8-K: FAT Brands Inc. Reports Mixed Second Quarter Results Amidst Expansion Efforts

FAT Brands Inc. announced a significant increase in revenue for the second quarter of 2024, but also reported a substantial net loss and a decrease in adjusted EBITDA compared to the same period last year.

Summary

• FAT Brands reported a 42.4% increase in total revenue to $152.0 million for the second quarter of 2024, compared to $106.8 million in the same period of 2023.
• This revenue growth was primarily driven by the acquisition of Smokey Bones and new restaurant openings.
• System-wide sales increased by 8.6% in the second quarter of 2024 compared to the prior year.
• However, same-store sales declined by 1.6% year-to-date.
• The company opened 24 new stores during the second quarter of 2024.
• FAT Brands experienced a net loss of $39.4 million, or $2.43 per diluted share, compared to a net loss of $7.1 million, or $0.53 per diluted share, in the second quarter of 2023.
• EBITDA was $6.8 million, down from $25.6 million in the same quarter last year.
• Adjusted EBITDA was $15.7 million, compared to $23.1 million in the second quarter of 2023.
• The adjusted net loss was $30.9 million, or $1.93 per diluted share, compared to an adjusted net income of $3.0 million, or $0.08 per diluted share, in the second quarter of 2023.
• The company has signed over 180 development deals year to date, compared to 226 deals for the entirety of 2023, bringing the current pipeline to approximately 1,100 locations.
• FAT Brands plans to open over 120 new restaurants in 2024, including 12 to 15 new Twin Peaks lodges.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with strong revenue growth offset by significant losses and declining profitability. The expansion plans are positive, but the financial results raise concerns about the company's current performance and debt levels.

Positives

• Total revenue saw a significant increase of 42.4% year-over-year.
• System-wide sales experienced a healthy growth of 8.6%.
• The company is rapidly expanding with 24 new store openings in the quarter.
• The development pipeline is strong with over 180 deals signed year-to-date.
• The company is focused on expanding the Twin Peaks brand with new lodges and conversions.
• The company has a large purchasing power of approximately $600 million, which should lead to cost savings.

Negatives

• The company reported a substantial net loss of $39.4 million, a significant increase from the $7.1 million loss in the same quarter last year.
• EBITDA decreased to $6.8 million from $25.6 million in the prior year's second quarter.
• Adjusted EBITDA also declined to $15.7 million from $23.1 million in the same period last year.
• Same-store sales declined by 1.6% year-to-date.
• Adjusted net loss was $30.9 million, compared to an adjusted net income of $3.0 million in the second quarter of 2023.
• General and administrative expenses increased significantly by $19.6 million, or 197.2%, primarily due to the Smokey Bones acquisition.

Risks

• The company's net loss has significantly increased year-over-year.
• EBITDA and adjusted EBITDA have both decreased compared to the prior year.
• Same-store sales are declining, indicating potential challenges in existing locations.
• Increased costs and expenses, particularly general and administrative expenses, are impacting profitability.
• The company's debt has increased due to new debt issuances, leading to higher interest expenses.
• The company is subject to significant business, economic and competitive risks, uncertainties and contingencies.

Future Outlook

The company plans to open over 120 new restaurants in 2024 and is focused on expanding the Twin Peaks brand. They aim to create value through organic expansion, strategic acquisitions, and divestments to manage debt and increase long-term stakeholder value. The company also aims to grow factory production to utilize ~60% excess capacity.

Management Comments

• Andy Wiederhorn, Chairman of FAT Brands, stated that the company has grown its portfolio to 18 brands with approximately 2,300 units.
• Ken Kuick, Co-Chief Executive Officer, noted the company has signed over 180 development deals year to date and is focused on expanding Twin Peaks.
• Rob Rosen, Co-Chief Executive Officer, highlighted opportunities in 2024 and the company's long-term strategy.

Industry Context

The restaurant industry is competitive, and FAT Brands is focused on growth through acquisitions and new store openings. The company's performance is being impacted by integration costs and increased expenses, which is not uncommon during periods of rapid expansion. The decline in same-store sales is a concern, as it indicates potential challenges in maintaining performance at existing locations.

Comparison to Industry Standards

• Comparing FAT Brands to other multi-brand restaurant groups like Dine Brands Global (owner of Applebee's and IHOP) or Restaurant Brands International (owner of Burger King, Tim Hortons, and Popeyes), FAT Brands is showing strong revenue growth due to acquisitions, but is struggling with profitability.
• Dine Brands, for example, focuses on a more mature franchise model with less emphasis on rapid acquisitions, and typically shows more stable same-store sales and profitability.
• Restaurant Brands International, while also acquisitive, has a more established global presence and generally reports higher EBITDA margins.
• FAT Brands' negative same-store sales growth contrasts with the positive trends seen in some of its competitors, indicating a need to focus on improving performance at existing locations.
• The high level of debt and interest expense at FAT Brands is also a concern compared to peers with stronger balance sheets.

Stakeholder Impact

• Shareholders are negatively impacted by the significant net loss and decreased profitability.
• Employees may be impacted by the company's focus on cost management and efficiency.
• Franchisees may benefit from the company's expansion plans and new store openings.
• Customers may see more locations and brand options as the company grows.
• Creditors are impacted by the company's increased debt and interest expenses.

Next Steps

• The company plans to continue expanding its restaurant portfolio with over 120 new openings in 2024.
• The company will focus on the expansion of the Twin Peaks brand, including new lodges and conversions.
• The company aims to grow factory production to utilize ~60% excess capacity.
• The company will continue to evaluate strategic divestments to manage outstanding debt.

Key Dates

Keywords

FAT Brands, restaurant franchising, financial results, revenue growth, net loss, EBITDA, same-store sales, new store openings, development deals, Twin Peaks, Smokey Bones