We are officially at the “moderately less bad is encouraging” part of the apparent restaurant recession.
On Wednesday, Fat Brands CEO Andy Wiederhorn expressed optimism about the state of his company’s same-store sales with this quote:
“Most encouraging is the momentum we were building in same-store sales performance. We’ve narrowed our decline to just 3.5%, down from 4.2% in the second quarter, representing our strongest quarterly performance this year.”
It is worth pointing out that on a two-year basis Fat Brands’ performance was, in fact, worse last quarter—a two-year stack decline of 6.2%, compared with a 5.8% decline in the previous period.
Its casual-dining segment, including Ponderosa and Bonanza, Hurricane Grill & Wings, Native Grill & Wings and Buffalo’s Café, was positive at 3.9%, implying weaker performance at the limited-service chains that dominate the Fat Brands roster.
Still, Fat Brands’ sales performance has been negative for eight straight quarters now, which is exacerbating a problem created when the company bought nearly $1 billion worth of restaurant chains in 2020 and 2021: It has too much debt.
The company used a series of whole business securitizations to buy up a bunch of restaurant chains, most of which are past their peak, including Fazoli’s, Johnny Rockets, Round Table Pizza, Hot Dog on a Stick, Great American Cookies, Pretzelmaker and Marble Slab Creamery. It also bought Twin Peaks, a legitimate growth concept, and has since spun that off in an IPO, though it still controls most of the chain.
A lot of companies use debt to buy other companies. But it also requires those acquired companies to generate hoped-for sales and earnings growth. Fat Brands hoped the companies’ franchising model and a low-cost management structure would provide plenty of earnings.
But costs have soared since those acquisitions, and the value of restaurant chains has come down. Consumers are also cutting back on dining, which has hurt the topline. On top of that, Weiderhorn was charged with tax fraud, which has since been dropped, and the company faced various shareholder lawsuits, which have been settled. Those costs were not insignificant: Fat Brands estimates that it will save $30 million a year not fighting all of that.
It still has a debt problem. The company has $1.2 billion in long-term debt, which is almost as much as the total value of its assets. Fat Brands paid $37 million to cover interest expense last quarter.
Those interest payments make up the bulk of the company’s $58 million loss in the period.
Evidence of financial challenges go beyond the Fat Brands balance sheet. Franchisees of Round Table Pizza appear to be girding for a lawsuit against the company after Fat Brands missed a payment to a marketing firm, which left that brand without advertising for several months.
That came shortly after franchisees of Hurricane Grill and Wings accused Fat Brands of raiding the marketing fund.
Fat Brands is taking steps to shore up its cash position and pay down debt. It suspended its dividend, which should preserve $30 million to $40 million per year—though it is still paying dividends on preferred shares, including $2.3 million last quarter. It is also negotiating a debt restructuring.
Interestingly enough, it is also planning to raise equity from Twin Peaks that could provide another $75 million to $100 million to pay down debt and “fund new-unit development.” But it’s being hampered by the federal government shutdown.
“Soon as the government opens, Twin Peaks is good to go, and the majority of the proceeds from the equity raise go to reduce debt with the note holders,” Weiderhorn said. “So we’d like to get that started as quickly as we could. We’re just waiting for the government to open.”
All of that should, executives say, put Fat Brands on track to generate positive cash flow in the coming quarters. At least in theory. But an actual reversal of same-store sales trends sure would help.