ONE GP HOSPITALITY (THE) STKS
May 31, 2022 - 11:55am EST by
mitc567
2022 2023
Price: 9.02 EPS 0.77 1.01
Shares Out. (in M): 32 P/E 12.03 10.4
Market Cap (in $M): 293 P/FCF 8 6
Net Debt (in $M): 0 EBIT 42 58
TEV ($): 293 TEV/EBIT 7 5

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Description

The One Group Hospitality Inc (STKS, $9.02) is the owner of two vibe dining restaurant businesses, STK Steakhouse (“STK”) and Kona Grill (“Kona”), and a Food and Beverage (“F&B”) management company servicing hotels.  I believe that STKS has reached a positive inflection point in its businesses driven by strong management, proper positioning during the Covid 19 pandemic and consumer demand for a more compelling dining experience.  Based on continued execution, the rollout of new restaurants and a re-awakening of the global economy I believe STKS’ stock price can reach $28 per share over the next two years for an implied gain of about 165%.

History

STKS was founded by Jonathan Segal in 2004 as a vibe dining concept.  Vibe Dining is an up-tempo restaurant dining experience centered on a party atmosphere that builds energy as the night goes on.  It is typically fueled by a live DJ and attracts a younger, hipper, more female centric clientele.  STKS was a private company until it merged into a SPAC on October 16, 2013.  From the date it became a public company, STKS undertook an aggressive expansion strategy led by Mr. Segal.  Unfortunately for investors, the Company made several mistakes in site selection and began to struggle financially by 2017.

In April of 2017 Emanuel “Manny” Hilario joined the board of directors and six months later was named CEO.  Under Mr. Hilario the Company began to turnaround its operations by closing poorly located stores, creating stronger operating controls and hiring competent senior management.  Mr. Hilario is a long-time restaurant industry veteran.  Here is his bio from the Company’s website:

Prior to joining The One Group, Mr. Hilario served as Chief Financial Officer (CFO) of Sizzling Platter, a restaurant platform focused on adding and scaling segment leading brands in outstanding demographic areas across the United States and select international markets. Before joining Sizzling Platter, Mr. Hilario served as Chief Operations Officer for Einstein Noah Restaurant Group, Inc. He has previously served as Chief Financial Officer for Einstein Noah Restaurant Group, Inc., McCormick & Schmick's Seafood Restaurants, Inc., and Angelo and Maxie's, Inc. Mr. Hilario began his career at McDonald's and has held various financial roles within the company. He holds a Bachelor of Science and Commerce degree from Santa Clara University.

STKS has three distinct parts of its business, STK Steakhouses, Kona Grills and F&B Management.

STK Steakhouses

STK Steakhouses provide a high-end entertaining night out for its customers, who skew towards females.  The Company’s tagline is “Not Your Daddy’s Steakhouse”.  Each STK restaurant has a live DJ who provides musical content tailored to the crowd.  Typically, as the night progresses the music picks up in intensity and volume. STK’s are the polar opposite of a normal high-end steak house like Del Frisco’s or Ruth’s Chris which are stodgy and male oriented.

During the Covid pandemic, STK was able to create an online butcher shop so that its customers could enjoy STK steak in the safety of their own homes.  It also partnered with 11 different delivery companies to expand the four walls of its restaurants.  Today, the average STK in North America is doing over $1 million per restaurant in total from these two types of revenue.

The Company also shifted to expand its day parts by offering brunch and earlier seatings for dinner.  This enabled STK to emerge from the Covid pandemic earlier than any of its peers.  STK began comping positively over its 2019 numbers in the first quarter of 2021 despite operating many of its restaurants at reduced capacity due to local restrictions.  These positive comps are by far the best I have seen in the whole restaurant industry and have continued to eclipse its peers’ performance as is shown in the slide below:

 The STK Steakhouse chain uses three different ownership models, Owned, Managed and Licensed.  All Owned restaurants for STK are in North America and reside in large metropolitan areas.  STK has utilized managed and licensed restaurants as a form of “asset light” growth to enable the Company to grow revenues and profitability more quickly than it would have been capable of due to capital constraints from its previous management’s operating errors.  STKS now has a clean balance sheet that will allow for more owned restaurants should it chose to take that route.  Current management has indicated that landlords are providing real estate deals that de-risk this strategy by offering percentage rents and hefty tenant improvement incentives. 

