First Quarter Post Call Commentary

Staying In-House

A New Board

A Changing of the Guard

Joe Gomes

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Consumer Cyclical

Restaurants

FAT Brands Inc.

Fourth Quarter and Full Year 2022 Operating Results

For the fourth quarter, revenue totaled $103.8 million, up 39.9% from the $74.2 million in the fourth quarter of 2021. Royalties rose 26% to $22.5 million, while restaurant sales increased 64.3% to $61.5 million, driven by the acquisitions of Twin Peaks, Fazoli&#8217;s and Native Wings in the fourth quarter of 2021. Factory revenue was $8.9 million, up from $8.0 million in the year ago quarter. Advertising fees were $9.6 million versus $8.7 million. Franchise fees came in at $943,000 versus $1.9 million and Management fees and other income was $313,000 versus $291,000.

Average weekly sales of domestic locations improved to $23,915, up from $23,333 in the fourth quarter of 2021, continuing a trend of year-over-year improving average weekly sales per location.&nbsp;System-wide sales grew 22.1% in the fourth quarter of 2022 to $532.9 million while system-wide same-store sales growth was 2.7% compared to the prior year. 
 

The following table provides a snapshot of the ongoing quarterly improvements in FAT Brands&#8217; operating metrics. 
 

 <img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/FATOpMet223.PNG" /> 
 

Costs and expenses totaled $136.4 million in the quarter. Again, breaking the costs out to the key components, G&amp;A expense totaled $39.1 million versus $21.6 million in the fourth quarter a year ago. Included in the current period G&amp;A is a $16.1 million non-cash reserve on claimed employee retention tax credits. This appears to be a conservative move on management&#8217;s part due to uncertain accounting treatment as the majority of these credits have already been received by the Company.

 Depreciation and amortization increased to $6.9 million in the fourth quarter, up from $5.3 million in the year ago quarter. Cost of Restaurant and Factory revenue increased to $61.7 million from $36.9 million in the fourth quarter of 2021. Advertising expense for the fourth quarter totaled $11.6 million compared to $9.9 million a year ago. Also during the quarter, FAT Brands incurred a $14 million impairment charge related to trademarks. According to management, the charge was incurred as rising interest rates have reduced the projected cash flow valuations of certain acquisitions.

 Operating loss for the fourth quarter of 2022 totaled $32.6 million, compared to an operating loss of $2.8 million a year ago. Interest expense in the quarter was $20.9 million versus $14.9 million in the same period in the fourth quarter of 2021, while interest expense related to preferred shares totaled $4.7 million, compared to $1.5 million a year ago. 
 

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Pre-tax loss was $56.8 million compared to a loss of $19.8 million in the fourth quarter of 2021. In the current quarter, FAT Brands incurred a $14 million income tax provision, versus a $234,000 benefit last year. The fourth quarter of 2022 included the impact of a $20.4 million valuation allowance on indefinite lived tax credits, impacting the tax provision.
GAAP net loss for the quarter was $70.8 million, or a loss of $4.29 per share, compared to a net loss of $19.6 million, or a loss of $1.38 per share, in the fourth quarter of 2021. On an as adjusted basis, which removes the impact of impairment losses, litigation costs, refranchising losses, and tax adjustments, net loss was $43 million, or a loss of $2.60 per share, compared to a net loss of $16.5 million, or a loss of $1.16 per share, in the fourth quarter of 2021. We would note, of the $70.8 million GAAP loss, approximately $60 million are related to non-cash charges.
Adjusted EBITDA in the quarter totaled $19.6 million, compared to $10.4 million a year ago and slightly below management&#8217;s guidance of fourth quarter adjusted EBITDA being comparable to the third quarter&#8217;s $24.6 million, According to management, the lower than expected adjusted EBITDA reflects some store openings that got pushed from the fourth quarter into the first quarter of 2023 and some margin compression, especially at the factory. Management has implemented cost increases to relieve the margin pressure.
For the full year 2022, FAT Brands reported revenue of $407.2 million, a net loss of $126.2 million, or a loss of $7.66 per share, and adjusted EBITDA of $88.8 million.
Organic and Inorganic Growth
Once again, FAT Brands saw impressive new store openings in the quarter. During the fourth quarter, a total of 44 units were opened, bringing the year-to-date total to 140. For 2023, an additional 150 to 175 new locations are projected to be opened, with some 50-60 projected to open in the first quarter of 2023. As we have noted in the past, 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. Management noted in their remarks that there continues to be significant interest from both existing and potential franchisees for new locations.
FAT Brands remains on the prowl for additional concepts to acquire. While we would expect a focus on tuck-in acquisitions in 2023 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.
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 believes this could occur sometime in 2023, although the recent increase in interest rates makes this less of an imperative. Management is in discussions with its bankers for the redemption of the remaining $95 million of Series B preferred.
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. While management stated that business remains good across the system, the current overall economic uncertainty could be a fly in the ointment for 2023. We also would expect to see an increase in interest expense year-over-year, although we are hopeful litigation expenses turn lower. We are projecting 1Q23 revenue of $105 million, adjusted EBITDA of $20.3 million, and a net loss of $17.3 million, or a loss of $1.04 per share. For the full year, we are at revenue of $427.8 million, adjusted EBITDA of $92.6 million, and a net loss of $61.2 million, or a loss of $3.70 per share.

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FAT Brands Inc. (FAT)

Fourth Quarter and Full Year 2022 Results

Fundamental Analysis:

Rating: Log in to view

First Quarter Post Call Commentary (FAT)

Staying In-House (FAT)

A New Board (FAT)

A Changing of the Guard (FAT)

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