The ONE Group Hospitality, Inc. (STKS) Q1 2022 Earnings Report, Transcript and Summary

Good morning, everyone. And welcome to The ONE Group First Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Tyler Loy, Chief Financial Officer. Sir, please go ahead.

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 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. For 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?

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 saying that I'm thrilled by the extremely strong start to 2022 and despite the challenges affecting the industry. Key highlights for the quarter include continued strong sales performance versus 2021 and 2019, which exceeded the high end of our revenue guidance, achieved $10.8 million in adjusted EBITDA or $4.3 million or 65.5% increase versus the same quarter last year. This brings our trailing 12-month adjusted EBITDA to approximately $47 million, and we finished the quarter with $28.3 million in cash, which exceeds our debt and can be used to fund our rapidly expanding and robust pipeline of future developments. I thank our entire team for these results and for providing our guests with exceptional unforgettable dining experiences each and every day. I'm also proud of their ongoing hard work. Our comparable sales continue to be among the best in the restaurant industry. During the first quarter, consolidated comparable sales increased 45.1%, consisting of an increase of 66.5% at STK and 21.9% at Kona Grill. Impressively and also among the best in the industry when compared to 2019, our pre-pandemic base year, consolidated comparable sales increased 45.3%, consisting of an increase of 62.9% at STK and a 27.5% increase at Kona Grill. Our first quarter U.S. average weekly sales were equally impressive at $311,000 for STK compared to $212,000 in the same period in 2019 and 101,000 at Kona Grill compared to $79,000 in the same period in 2019. The sales momentum improves the interest in dining at our highly differentiated upscale and polished cattle restaurants remain strong even in an uncertain environment. Our focus on strong operational execution, innovative culinary offerings and big dining continues to resonate with our guests as we provide exceptional and unforgettable dining experiences with opportunities for guests to enjoy themselves. We continue to build and emphasize occasions with available capacity such as lunch and happy hour. We are particularly encouraged by our growing branch daypart, which has driven incremental interest in both Kona Grill and STK on Saturdays and Sundays. Both our branch and happy hour offerings showcase our commitment to culinary innovation and an incredible value in a fun and vibrant atmosphere. This allow us to expose our brands to new guests at approachable price points with an opportunity to convert those guests into the dining room on evenings. While we are happy with our progress so far, we believe we still have lots of opportunity to grow the branch and happy hour dayparts. In addition, we continue to focus heavily on holidays, another way in which we introduce new guests to the brands and thereby broaden the consumer base. During the first quarter at both STK and Kona Grill, we had a very successful Valentine's Day and the Super Bowl weekend featuring special menus that our guests truly enjoy. We also kicked off the second quarter with activations featuring specialty Easter dishes and beverage promotions. We celebrated National Tax Day with $10.40 signature cocktails all day long and look forward to celebrating Mother's Day, which traditionally is a strong day for both Kona Grill and STK. Our takeout and delivery business continues to be a meaningful part of the business, and we're encouraged by ourselves in this additive layer. For the STK restaurants that have takeout and delivery, it's approximately 5% of sales and Kona Grill is approximately 13% of sales. In addition to takeout delivery, we are building our catering capabilities as offices reopen and larger gatherings have resumed. We are also seeing bookings for private dining increase, which is a tremendous opportunity as private dining and business planning has been a missing layer of business over the past couple of years. Moving on to development. The 2022 developed pipeline is the strongest we've ever had in our history today. This year, we plan to open at least 90 venues, which include two company-owned STKs, Dallas, Texas and San Francisco, California, and managed STK in Stratford, London, U.K. Three company-owned Kona Grills, a Kona Grill in Riverton, Utah, a Kona Grill in Columbus, Ohio and a Kona Grill Paradise Valley, Arizona. And finally, we plan to open three licensed units in a partnership with Reef's Kitchen, and we'll provide takeout and delivery only featuring offerings from our STK, Kona Grill and Valiant Concepts in Texas. As we have long stated, we are early in our growth strategy with significant white space ahead. We are excited about our long-term opportunity as we believe our units deliver best-in-class returns. For new restaurants, we are targeting between 40% and 50% ROIs for new company-owned STKs and for company owned grows. We foresee a total addressable market of at least 400 restaurants, including 200 STK restaurants globally and at least 200 Kona Grills domestically. Moving on to the current cost environment. We continue to deliver best-in-class restaurant operating margins. We are managing through this historically high inflation along with supply chain challenges and yet are still delivering cost of goods in the 25% to 26% range. We've been able to accomplish this by being flexible with our menu and supply chain and emphasizing and executing our margin and sales driving initiatives such as stopping and signed at STK and beverage sales at Kona Grill. This has allowed us to provide our entire breadth of offerings at both STK and Kona Grill, Corners still deliver world-class margins. Turning to labor. Being fully staffed is a competitive advantage in this environment. In order to protect the brand and ensure high levels of execution in our restaurants. We are happy to report that we continue to be fully staffed and we continue to invest in hiring and retention for all levels in our restaurants. To conclude, our team is doing a fantastic job walking guests into our restaurants for a great exceptional and unforgettable dining experiences. Ultimately, our focus on operations and day-to-day execution has proved effective in translating to a strong P&L, and we plan to continue on our current trajectory of industry-leading same-store sales disciplined cost management and new store development. Now I'll turn the call back to Tyler.

