A Changing of the Guard

Fourth Quarter and Full Year 2022 Results

Selling Additional Notes

FAT Brands at ICR Conference

Joe Gomes

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Consumer Cyclical

Restaurants

FAT Brands Inc.

Third Quarter 2022 Operating Results
Third quarter top line operating results were in-line with our expectations. Again, due to the number and timing of acquisitions in 2021, sequential comparisons are more useful than year-over-year comparisons. Revenue for the quarter came in at $103.2 million, up from $102.8 million in the second quarter of 2022 and $29.8 million in the third quarter of 2021. We had projected $104.3 million. System-wide sales were $548.2 million, down slightly from $553.4 million in the second quarter of 2022, but up from $349.8 million in the third quarter of 2021.
Diving deeper into the revenue generation, with all comparisons to the second quarter of 2022. Royalties revenue was $22.8 million, up from $21.7 million. Company-owned restaurant sales increased to $61.4 million from $60.0 million. Factory revenue was $7.8 million, down from $8.6 million in the second quarter of 2022. Advertising fees were $9.5 million versus $9.6 million. Franchise fees came in at $754,000 versus $1.3 million and Management fees and other income was $965,000 versus $1.6 million.
Average weekly sales of domestic locations improved to $24,950, up from $23,758 in the third quarter of 2021, and up from $24,624 in the second quarter of 2022, continuing a trend of improving average weekly sales per location. Management did not provide a quarterly same store sales number, but, on a year-to-date basis, same store sales were up 7.0% compared to the same period in 2021.
The following table provides a snapshot of the ongoing quarterly improvements in FAT Brands&#8217; operating metrics.
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Costs and expenses totaled $102.2 million in the quarter. Again, breaking the costs out to the key components, G&amp;A expense totaled $28.8 million versus $20.8 million in the second quarter of 2022 and $10.6 million in the year ago quarter. Depreciation and amortization increased to $6.9 million in the third quarter, up modestly from $6.7 million in the second quarter, and compared to $2.4 million in the third quarter of 2021. Cost of Restaurant and Factory revenue increased to $55.3 million from $49.8 million in the second quarter. As a percentage of Restaurant and Factory sales, Cost of Restaurant and Factory revenue was 79.9%, compared to 72.6% in the second quarter. Similar to the second quarter, FAT Brands benefitted from the Employee Retention Credit section of the CARES Act. According to the 10-Q, the Company determined it had reasonable assurance for receipt of the ERC and during the thirteen weeks ended September 25, 2022 recorded an ERC benefit of $2.2 million within the cost of restaurant and factory revenues and G&amp;A expense as a reduction to labor expense. Advertising expense for the third quarter totaled $11.2 million, compared to $11.6 million in the second quarter and $5.5 million in the year ago period.&nbsp; We would note there was a $5.5 million provision for bad debt expense taken in the quarter. Management stated the abnormally high bad debt expense is a measure of conservatism based on the current economic environment, but it bears watching.
Driven by the ERC, FAT Brands reported an operating profit in the quarter of $1.0 million, compared to an operating profit of $13.2 million in the previous quarter, which benefitted from a $12.6 million ERC credit. In the third quarter of 2021, FAT Brands reported a $2.4 million operating profit.
GAAP net loss for the quarter was $23.4 million, or $1.42 per share, compared to a net loss of $8.2 million, or $0.50 per share, in the second quarter. On an as adjusted basis, net loss was $16.3 million, or $0.98 per share, compared to a net loss of $3.1 million, or $0.19 per share, in the second quarter of 2022. In the third quarter of 2021, the Company reported a loss of $3.6 million, or $0.26 per share, and an adjusted loss of $2.3 million, or $0.16 per share.
Adjusted EBITDA in the quarter totaled $24.6 million compared to $29.5 million the second quarter of 2022 and compared to adjusted EBITDA of $7.2 million in the third quarter last year. On a year-to-date basis, adjusted EBITDA was $69.2 million, compared to $10.4 million in the first nine months of 2021.
Improving Utilization of Manufacturing Facility
As we have mentioned in previous reports, a key goal of the Company is to improve the utilization of its manufacturing facility, which produces pretzel mix and cookie dough for several of the restaurant concepts. Currently, the facility is operating at about 33% capacity. The recent acquisition of the franchised chain of stores known as Nestle Toll House Cafe by Chip increases the Company&#8217;s presence in the cookie segment and will increase utilization of the facility to about 38%. Franchisees benefit from the facility as it mitigates supply chain issues and enables franchisees to purchase goods at an approximate 20% discount relative to the price franchisees would pay from other suppliers.
