Fat Brands Earnings Call: Legal Wins and Financial Hurdles

Fat Brands ((FAT)) has held its Q3 earnings call. Read on for the main highlights of the call.

Fat Brands’ recent earnings call painted a mixed picture for investors, with significant positive strides being made alongside notable financial challenges. The call highlighted the resolution of legal matters, strategic leadership changes, and international expansion efforts as key positive developments. However, these were offset by a decline in revenue, an increased net loss, and ongoing debt restructuring efforts, which tempered the overall sentiment.

Resolution of Legal Matters

The company announced a major victory with the U.S. Department of Justice dismissing all charges against key company figures. Additionally, the settlement of the Delaware derivative cases resulted in a $10 million insurance payment to the company and the contribution of 200,000 shares, providing a financial boost and clearing legal hurdles.

Strategic Leadership Additions

Fat Brands is positioning itself for growth with new leadership appointments at Twin Hospitality Group. Ken Brendemihl has been named President of Smokey Bones, and Lexi Burns has taken on the role of Chief People Officer. These strategic additions are expected to drive the company forward.

Cost Reductions

The company executed over $10 million in SG&A reductions and anticipates further savings. These efforts are aimed at strengthening the financial position of Fat Brands, providing a cushion against financial challenges.

Casual Dining Segment Growth

The casual dining segment showed resilience with a 3.9% growth in same-store sales. This positive trend indicates a potential area of strength for the company amidst broader financial challenges.

International Expansion

Fat Brands continues to expand globally, with Johnny Rockets opening seven new locations and Fatburger announcing a return to Japan through a new franchise agreement. These moves highlight the company’s commitment to international growth.

Manufacturing Expansion

The Georgia production facility reported $9.6 million in sales with a 39.6% margin, despite operating at only 45% capacity. This indicates significant potential for future expansion and increased revenue.

Community Engagement

Demonstrating corporate social responsibility, the FAT Brands Foundation awarded 42 grants and raised funds for community initiatives, showcasing the company’s commitment to giving back.

Revenue Decline

Total revenues decreased by 2.3% to $140 million, primarily due to the closure of underperforming Smokey Bones locations and lower same-store sales. This decline highlights the financial challenges the company faces.

Net Loss Increase

The net loss attributable to FAT Brands increased to $58.2 million from $44.8 million in the prior year quarter, underscoring the financial hurdles the company is working to overcome.

Same-Store Sales Decline

Overall same-store sales declined by 3.5%, though this was an improvement over the previous quarter, indicating some progress in addressing sales challenges.

General and Administrative Expense Increase

G&A expenses rose by $8.2 million due to store closure reserves and non-cash impairment of fixed assets, adding to the financial pressures on the company.

Debt Levels

Debt restructuring negotiations are ongoing, with plans for a $75 million to $100 million equity raise at Twin Peaks to reduce debt, reflecting the company’s efforts to manage its financial obligations.

Dividend Pause

The dividend pause remains in effect, preserving $35 million to $40 million annually in cash flow, as the company prioritizes financial stability.

Forward-Looking Guidance

Looking ahead, FAT Brands is advancing plans for a significant equity raise at Twin Peaks to pay down debt and fund new unit development, with expectations of achieving positive cash flow in the coming quarters. The company has paused dividends to preserve cash flow and resolved legal matters, providing substantial annual savings. With plans to open 80 new locations in 2025 and a focus on organic expansion, targeted acquisitions, and manufacturing scale-up, FAT Brands aims to enhance shareholder value.

In conclusion, Fat Brands’ earnings call highlighted a blend of positive developments and financial challenges. While legal resolutions and strategic expansions offer optimism, the company faces hurdles in revenue and net loss. The forward-looking guidance suggests a proactive approach to overcoming these challenges, with a focus on growth and financial stability.