growth has been driven by factors such as population growth, increasing dining-out trends, and the rise of unique dining experiences, all of which play into GEN's strengths.

As GEN navigates the evolving landscape, investors would be wise to closely monitor the company's progress. With a strong financial foundation, a robust expansion pipeline, and a proven track record of success, GEN Restaurant Group stands out as a promising investment opportunity in the dynamic world of casual dining.