To improve utilization, FAT Brands is focused on adding to the goods currently manufactured for the entire portfolio of brands, as well as exploring selling goods to third parties brands not in the portfolio. A key consideration in potential additional acquisitions is if the proposed acquisition can add to factory utilization. Management noted the factory is currently on a $15 million annual adjusted EBITDA run rate, which should increase as utilization increases.
Capital Structure and Cash Flows
FAT Brands continues to actively pursue the rating and refinancing of the different securitization facilities, beginning with the FAT 2021 and FGFG 2021 securitization trust. Originally, management had hoped to get the rating and refinancing of these two trusts done in 2022. However, due to a number of events, including a more challenging credit market, especially in the high yield and asset securitization sectors, and some changes in the ratings agencies, management is now expecting this to occur in the second quarter of 2023. With rates rising, it is likely a portion of the interest rate savings originally expected will not occur, but we believe the Company, with the solid operating performance being exhibited, will still be able to see substantial savings.
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There is good news on the Series B preferred stock redemption front. A total of 1,821,831 shares, representing $43 million, should have been redeemed last Friday. Recall, a total of $135 million of Series B was issued in the GFG and Twin Peaks acquisitions. The holders had an option to require redemption, which has been exercised. During the period between the redemption exercise and payment, about $67.5 million of the issue was accruing interest at a 10% rate, with the rest accruing at 5%. The $43 million redemption is of the 10% accruing shares. This will yield substantial cash flow savings for the Company as the rate on the securitizations is significantly lower than 10%. Management is in discussions with its bankers for the redemption of the remaining $95 million, hopefully to occur in the next two or three quarters.
Organic and Inorganic Growth
During the third quarter, a total of 38 units were opened, bringing the year-to-date total to 100. An additional 25 units are expected to open by year-end, at the high end of original expectations. For 2023, an additional 130 to 150 new locations are projected to be opened, with 90 already under construction. The opening of new units is the most efficient means of increasing adjusted EBITDA, in our opinion. FAT Brands now has agreements in place for over 1,000 new franchise restaurants, representing 43% unit growth that will provide an additional estimated $60 million of incremental adjusted EBITDA.
FAT Brands remains on the prowl for additional concepts to acquire. While we would expect a focus on tuck-in acquisitions in 2022, we do not rule out a major acquisition if the opportunity presented itself at attractive terms. Management noted there are a number of interesting potentially accretive opportunities available in the market. Management would explore multiple avenues to finance any potential acquisition, including using a combination of equity and preferred. Such a transaction could increase the publicly traded stock float. The focus is on concepts with a record of long-term sustainable and profitable operating business. We believe the Company&#8217;s&nbsp;scalable platform affords FAT Brands the opportunity to synergistically incorporate new concepts with minimal incremental corporate overhead costs.
Updated Projections
We expect management to focus on consolidating the recent acquisitions, driving efficiencies, synergies, and organic growth through the opening of new locations. These actions will add to incremental revenue and adjusted EBITDA. Management has estimated the normalized revenue run rate of the enterprise at $400 million, with normalized adjusted EBITDA in the $90-$95 million range. While management stated on the conference call that &#8220;business is really good across the system,&#8221; the current overall economic uncertainty could be a fly in the ointment for the fourth quarter. We would note that the recent Hurricane Ian did not have a negatively impact as the locations in the affected areas were mostly spared outside of minor damage.
For the fourth quarter we are projecting revenue of $104.8 million, adjusted EBITDA of $25 million and a net loss of $16.5 million, or $0.99 per share. Previously, we were at $107 million, $25.5 million, and a loss of $11.3 million, or $0.69 per share, respectively. The increased loss comes from a more conservative view of costs and expenses to be more in-line with the third quarter results. For the full year, we are projecting revenue of $408.2 million, adjusted EBITDA of $95 million, and a net loss of $71.8 million, or $4.35 per share. Previously, we were at revenue of $411.4 million, adjusted EBITDA of $88.7 million, and a net loss of $58.1 million, or $3.52 per share.
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FAT Brands Inc. (FAT)

Third Quarter Results

Fundamental Analysis:

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A Changing of the Guard (FAT)

Fourth Quarter and Full Year 2022 Results (FAT)

Selling Additional Notes (FAT)

FAT Brands at ICR Conference (FAT)

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