Fast-casual restaurant franchisor FAT Brands (NASDAQ:FAT) stock has been in a solid uptrend since bottoming out at the height of the COVID-19 pandemic with the S&P 500 index. The asset-light operating model has kept the Company resilient during and through the pandemic. As the vaccine rollout accelerates, shares should continue to recover as franchisees see an economic recovery on the return to normalcy.
To be clear, the Company doesn’t own or operate any restaurants. Instead, it owns nine restaurant brands including Fat Burger, Johnny Rockets, Buffalo’s Café, and Ponderosa, and collects franchise fees, advertising fees and royalties from over 700 units in 30 countries worldwide. Confusion with the structure and the thin liquidity of shares have kept the stock “under the radar”, which can be a boon to prudent risk-tolerant investors looking for opportunistic pullback entries in 2021.
Q3 FY 2020 Earnings Release
On Nov. 10, 2020, FAT Brands released its third-quarter fiscal 2020 results for the quarter ending September 2020. The Company reported an earnings-per-share (EPS) loss of ($0.04) excluding non-recurring items versus consensus analyst estimates for a loss of ($0.11), beating estimates by $0.07. Revenues fell (-37%) year-over-year (YoY) to $4.1 million. System-wide sales growth grew 52.8% quarter-over-quarter (QoQ) with 12 new franchised store openings in the quarter bringing total new stores openings to 45 stores for 2020. Total store count as of Sept. 27, 2020 was 678 stores system-wide. On July 16, 2020, the Company closed its public offering of 360,000 shares of its 8.25% Series B Cumulative Preferred Stock and 1.899 million warrants exercisable at $5 per share. The Company completed its acquisition of Johnny Rockets from Sun Capital Partners for approximately $25 million, under 4X cash flow. The transaction was funded by the sale of $40 million in Series 2020-2022 Fixed Rate Asset-Backed Notes, increasing the securitization facility to $80 million. The Company also rolled out Chowly, a point-of-sale integrators for third party delivery systems and HNGR, a native online ordering and delivery-as-a-service platform for the Company’s brands.
Conference Call Takeaways
Fat Brands CEO, Andy Weiderhorn, provided updates on the “uplift in system-wide sales” as they improved from $42 million in Q2 to $68 million in Q3, a 63.2% QoQ improvement. This was directly due to the eased shelter-in-place restrictions and phased reopening rollouts, strong to-go delivery sales bolstered by their software rollout of Chowly and HNGR apps. The Company expects to close 2020 with 57 total new stores, up from 24 new stores in 2019. The Company raised $9 million in cash and total of $15 million in equity in the quarter. Nearly half the Johnny Rockets are international locations including cruise ships, movie theaters, amusement parks and malls. These are pandemic epicenters hit hardest by the COVID-19 restrictions. The Company has another 26 new stores under development for the first half of 2021, which are fully committed leases signed and nearly completed with buildout. In response to cash flow burn during the Q&A, CEO Weiderhorn stated:
“So we are not burning cash any longer. We are generating cash. We never say never. We have winter here, but we are positively cash flowing… we’re not losing money anymore. We made expense reductions we could and with the additional revenues from Johnny Rockets and the new stores constantly coming online and cash flow is positive.”
Weiderhorn expects to make one Johnny Rockets like acquisition a year. Fat Brands system is purchasing $250 million in buy, paper and beverages a year. This gives the Company scale versus a smaller brand spending $20 million to $50 million a year, paying 2% to 3% more. Those economies of scale is a win-win for acquisitions.
Fog Cutter Capital Deal
On Dec. 30, 2020, FAT Brands announced the acquisition of controlling shareholder Fog Cutter Group. Holders of FAT common shares, other than Fog Cutter Capital, would be distributed a special stock dividend of 0.2319998077 shares of the FAT Brands’ 8.25% Series B Cumulative Preferred Stock. The purpose of the acquisition is to apply over $100 million of net operating loss carryforwards (NOL) which will be internalized at FAT Brands. The acquisition of Johnny Rockets, the Company expects to generate 2X 2019 EBITDA of $7.7 million.
Thin Liquidity
It’s worth noting that total outstanding shares are just around 12 million with a super tiny float of just 1.65 million shares. Insider ownership is around 89% with at least 80% owned by Fog Cutter Capital. This explains the daily average trading volume averaging 100,000 shares or less. The result is wider spreads and more slippage from the lack of liquidity. As closed locations come back online especially with the COVID-19 vaccine rollouts, top and bottom line will grow. With this in mind, prudent investors should use limit orders and wait for opportunistic pullbacks on this underfollowed stock, when seeking to take positions.
FAT Brands Inc Monthly Chart
FAT Opportunistic Pullback Levels
Using the rifle charts on the monthly and weekly time frames provides a broader view of the landscape for FAT stock. The monthly rifle chart shas been in an uptrend powered by monthly stochastic mini pups. The monthly rifle chart triggered a market structure low (MSL) buy above $3.24 back in April 2020. The monthly 5-period moving average (MA) support has been climbing to $4.80 with upper monthly Bollinger Bands (BBs) expanding at $6.05. While shares have had large spikes surpassing the monthly upper BBs, reversions have always set in pulling shares back down under the monthly upper BBs.
The weekly rifle chart has been accelerating on the strong pup breakout powered by the weekly stochastic mini pup. Shares peaked near the $9.15 Fibonacci (fib) level and again near the $7.08 fib. This caused the weekly stochastic to cross down despite the rising weekly 5-period MA at $5.85. If the weekly stochastic crossover down accelerates, then prudent investors can monitor for opportunistic pullback levels at the $5.51 fib, $5.04 fib, $4.59 fib and the $3.94 fib. Upside trajectories range from the $7.00 fib to the $10.73 fib levels.
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