The ONE Group Hospitality, Inc. (NASDAQ:STKS) Q4 2022 Earnings Call Transcript

The ONE Group Hospitality, Inc. (NASDAQ:STKS) Q4 2022 Earnings Call Transcript March 9, 2023

Operator: Good day and welcome to The ONE Group Fourth Quarter 2022 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Manny Hilario, the CEO. Please, Manny, go ahead.

Tyler Loy: Thank you, operator and hello, everyone. Before we begin our formal remarks, let me remind you that part of our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance and you should not place undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Please also note that these forward-looking statements reflect our opinion only as of the date of this call. We undertake no obligation to revise or publicly release any revisions of these forward-looking statements in light of new information or future events. We refer you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial conditions.

During today’s call, we will discuss certain non-GAAP financial measures which we believe can be useful in evaluating our performance. However, the presentation of these measures or other information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. The reconciliations of these measures, such as adjusted EBITDA, adjusted net income, restaurant operating profit, comparable sales and total food and beverage sales at owned and managed and licensed units to GAAP measures, along with a discussion of why we consider these measures useful, please see our earnings release issued today. With that, I’d like to turn the call over to Manny Hilario. Manny?

Manny Hilario: Thank you, Tyler and hello, everyone. We sincerely appreciate you joining us today and for your interest in The ONE Group. Let me begin by thanking all of our team members for their hard work, providing world-class operations across all of our restaurants. Our team members help to bring our mission to life every day which is to be the best restaurant in every market that we operate by delivering exceptional and unforgettable guest experiences to every guest every time. It is because of our teams that we have been able to strengthen our leadership position in vibe dining, both high end and upscale casual and that we can have great confidence moving forward. 2022 was undoubtedly a good year for The ONE Group. We increased revenue 14.2% to $316.6 million which included a 10.8% increase in comparable store sales.

Our focus on diversifying our customer base to include more social occasions has paid off as demonstrated by our ability to own the holidays and date nights. For the fourth quarter, while we were negatively impacted by the weather and subsequent travel delays in December, we’re overall very pleased with our holiday performance, resulting in $13 million in adjusted EBITDA for the quarter driven by store-level margins of almost 19%. In addition, we are starting to see the return of the business clientele as people are returning to work offices in the urban areas where our restaurants are located and there has been an increase in demand for our corporate and off-site events. Additionally, we are noticing more convention activity, especially in cities like Orlando, Scottsdale and Las Vegas and we have deployed our sales force to aggressively pursue these opportunities.

Maybe most importantly, in 2022, we built an incredible pipeline of development that we expect will deliver double-digit revenue and adjusted EBITDA growth going forward. This past year, we saw that pipeline begin to materialize as we opened 2 company-owned STKs in San Francisco and Dallas and 1 managed STK in Stratford, our third in London and a virtual REEF Kitchen located in Austin, Texas. Since opening our 2 new company-owned STKs, San Francisco and Dallas have averaged approximately $350,000 in sales per week. This is significantly above our STK investment model of roughly $154,000 per week. On the average, we expect to have less than 1-year payback for these locations. We have continued this momentum into 2023 with the opening of a new design Kona Grill in Columbus, Ohio in the Eastern Town Center in January.

This is the first new Kona Grill we have opened since acquiring the brand and it is a big step in what we expect will be a large expansion for Kona Grill. This restaurant has opened averaging approximately $115,000 per week, again, pacing ahead of our investment model despite opening in what is typically our slowest part of the year. Additionally, we recently opened a new rooftop at the STK in Scottsdale, Arizona ahead of the Super Bowl which was held in Phoenix last month. This is the fourth significant domestic STK Rooftop in our portfolio and features both the patio and fireplace along with a great view of the canal. The vast size and open floor plan make the space extremely virtual and capable of being transformed to accommodate a wide array of events.

We are encouraged by the incredible start for this new rooftop. Lastly, we have recently opened 2 additional REEF Kitchen locations in Austin, bringing it to a total of 3 vessels as we evaluate future expansion. As we look forward to the rest of 2023, we have an incredible pipeline of high-quality real estate. The best in the history of the company. Despite a challenging construction environment, 2023 will be an extremely busy year as our intention is to open 8 to 12 new venues. For the remainder of the year, we plan to open 2 to 4 additional Kona Grills in the following cities: Riverton, Utah; Phoenix, Arizona; Henderson, Nevada; and Tigard, Oregon. And 3 to 5 new company-owned STKs in the following cities: Charlotte, North Carolina; Boston, Massachusetts; Washington, D.C.; Aventura, Florida; and Philadelphia, Pennsylvania.

Finally, we plan to open 1 managed or licensed STK. When factoring in our 2022 and 2023 openings, along with our immediate pipeline thereafter, including asset-wide development, we anticipate a significant increase in run rate revenues and run rate adjusted EBITDA by the end of 2023. As we have long stated, our growth story has just begun. We foresee a total addressable market of at least 400 restaurants, including 200 STK Restaurants globally and at least 200 Kona Grills domestically. Over the long term, the target is 5 to 6 new STKs, 3 to 5 new Kona Grills and 1 F&B venue per year. This will be a blend of owned units and managed and licensed units which requires lower capital investment and produces high-margin royalty, management and incentive fee streams.

