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

FAT Brands Inc. announced a 31.1% increase in total revenue for the third quarter of 2024, but also reported a net loss of $44.8 million.

Summary

• FAT Brands Inc. reported a 31.1% increase in total revenue to $143.4 million for the third quarter of 2024, compared to $109.4 million in the same period of 2023.
• The revenue growth was primarily driven by the acquisition of Smokey Bones in September 2023 and new restaurant openings.
• System-wide sales grew by 6.4% in the third quarter of 2024, while year-to-date same-store sales declined by 2.7%.
• The company opened 22 new units during the third quarter, bringing the year-to-date total to 71 new units, and is on track to reach 100 new units by the end of the year.
• FAT Brands signed 225 development deals year-to-date, compared to 226 in all of 2023, resulting in a development pipeline of approximately 1,000 locations.
• The company reported 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 third quarter of 2023.
• EBITDA was $1.7 million, down from $10.8 million in the same quarter of the previous year, and adjusted EBITDA was $14.1 million, compared to $21.9 million in the third quarter of 2023.
• Adjusted net loss was $38.0 million, or $2.34 per diluted share, compared to an adjusted net loss of $17.1 million, or $1.14 per diluted share, in the third quarter of 2023.
• Costs and expenses increased by 48.1% to $152.2 million, primarily due to the Smokey Bones acquisition and increased activity from company-owned restaurants and the company's factory.
• General and administrative expenses increased by 41.0% to $34.5 million, mainly due to the Smokey Bones acquisition and increased professional fees related to pending litigation.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with strong revenue growth offset by significant losses and declining same-store sales. The potential for a Twin Peaks IPO is a positive, but the overall financial performance is concerning.

Positives

• Total revenue increased by 31.1% year-over-year, reaching $143.4 million.
• System-wide sales grew by 6.4% in the third quarter.
• The company opened 22 new units in the third quarter, and 71 year-to-date.
• FAT Brands has a strong development pipeline of approximately 1,000 locations.
• The company is on track to open 100 new units by the end of the year.
• The company has expanded its brand portfolio to 18 distinct concepts.
• The company's footprint has increased tenfold, encompassing over 2,300 locations across more than 40 countries and 49 U.S. states or territories.

Negatives

• The company reported a net loss of $44.8 million, or $2.74 per diluted share, for the third quarter.
• EBITDA decreased to $1.7 million from $10.8 million in the same quarter of the previous year.
• Adjusted EBITDA decreased to $14.1 million from $21.9 million in the same quarter of the previous year.
• Adjusted net loss was $38.0 million, or $2.34 per diluted share.
• Year-to-date system-wide same-store sales declined by 2.7%.
• Costs and expenses increased by 48.1% to $152.2 million.
• General and administrative expenses increased by 41.0% to $34.5 million.

Risks

• The company's net loss has significantly increased compared to the same period last year.
• The decline in same-store sales growth indicates potential challenges in maintaining sales at existing locations.
• Increased costs and expenses, particularly in general and administrative areas, are impacting profitability.
• The company is facing increased professional fees related to pending litigation.
• The company's debt has increased due to new debt issuances, leading to higher interest expenses.
• The company's adjusted EBITDA and adjusted net loss have worsened compared to the previous year.

Future Outlook

The company intends to continue its accelerated growth strategy, particularly in the Polished Casual category, and is exploring a potential IPO or alternative transaction for Twin Peaks and Smokey Bones. They also plan to refinance Twin Peaks securitization debt.

Management Comments

• Andy Wiederhorn, Chairman of FAT Brands, stated that the company has expanded its brand portfolio to include 18 distinct concepts and increased its footprint tenfold over the last three years.
• Ken Kuick, Co-Chief Executive Officer of FAT Brands, highlighted the company's focus on accelerated growth in the Polished Casual category, particularly through Twin Peaks.
• Rob Rosen, Co-Chief Executive Officer of FAT Brands, mentioned the potential IPO or alternative transaction for Twin Peaks and Smokey Bones as a strategic opportunity to unlock value for FAT shareholders.

Industry Context

The restaurant industry is experiencing a mix of growth and challenges, with companies focusing on expansion and brand diversification. FAT Brands' strategy of acquiring and developing multiple restaurant concepts aligns with this trend, but the company is facing headwinds in same-store sales and profitability.

Comparison to Industry Standards

• While FAT Brands' revenue growth of 31.1% is strong, the decline in same-store sales of 2.7% is concerning, as many competitors are seeing positive same-store sales growth.
• Companies like Restaurant Brands International (RBI), which owns Burger King and Tim Hortons, and McDonald's have reported positive same-store sales growth in recent quarters, indicating that FAT Brands is underperforming in this area.
• FAT Brands' adjusted EBITDA of $14.1 million is significantly lower than that of larger, more established restaurant groups, which often report adjusted EBITDA in the hundreds of millions or billions of dollars.
• The net loss of $44.8 million is also a significant concern, as many publicly traded restaurant companies are profitable, or at least have smaller losses.
• FAT Brands' aggressive acquisition strategy and rapid expansion are similar to that of companies like Inspire Brands, which has acquired multiple restaurant chains, but Inspire Brands has generally been more successful in integrating and growing its acquired brands.

Legal Proceedings

• The company is facing increased professional fees related to pending litigation.

Stakeholder Impact

• Shareholders are negatively impacted by the significant net loss and declining profitability.
• Employees may be affected by the company's cost-cutting measures and restructuring efforts.
• Customers may experience changes in service and offerings as the company integrates new brands and locations.
• Suppliers may see changes in demand and purchasing patterns as the company expands and consolidates its operations.
• Creditors may be concerned about the company's increasing debt and financial losses.

Next Steps

• The company will continue to focus on accelerated growth in the Polished Casual category.
• The company will explore a potential IPO or alternative transaction for Twin Peaks and Smokey Bones.
• The company intends to refinance Twin Peaks securitization debt.
• The company will continue to build out its 1,100+ unit new store pipeline.
• The company will focus on driving adjusted EBITDA growth from new stores and factory production.
• The company will maintain strong liquidity and continue to build net asset value for future liquidity events.

Key Dates

Keywords

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