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    Fat Brands (FAT)

    FAT Q3 2024: Conversion lifts sales to $8.3M, guides 2025 breakeven

    Reported on Oct 30, 2024 (After Market Close)
    Pre-Earnings Price$2.98Last close (Oct 30, 2024)
    Post-Earnings Price$2.88Open (Oct 31, 2024)
    Price Change
    $-0.10(-3.36%)

    What went well

    • Strong Conversion Results: The conversion of a Smokey Bones location to a Twin Peaks resulted in a dramatic sales jump from $3.6 million to $8.3 million, demonstrating the effectiveness of the conversion strategy and the potential for significant revenue acceleration as more locations convert.
    • Robust Twin Peaks Performance & Growth Pipeline: Twin Peaks is not only showing robust same-store sales and strong market performance but also benefits from an expanding franchise system—with 115 lodges currently and plans to add 19 more in 2025—which indicates a promising future for system-wide growth.
    • Pathway to Improved Cash Flow Through Debt Refinancing: The company has a clear plan to refinance its debt—including reversing significant amortization charges—and to redeem expensive preferred stock, which is expected to lead to cash flow breakeven by the end of 2025 (including dividends), setting up a strong foundation for future operating improvements.

    What went wrong

    • Weak operational performance: Analysts highlighted declining same-store sales and increasing operating losses (e.g., royalty and restaurant sales down sequentially) as a concern, exacerbated by underperformance in some brands; this adds pressure on the margins.
    • Underperforming acquired assets: The Smokey Bones brand has struggled on a stand-alone basis, with sales significantly lower prior to its conversion; delays and higher-than-expected CapEx in the conversion process could continue to drag down overall performance.
    • Debt and cash flow pressures: Ongoing refinancing challenges, significant debt amortization, expensive preferred dividends, and persistent legal expenses have negatively affected cash flow, delaying a move toward breakeven despite future refinancing plans.

    Q&A Summary

    1. Cash Flow Breakeven
      Q: When breakeven cash flow expected?
      A: Management expects cash flow breakeven by the end of 2025 by refinancing debt, redeeming expensive preferred stock, and recovering legal expenses, which will improve cash flow significantly.

    2. Operating Losses
      Q: Why are operating losses rising?
      A: Losses stem primarily from underperforming Smokey Bones units and pressure on Fazoli’s in a price‐sensitive segment, while strong Twin Peaks performance offsets some issues.

    3. Debt Refinancing
      Q: Any update on further debt refinancing?
      A: A successful refinance of Twin Peaks is underway with Fazoli’s discussions ongoing, and preferred stock redemption is planned for later in 2025 to lower cash outflows.

    4. Conversion Progress
      Q: How is the conversion process performing?
      A: The conversion of Smokey Bones to Twin Peaks is exceeding expectations, with sales rising from $3.6M to $8.3M, despite higher than anticipated CapEx on deferred maintenance.

    5. Twin Peaks Outperformance
      Q: Is Twin Peaks outperforming comps?
      A: Twin Peaks is showing robust same-store sales and strong overall performance, even recovering from early-year setbacks, which management views very positively.

    6. Sequential Trend
      Q: What is the recent comps trend?
      A: Sequentially, system-wide sales have improved with most brands showing positive same-store sales as weather and holiday traffic picked up.

    7. Factory Utilization
      Q: When will factory utilization improve?
      A: Management anticipates a major rollout of third-party programs by Q1 as national tests with distribution centers progress, boosting cookie production.

    8. Conversion Cost Savings
      Q: Do conversions save on construction costs?
      A: Yes; conversions save roughly 18 months of construction time, lowering interest and build costs despite some deferred maintenance expenses.

    9. Franchisee Interest
      Q: Which brands attract most franchisee deals?
      A: Franchise interest is strong across multiple brands, notably in Round Table Pizza, Fazoli’s, and Twin Peaks, where development deals have exceeded last year’s totals.

    10. Franchisee Expansion
      Q: Are Twin Peaks growers mainly existing groups?
      A: It’s a mixed picture, but many Twin Peaks growth initiatives are driven by established franchisee groups expanding their territories.

    11. Sports Bar Comparisons
      Q: How does Twin Peaks compare to troubled sports bars?
      A: Unlike struggling sports bar chains, Twin Peaks is performing exceptionally well with high guest satisfaction, showing little need for turnaround efforts.

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