FAT Q2 2024: 120 New Store Target, M&A at 3-4x Cash Flow
- Robust New Store Pipeline: Management highlighted a strong schedule of upcoming store openings with around 80+ scheduled openings by year-end and significant contributions to incremental EBITDA from new units, which supports continued revenue growth and expansion of the franchise network.
- Accelerated Conversion Opportunities: The successful and efficient conversion of Smoky Bones to the Twin Peaks brand—with the Lakeland, Florida location expected to be operational in under 9 months—demonstrates the company's ability to quickly integrate acquisitions, driving future growth and operational synergies.
- Attractive M&A Prospects: Executives noted increasing deal flow and opportunities to acquire companies at attractive multiples (around 3x to 4x cash flow) compared to higher market expectations, positioning FAT Brands to enhance scale and reduce leverage strategically.
- Rising Expense Growth: Analysts noted that expenses, including higher costs from acquisitions, tax credit fluctuations, and increased general & administrative expenses, are growing faster than revenues, which could continue to pressure margins.
- Slower New Store Openings: Franchisee delays were highlighted in the Q&A, indicating that the pace of new store openings has lagged behind initial projections, potentially limiting organic revenue growth.
- Capital Intensity and Conversion Risks: The high costs and complexity associated with converting stores (e.g., Smoky Bones to Twin Peaks) may strain franchisee cash flows and add execution risk to the company’s growth strategy.
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Expense Flex
Q: When will revenue outpace expense growth?
A: Management explained that while tax credit differences, higher interest, and depreciation have contributed to elevated expenses this quarter, they expect improvements via refinancing Twin Peaks and incremental royalties from new store builds within roughly 12–18 months. -
M&A Prospects
Q: Are new acquisition deals emerging now?
A: They noted a surge in attractive M&A opportunities with sellers accepting multiples around 3x to 4x cash flow, which should help add EBITDA and deleverage the balance sheet. -
Store Openings
Q: Is the new store opening target still on track?
A: Despite some pace slowdowns due to franchisee financing delays, scheduled openings for the rest of the year keep the target at approximately 120 new units intact, including domestic and international projects. -
Same-Store Sales
Q: What are the same-store sales trends this quarter?
A: The burger, fast casual, and snack segments have held same-store sales nearly flat, down only 1.6% sequentially, indicating resilience in challenging conditions. -
Conversion Progress
Q: How is the Smoky Bones conversion proceeding?
A: The first Smoky Bones-to-Twin Peaks conversion in Lakeland is on track to be completed within 9 months, with more conversions planned for later periods.