To conclude, I’m pleased with our 2022 results despite a very challenging restaurant environment and our team is doing a fantastic job. Now, I’ll turn the call back to Tyler.

Copyright: gdolgikh / 123RF Stock Photo

Tyler Loy: Thank you, Manny. Let me start by discussing our fourth quarter financials in greater detail. Total GAAP revenues were $88.3 million, increasing 5% from $84.1 million for the same quarter last year. Included in our total revenue is our owned restaurant net revenues of $83.9 million which increased 5.6% from $79.4 million for the same quarter last year. The increase in revenue is primarily attributable to the opening of STK San Francisco in August of 2022 and STK Dallas that opened in November of 2022. Domestic consolidated comparable sales decreased 3.1% for the quarter compared to 2021. For STK, comparable sales were flat versus 2021 and Kona Grill comparable sales decreased 7.6% versus 2021. As a reminder, we are lapping incredibly strong comparable sales in 2021 relative to 2020 and 2019.

Compared to 2019, our pre-pandemic base year, domestic consolidated comparable sales increased 46.2%. STK comparable sales increased 62.6%. And Kona Grill comparable sales increased 27.7% which shows that our differentiated vibe dining experience continues to resonate with our guests. Management license and incentive fee revenues were $4.4 million, decreasing 4.5% from $4.6 million in the fourth quarter of 2021. This decrease is primarily the result of decreased revenue in our existing managed properties in London, England, partially offset by the opening of STK Stratford in November of 2022. Owned restaurant cost of sales as a percentage of owned restaurant net revenue decreased 190 basis points to 24% in the fourth quarter of 2022 compared to 25.9% in the prior year primarily due to menu mix management and price increases, partially offset by increased commodity prices.

Owned restaurant operating expenses as a percentage of owned restaurant net revenue increased 340 basis points to 57.1% in the fourth quarter of 2022 from 53.7% in the fourth quarter of 2021 primarily due to consolidated average wage increases and higher operating expenses, both driven by inflation consistent with the industry. This was partially offset by a low single-digit price increase in August of 2022 and a mid-single-digit price increase in November of 2022. We believe that we have additional pricing power for both brands as we compare our prices to those of our competitors. Restaurant operating profit decreased 150 basis points to 18.9% for the fourth quarter of 2022 compared to 20.4% in the fourth quarter of 2021. Restaurant operating profit at STK decreased approximately 220 basis points but was still a robust 22.6% and Kona Grill operating profit decreased 180 basis points and was 13.1% for the quarter.

On a total reported basis, general and administrative expenses were $8.5 million compared to $8.3 million in the prior year. The increase was attributable to additional investments ahead of growth, increased accounting and legal fees and increased stock-based compensation expense, partially offset by a decrease in performance-based variable compensation expenses. In addition, the company experienced increased travel expenses due to rising hotel and airfare cost. When adjusting for stock-based compensation, adjusted general and administrative expenses were $7.3 million in the fourth quarter of 2022 and $7.5 million in the same quarter last year. Preopening expenses were $1.7 million compared to $0.2 million in the prior year. This increase was primarily related to payroll, training and cash and noncash preopening rent for STK Dallas which opened in November of 2022; Kona Grill Columbus which opened in January of 2023; and other venues that are currently under construction.

Interest expense was $0.7 million in the fourth quarter of 2022 compared to $0.5 million in the fourth quarter of 2021. The increase was primarily driven by increases in benchmark rates year-over-year. Income tax expense was $0.2 million in the fourth quarter of 2022 compared to an income tax benefit of $0.6 million for the fourth quarter of 2021. Our 2022 annualized effective tax rate was 6.2%. Net income attributable to The One Group Hospitality, Inc. was $5.1 million or $0.15 net income per share compared to a net income of $5.8 million in the fourth quarter of 2021 or $0.17 net income per share. When adjusting for nonrecurring expenses or gains, adjusted net income was $6.5 million or $0.19 adjusted net income per share compared to an adjusted net income of $8.3 million in the fourth quarter of 2021 or $0.24 adjusted net income per share.

Adjusted EBITDA for the fourth quarter attributable to The ONE Group Hospitality, Inc. was $13 million compared to $13.3 million in the fourth quarter of 2021. We have included a reconciliation of adjusted EBITDA in the tables in our fourth quarter and full year 2022 earnings release. During the fourth quarter of 2022, we repurchased approximately 0.6 million shares of our common stock. We purchased an additional 118,000 shares during the first 2 months of 2023. In total, we have purchased 1.2 million shares under our buyback program and approximately $2.1 million in share repurchases remain available under the $10 million share repurchase program announced on September 7, 2022. We will continue to use discretion in determining the conditions under which shares may be purchased from time to time, if at all.

