Business Overview and History
Founded in 2017, FAT Brands has quickly become a force to be reckoned with in the restaurant franchising space. The company's growth strategy has been driven by a series of strategic acquisitions and mergers. In December 2020, FAT Brands completed a significant merger with Fog Cutter Capital Group Inc., which provided the company with additional resources and a platform to pursue further acquisitions and expand its business.
The COVID-19 pandemic presented a major challenge for FAT Brands, as it did for the entire restaurant industry. The company had to navigate temporary restaurant closures and reduced customer traffic, but was able to adapt and implement strategies to support its franchisees and maintain business operations during this difficult period.
In late 2021, FAT Brands made two notable acquisitions, adding Twin Peaks and Fazoli's to its brand portfolio. These acquisitions further expanded the company's geographical presence and provided additional growth opportunities. As of September 2024, FAT Brands owned 18 restaurant brands with approximately 2,300 locations open or under construction, of which about 92% were franchised.
The company's asset-light franchising model has been a key factor in its ability to scale rapidly and generate strong profit margins and cash flow. However, FAT Brands has also faced legal and regulatory challenges. In 2021, the U.S. Attorney's Office and the SEC opened investigations relating to the company's 2020 merger with Fog Cutter Capital Group and transactions between the entities. These investigations were ongoing as of the company's most recent public filings.
In May 2024, the U.S. Department of Justice indicted the company on two violations of the Sarbanes-Oxley Act for extending credit to the former CEO. Concurrently, the SEC filed a complaint against the company alleging various disclosure and internal control failures. Additionally, the company is involved in shareholder derivative litigation related to its 2020 merger and 2021 recapitalization transactions.
Financial Performance and Ratios
FAT Brands' financial performance has been a mixed bag in recent years, with the company navigating a challenging macroeconomic environment and the impact of the COVID-19 pandemic. In fiscal year 2024, the company reported total revenue of $592.7 million, a 23.4% increase from the prior year. However, the company's net income for the year was a loss of $122.43 million, reflecting the impact of various one-time charges and impairments.
The company's financial ratios paint a more nuanced picture of its overall financial health. As of the end of fiscal year 2024, FAT Brands had a current ratio of 0.30, indicating potential liquidity challenges. The company's debt ratio stood at 1.14, suggesting a highly leveraged balance sheet, with total debt of $1.2 billion. The company's return on assets and return on equity were -14.73% and 51.40%, respectively, highlighting the capital-intensive nature of its business model.
Quarterly Performance and Guidance
In the fourth quarter of fiscal year 2024, FAT Brands reported total revenue of $145.3 million, an 8.4% decrease compared to the prior-year quarter. The company's net loss for the quarter was $67.4 million, or $4.06 per diluted share, compared to a net loss of $26.2 million, or $1.68 per share, in the same period a year earlier.
The company's performance in the fourth quarter was impacted by a number of factors, including the closure of underperforming Smokey Bones locations, as well as non-cash impairment charges related to goodwill and other intangible assets. Additionally, the company's results were affected by the timing of the fiscal calendar, with the fourth quarter of 2023 containing 14 weeks compared to 13 weeks in the fourth quarter of 2024.
Looking ahead, FAT Brands has provided guidance for fiscal year 2025, anticipating the opening of more than 100 new restaurant locations across its portfolio. The company also expects to make progress on its deleveraging efforts, with plans to raise equity at its Twin Hospitality Group subsidiary and reduce debt by $75 million or more during the year.
FAT Brands ended 2024 with total revenue increasing 23.4% to $592.7 million and system-wide sales increasing 3.1% to $2.4 billion. For 2025, the company plans to open over 100 new locations, having already opened 17 units year-to-date. FAT Brands anticipates strong organic growth across their portfolio in 2025, particularly with Great American Cookies, Marble Slab Creamery, Fatburger, Buffalo's Express, Round Table Pizza, and Fazoli's.
The company's current development pipeline consists of signed agreements for approximately 1,000 additional locations, which includes over 250 units that were signed in 2024. Once these units are open, FAT Brands expects them to generate approximately $50 million in incremental annual adjusted EBITDA.
Risks and Challenges
Despite its impressive growth trajectory, FAT Brands faces a number of risks and challenges that could impact its future performance. The company's highly leveraged balance sheet and liquidity concerns pose a significant risk, particularly in the face of a potential economic downturn or rising interest rates.
Additionally, the company's reliance on franchisees for the majority of its restaurant operations introduces inherent risks, as the success of the business is largely dependent on the financial health and operational capabilities of its franchisee network. The company's ability to effectively manage and support its franchisees will be crucial to its long-term success.
Furthermore, the highly competitive nature of the restaurant industry presents ongoing challenges for FAT Brands, as the company must continually adapt to evolving consumer preferences and industry trends. The company's ability to innovate and differentiate its brands will be a key determinant of its future performance.