 

The 21 current locations listed below will grow by approximately 10 new stores over the next two years based on current management guidance.  These new restaurants will be a mix of the three ownership types, with the majority expected to be in the managed category.  Management has stated publicly that it believes it can open STK’s in approximately 200 major cities across the world.  This number can grow if it can prove that the successful opening of the Cabo San Lucas airport location will translate into other similar locations. 

The current list of owned restaurants is as follows:

Two new owned restaurants will open in 2022 in Dallas, TX and San Francisco, CA.  There is a possibility that the Company will open owned restaurants in Boston, MA and/or Washington, DC this year or next.

STK manages 5 locations across the world with 2 currently in the US and 3 in Europe.  Managed locations typically have two revenue streams for STKS.  The first is a management fee of about 5%.  The second piece is a percentage of the profits generated which runs somewhere in the 40% - 50% range.  For a restaurant like Las Vegas which produces better than $30 million per year in revenues this can add up to significant profits for STKS.

The Company licenses STK in a growing number of locations including both traditional sites and now in airports.  Licensees pay a rate of about 5% of revenues to STKS with no additional profit participation.  There is also an upfront fee which can run up to $500,000 per location.  It currently has the following licenses:

 

Kona Grill

Kona was purchased out of bankruptcy by STKS in September 2019.  The original founders had a deal to buy Kona’s assets but failed to deliver a fully financed transaction.  STKS was able to buy the 24 restaurants it wanted for $25 million in cash plus the assumption of $11 million in liabilities.  Many of the assumed liabilities were gift cards that will probably never be utilized as they are located in cities of closed restaurants.  The transaction added approximately $100 million in revenues and was accretive to earnings prior to the pandemic.

Kona was operating less profitably (low single digit margins) than STK’s on a margin basis due to several factors including poor pricing decisions on the happy hour daypart, weak supply chain management and a lack of corporate leadership.  Kona Grills are typically located in the suburbs in or near major shopping destinations.  There is some market overlap with STK’s as there are locations in Scottsdale, Las Vegas (suburbs), Denver and the soon to be open Dallas restaurant.  Here is a list of current locations: 

STKS quickly fixed the problems at this chain, and it now boasts accelerating comparable store sales with restaurant level margins above 20%.  This implies that STKS purchased this chain for approximately one times 2021 restaurant level operating profits.  On its most recent call the Company announced that it will begin adding 3 - 5 new Kona Grills per year.  These stores are all company-owned but based on recent conversations with management they noted that the current environment for landlord concessions will make the cost of opening the new restaurants low risk and high reward.  The first of these new locations will be in Salt Lake City opening in the second quarter of 2022.  There are plans to open another Phoenix, AZ area location in the near future.

 

F&B Management

STKS’ F&B management relationships are currently in Los Angeles, England and Italy.  In these deals STKS agrees to manage all of the food and beverage operations within a high-end hotel property.  This includes room service, restaurants and bars.  STKS believes that these relationships are a win/win for it and its customers as F&B operations provide higher margins to the hotels than if the hotel owner undertook running these areas themselves.  The Company books the revenue on these relationships net of cost.  Oversight of this sector runs through the G&A line on the income statement.

The Covid pandemic put these F&B agreements on hold as many of these hotels were closed until the early part of 2021.  Today, these relationships are coming back to life as travel has restarted.  The Company has several new agreements that it has signed, and this sector should be back to full strength as Covid abates.  Based on conversations with management, I believe that the average F&B deal generates above $500,000 in annual profit and free cash flow.  Below is a snapshot of the current F&B portfolio from the One Group 2nd quarter presentation: