The ONE Group Hospitality, Inc. (NASDAQ:STKS) has solidified its position as a global leader in the high-end and polished casual vibe dining segment with its recent acquisition of Safflower Holdings Corp., the parent company of the iconic Benihana and RA Sushi restaurant brands. This strategic move not only aligns with the company's vision of becoming the undisputed global leader in vibe dining but also presents significant synergistic opportunities that are expected to drive substantial value for shareholders.

Financials

In the first quarter of 2024, The ONE Group reported total GAAP revenues of $85 million, a 3% increase from the $82.6 million generated in the same period of the prior year. This top-line growth was primarily driven by the opening of six new restaurants since July 2023, which contributed significant revenues at margins above the rest of the system. However, the company experienced a 7.9% decrease in comparable sales, with STK and Kona Grill reporting declines of 6.8% and 9.7%, respectively, amid a challenging consumer environment.

Despite the headwinds, The ONE Group was able to maintain its restaurant-level margins at 16.1% in the first quarter of 2024, compared to 16.4% in the same period of the prior year. This was achieved through the implementation of cost-saving initiatives enacted in the fourth quarter of 2023, which generated approximately $3 million in restaurant operating profit during the quarter. The company also managed its general and administrative expenses effectively, with G&A, excluding stock-based compensation, as a percentage of revenue improving by 20 basis points year-over-year.

The company's adjusted EBITDA for the first quarter of 2024 was $10.5 million, nearly in line with the $10.9 million reported in the same period of the prior year. Net loss attributable to The ONE Group Hospitality, Inc. was $2.1 million, or $0.07 per share, compared to net income of $2.6 million, or $0.08 per share, in the first quarter of 2023. Adjusted net loss was $0.6 million, or $0.02 per share, compared to adjusted net income of $3.2 million, or $0.10 per share, in the prior-year period.

Outlook

For the full year 2024, The ONE Group is projecting total GAAP revenues between $700 million and $740 million, which includes an additional $340 million to $360 million from the Benihana acquisition. Managed, franchise, and license fee revenue is expected to be between $17 million and $19 million, with an additional $2 million to $3 million from Benihana. The company anticipates total owned operating expenses as a percentage of owned restaurant net revenue to be approximately 83%, and total G&A, excluding stock-based compensation, to be around $40 million. Adjusted EBITDA is expected to be between $95 million and $100 million, with restaurant pre-opening expenses ranging from $7 million to $9 million. The effective income tax rate is projected to be between 5% and 10%, and total capital expenditures, net of allowances received from landlords, are expected to be between $50 million and $60 million. The ONE Group plans to add 8 to 11 new venues in 2024, including 1 to 2 company-owned Benihana locations, 1 company-owned RA Sushi restaurant, 2 to 3 company-owned Kona Grill restaurants, and 3 to 4 company-owned STK restaurants.

Business Overview

The acquisition of Benihana and RA Sushi is a transformative move for The ONE Group, as it diversifies the company's portfolio of high-energy, experiential dining concepts and strengthens its position as a global leader in the vibe dining segment. The synergies expected from this combination, including the ability to leverage economies of scale in commodity costs, drive menu mix through culinary innovation, and utilize the company's robust digital capabilities and reservation management system, are expected to create significant value for shareholders.

The ONE Group's strategic priorities for 2024 include a focus on driving sales, improving Kona Grill margins, relying on self-funded growth for company-owned operations, successfully integrating Benihana, and continuing to return value to shareholders through share repurchases. The company's management team is confident in its ability to navigate the current challenging sales environment and capitalize on growth opportunities, positioning The ONE Group for long-term success.

Liquidity

The company's financial position remains strong, with a net debt position of approximately $300 million following the Benihana acquisition. The ONE Group's balance sheet includes a $40 million revolving credit facility with no financial covenants, providing ample liquidity to support its growth initiatives.

Geographic Presence

Geographically, The ONE Group operates 63 venues, including 28 STKs, 27 Kona Grills, and 8 F&B venues under the ONE Hospitality brand, across major metropolitan areas in North America, Europe, and the Middle East. The company's international presence, which includes 13 venues, provides diversification and exposure to high-growth markets.

Revenue Breakdown

In terms of revenue breakdown, the company's owned restaurant net revenue accounted for 95.9% of total revenues in the first quarter of 2024, while management, license, and incentive fee revenue contributed the remaining 4.1%. The decrease in management, license, and incentive fee revenue during the quarter was primarily attributed to lower revenues at the company's STK restaurants in North America and the early termination of the STK Westminster management agreement in the fourth quarter of 2023.

Conclusion

The ONE Group's financial performance in the first quarter of 2024 was impacted by the challenging consumer environment, as evidenced by the decline in comparable sales. However, the company's ability to maintain restaurant-level margins and effectively manage its general and administrative expenses demonstrates its operational discipline and resilience. The acquisition of Benihana and RA Sushi is expected to further strengthen the company's position in the high-end and polished casual vibe dining segment, with significant synergistic opportunities that should drive long-term value creation for shareholders.

Looking ahead, The ONE Group's focus on driving sales, improving Kona Grill margins, self-funded growth, successful Benihana integration, and shareholder value creation through share repurchases positions the company well to navigate the evolving market conditions and capitalize on growth opportunities. With a diversified portfolio of premier dining concepts, a strong financial profile, and a seasoned management team, The ONE Group is poised to solidify its leadership position in the global vibe dining industry.