Financials
FAT Brands Inc. has shown a mixed financial performance in recent years. The company's revenue has been growing, with total revenue reaching $592.7 million in fiscal year 2024, representing a 23.4% increase from the previous year. However, the company has been operating at a loss, with a net loss of $122.43 million reported for the same fiscal year. This loss reflects the impact of various one-time charges and impairments, as well as the challenges posed by the COVID-19 pandemic and other macroeconomic factors.
The company's financial ratios provide further insight into its financial health. FAT Brands' return on assets (ROA) of -14.73% and return on equity (ROE) of 51.40% highlight the capital-intensive nature of its business model and the challenges it faces in generating profits from its assets. The company's debt ratio of 1.14 indicates a highly leveraged balance sheet, with total debt standing at $1.2 billion.
In the most recent quarter, FAT Brands reported revenue of $145.3 million, a decrease of 8.4% year-over-year. This decline was primarily driven by the incremental operating week in the prior year quarter, which contributed $11.3 million in revenue, lower same-store sales, and the closure of Smokey Bones locations for conversion into Twin Peaks lodges, partially offset by revenue generated by the new Twin Peaks lodges.
The company's net loss for the quarter widened to $67.4 million, or $4.06 per diluted share, compared to a net loss of $26.2 million, or $1.68 per share in the prior year quarter. The increased net loss was primarily due to a $30.6 million non-cash goodwill and intangible asset impairment.
Operating cash flow for the quarter was negative $10.4 million, while free cash flow was negative $11.0 million.
Liquidity
Liquidity is a key concern for FAT Brands, as evidenced by its current ratio of 0.30 as of the end of fiscal year 2024. This low current ratio suggests that the company may face challenges in meeting its short-term obligations with its current assets. The company's high debt levels further compound these liquidity concerns, as a significant portion of its cash flow must be directed towards servicing its debt obligations.
To address these liquidity challenges, FAT Brands has outlined plans to deleverage its balance sheet. The company aims to raise equity at its Twin Hospitality Group subsidiary and reduce its debt by $75 million or more during the upcoming fiscal year, including a minimum of $25 million by late April. These efforts, if successful, could help improve the company's liquidity position and provide more financial flexibility for future growth initiatives.
As of the most recent reporting period, FAT Brands had $16.8 million in cash on hand. The company's debt-to-equity ratio stood at -3.24, further highlighting its highly leveraged position. The quick ratio, which measures the company's ability to meet its short-term obligations with its most liquid assets, was 0.27, indicating potential liquidity challenges.
Business Segments and Strategy
FAT Brands operates in three primary business segments: franchise, company-owned restaurants, and factory operations.
The franchise segment is the core of FAT Brands' business model, generating revenue through initial franchise fees and ongoing royalties. As of September 29, 2024, approximately 92% of the company's 2,300 total locations were franchised. This asset-light franchisor model allows FAT Brands to expand its brand portfolio and footprint with minimal incremental corporate overhead, leveraging significant economies of scale.
The company-owned restaurant segment generates revenue from the direct sale of food and beverages at corporate-run locations. During the thirty-nine weeks ended September 29, 2024, restaurant sales from company-owned locations totaled $312.59 million, up from $187.96 million in the same period of the prior year. This increase was largely driven by the acquisition of the Smokey Bones restaurant chain in September 2023.
The factory segment generates revenue from the sale of products, primarily dough, to the company's franchised and company-owned restaurants. Factory revenues were $28.60 million in the first three quarters of 2024, compared to $28.17 million in the same period of 2023.
FAT Brands is focused on three core strategic initiatives: organic growth across its existing brand portfolio, strategic acquisitions, and expanding manufacturing capabilities. The company plans to refranchise its 57 company-owned Fazoli's locations, leaving it with approximately 33 Hot Dog on a Stick locations out of its 2,300 total locations (or 2,125 excluding Twin Peaks and Smokey Bones).
The company's manufacturing facility in Georgia, which currently generates approximately $38 million in annual sales from franchisees with a 40% profit margin, has substantial room for expansion with a near-term goal of increasing utilization to 60-70%.
Conclusion
FAT Brands' journey has been marked by both successes and challenges, as the company has navigated a dynamic and competitive restaurant landscape. While the company's financial performance has been mixed in recent years, its robust development pipeline, international expansion, and strategic focus on synergies and cost reductions suggest that FAT Brands is well-positioned to capitalize on the significant growth opportunities that lie ahead.
As the company continues to execute on its strategic initiatives, investors will be closely watching its ability to deleverage its balance sheet, effectively support its franchisee network, and adapt to the changing industry landscape. By addressing these critical factors, FAT Brands may be able to unlock the full potential of its diverse brand portfolio and solidify its position as a leading player in the restaurant franchising sector.