Now, I’d like to provide some forward-looking commentary regarding our business. This commentary is subject to risks and uncertainties associated with forward-looking statements as discussed in our SEC filings. We, as always, remind our investors the actual numbers and timing of new restaurant openings for any given period is subject to a number of factors outside the company’s control, including weather conditions and factors under the control of landlords, contractors, licensees and regulatory and licensing authorities. Based on the information available now and the expectations as of today, we are providing you with the following financial targets for 2023. Beginning with revenues, we project our total GAAP revenues to be between $360 million and $380 million, including managed, license and incentive fee revenues of between $17 million and $17.5 million; total owned operating expenses as a percentage of owned restaurant net revenue of 82.5% to 82%; total G&A excluding stock-based compensation of approximately $27 million to $29 million; adjusted EBITDA of $50 million to $54 million which represents an approximate 21% to 30% increase compared to 2022; restaurant preopening expenses between $5.5 million and $6.5 million; operating income of between $25.5 million and $28.5 million; an effective income tax rate of between 5% and 10%; capital expenditures consisting of approximately 2% of company-owned revenue and approximately $3 million to $3.5 million per new company-owned venue net of allowances received from landlords.

And finally, we plan to open 8 to 12 new venues in 2023, including 1 managed or licensed STK Restaurant. I will now turn the call back to Manny.

Manny Hilario: Thank you, Tyler and thank you all for your time today. Let me conclude by saying that we are proud of our performance in 2022 and we are truly excited for 2023. We are in the early stages of our long-term growth strategy as we continue to build a portfolio of high-volume, high-margin brands with compelling returns for our shareholders. Above all, I’m grateful to our teammates who bring our mission to life every day to be the best restaurant in every market where we operate. They do this by delivering exceptional and unforgettable guest experiences to every guest every time. I also would like to thank our customers that visit and continue to return to our restaurants so that they can enjoy the highly differentiated vibe-dining experiences they have been craving. We appreciate everyone joining us on the call today. Tyler and I are happy to answer any questions that you may have. Operator?

See also 10 Best Healthcare Stocks for the Long Term and 18 Countries that Produce the Most Nuclear Energy.

Q&A Session

Operator: Our first question is coming from Mark Smith from Lake Street Capital.

Mark Smith: First one for me is, what are you guys seeing in the development pipeline for new restaurants in regards to what the locations look like, maybe TI dollars? And then if you can talk about any headwinds permitting construction, any headwinds that you’re seeing out there on getting them open?

Manny Hilario: Yes. So Mark, in terms of what we’re seeing is, at least for us, we continue to see very good deals from a TI perspective. So I think that those funds are still available. I still think that developers are looking for high-volume type of operations. So I think that’s still a very favorable market. In terms of construction, I would say probably the — I mean it’s definitely challenging, as we said in our prepared statement. But if I had to narrow it down to one area, that’s probably the one that you have to be very thoughtful about right now is just equipment purchasing and making sure that you do that on time because there’s challenges in getting some of the equipment. But we’ve been able to deal with some of that.

We’ve actually aggregated some of our — and prepurchased some of our equipment for future stores just in anticipation of some of the hard times to get that equipment. So I would say that’s probably our biggest headwind relative to development.

Mark Smith: Okay. And then as we look at kind of restaurant-level margins for 2023, you gave some good guidance here. What are the main kind of pressure points if you were to kind of rank them that you see kind of putting any pressure on margin in 2023?

Manny Hilario: So I’d probably answer the question from a perspective of risk of the margin is really inflation levels. I think what we’re seeing right now, still price increases over a year but they certainly have been less than historically in the last 12 months. So really that is — the pressure point on the margin is always going to be what happens with inflation. I think labor which frankly has been the biggest pressure point for us, I think that has stabilized. I think that with some of the — for instance, Amazon not increasing their labor pool or actually diminishing their labor pool actually has been helpful. It’s taking a lot of pressure off talented individuals coming off the industry. So really, labor is the big unknown. So I think there’s a lot more labor out there right now and that’s good for us. And as we said previously, our restaurants continue to be fully staffed which we think it’s a long-term competitive advantage for us.

Mark Smith: Perfect. And then the last one for me, just as we think about new restaurants, maybe if we look at Kona and STK separately, the average weekly sales at the new Kona that you opened look really solid. But can you talk about, as you open these new units, do you expect kind of pressure on these restaurant margins to pressure kind of consolidated margins in the first couple of months that they’re open?

Manny Hilario: I mean — so starting with STK, our pipeline coming up is Charlotte, we got Boston. We have really what we think will be very good revenue restaurants for us. So I don’t expect any pressure point coming out of STK at all. I think the margins will be very solid from the get-go in STK. Kona Grill, we did open Columbus. Columbus has frankly done exceptional considering that we opened in the slow month of the year which was January. And I think our — we’re super encouraged with the velocity of guests there. And so I think my overall answer would be that I don’t expect pressure from new stores and I think that our guidance for the year reflects our view on the new stores.