Warning: This document has been generated by an advanced customised AI prompted with financial data derived from company filings and other reputable sources. The process is specifically designed to minimise hallucinations, however the output is not 100% reliable. It is essential to check any information in this document before relying on it for financial decisions. You can find the underlying data used here.
Screener Ratings
Overall: 3
Value: 3
Growth: 5
Dividend Income: 2
Defensive: 2
Competitive Advantage: 3
Summary
FAT Brands operates a collection of casual dining franchises while carrying heavy debt from acquisitions. While recent menu updates and a planned spin-off show strategic activity, the financials reveal deep structural issues. The 20% dividend yield attracts income investors but appears dangerously disconnected from negative earnings. Success depends on executing operational turnarounds across multiple brands simultaneously while managing a precarious balance sheet.
Bull Case
The planned spin-off of Twin Peaks could unlock hidden value while new menu innovations drive same-store sales growth. If the company successfully refinances its debt at lower rates and franchisees adopt digital ordering tools, the 20%+ dividend yield might become sustainable alongside gradual margin improvement.
Bear Case
With negative book value and interest expenses consuming 225% of EBIT, the current capital structure appears unsustainable. A recession could trigger franchisee defaults, forcing dividend cuts and asset sales. The high beta suggests amplified downside in market corrections.
Recent News
- Fazoli’s launched Lasagna Rolls (Feb 2025) – Source
- Round Table Pizza offering holiday promotions (Feb 2025) – Source
- ICR Conference highlighted Twin Peaks/Smokey Bones spin-off plan (Jan 2025) – Source
- New Hot Dog on a Stick location in Utah (Jan 2025) – Source
- SNICKERS®-themed desserts launched (Jan 2025) – Source
Financial Analysis
- Negative book value (-$24.98) and EPS (-$3.36) indicate structural unprofitability
- Gross margin declined from 71% (2020) to 41% (2023) suggesting pricing pressure
- Debt/Equity ratio worsened from -3.89 (2020) to -6.43 (2023)
- Current ratio remains below 0.5 since 2020, indicating liquidity concerns
- Dividend yield of 20.8% appears unsustainable given negative EPS
- Beta of 1.798 indicates 80% more volatility than broader market
- Negative FCF margin (-3%) despite 35% revenue growth (2020-2023)
- Interest coverage ratio <1 (EBIT/Interest Expense = 0.18 in 2023)
- Asset turnover improved from 0.15 (2020) to 0.35 (2023) showing better utilization
- Receivables turnover surged from 4.1 (2020) to 22.7 (2023) suggesting tighter credit
The combination of high leverage (-6.43 D/E), negative margins, and aggressive dividend policy creates significant financial risk. While recent brand expansions and menu innovations show growth attempts, the capital structure appears unsustainable without debt restructuring or equity infusion. The restaurant industry’s post-pandemic recovery hasn’t translated to fundamental improvement in profitability metrics.
S.W.O.T. Analysis
Strengths:
- Diversified brand portfolio across multiple segments
- Recent menu innovations driving customer engagement
- Franchise model provides recurring royalty income
Weaknesses:
- Negative equity position (-$255M)
- $1.38B debt load with 8.25% coupon rate
- Dependence on franchisees in inflationary environment
Opportunities:
- Potential value creation from Twin Peaks spin-off
- Digital ordering and delivery partnerships
- International expansion of brands
Threats:
- Rising interest rates increasing debt servicing costs
- Labor cost inflation squeezing franchisee margins
- Consumer shift toward healthy eating trends
Industry Overview
Threat of New Competitors: Moderate. Low capital requirements for new restaurants but established brands have loyalty
Competition Among Existing Firms: High. Saturated market with numerous substitutes across price points
Suppliers’ Bargaining Power: Medium. Commodity food prices volatile but multiple suppliers available
Buyers’ Bargaining Power: High. Consumers have endless dining options and price sensitivity
Threat of Substitute Products: Very High. Home cooking, meal kits, and delivery apps provide alternatives
Competitive Advantage
Cost Advantage: None evident – negative margins suggest higher costs than peers
Intangible Assets: Moderate – portfolio of 18 brands but none dominate their categories
Network Effect: Weak – no visible platform benefits between brands
Switching Costs: Low – restaurant customers show little brand loyalty
Supporting Data
You can find supporting data that is derived from company filings and other reputable sources here. It was provided to the AI to generate this report and you can use it to verify the analysis. This supporting data is not AI generated but may still contain errors.
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