Thank you, Manny. Let me start by discussing our first quarter financials in greater detail. First quarter total GAAP revenues were $74.2 million, increasing 46.9% from $50.5 million for the same quarter last year. Included in our total revenue is our owned restaurant net revenues of $70.5 million, which increased 43.4% from $49.2 million for the same quarter last year. The increase in revenue is primarily attributable to strong sales momentum resulting from the execution of our sales initiatives along with the opening of new units. Domestic consolidated comparable sales increased 45.1% for the quarter compared to 2021. For STK, comparable sales increased 66.5% versus 2021 and Kona Grill comparable sales increased 21.9% versus 2021. Versus 2019, domestic consolidated comparable sales increased 45.3%, STK comparable sales increased 62.9% and Kona Grill comparable sales increased 27.5%. Management, license and incentive fee revenues were $3.7 million increasing 178.9% from $1.3 million in the first quarter of 2021. This increase is primarily the result of the sales recovery from the COVID-19 pandemic coupled with the opening of STK Los Cabos Airport in May and STK Westminster with two F&B venues in May and adding Rivershore Bar & Grill in August. Owned restaurant cost of sales as a percentage of owned restaurant net revenue increased 130 basis points to 25.7% in the first quarter of 2022 compared to 24.4% in the prior year primarily due to increased commodity prices, partially offset by operational and menu management initiatives. Owned restaurant operating expenses as a percentage of owned restaurant net revenue decreased 100 basis points to 55.8% in the first quarter of 2022 from 56.8% in the first quarter of 2021 due to leverage on higher average weekly sales and actively managing operating costs. Restaurant operating profit decreased 30 basis points to 18.5% for the quarter compared to 18.8% in the prior year first quarter. On a total reported basis, general and administrative expenses were $6.9 million compared to $5.2 million in the prior year. The increase is attributable to increased activity as our restaurants are generating strong average weekly sales. When adjusting for stock-based compensation, adjusted general and administrative expenses were $6 million in the first quarter of 2022 and $4.2 million in the same quarter last year. As a percentage of revenues, adjusted general and administrative expenses were 8.1% of total revenue in the first quarter of 2022 and were slightly favorable compared to the first quarter of 2021. We incurred approximately $2.3 million of direct costs related to COVID-19 during the first quarter, composed primarily of cost of regular [Indiscernible] cleaning of our venues, personal protective equipment and sanitation apply for COVID-19. This compares to $1.6 million of similar costs last year. Lease termination expenses were $255,000 during the first quarter compared to $187,000 in in the first quarter of last year. We have closed all lease disputes that originated in 2016 and before and anticipate nominal lease termination expenses going forward. Interest expense net of interest income was $508,000 in the first quarter of 2022 compared to $1.2 million in the first quarter of 2021. The decrease was driven by lower average outstanding balance and lower interest rates driven by the refinancing of our credit facility in August of 2021. Income tax expense was $173,000 for the first quarter compared to an income tax benefit of $329,000 for the first quarter of 2021. The first quarter effective tax rate differs from our annual effective tax rate due to discrete items in the quarter. Net income attributable to the ONE Group Hospitality, Inc. was $3.7 million or $0.11 net income per share compared to net income of $70,000 in the first quarter of 2021 from zero cents net income per share. When adjusting for COVID-19-related expenses, adjusted net income was $5 million or $0.15 adjusted net income per share compared to an adjusted net income of $1.6 million in the first quarter of 2021 or $0.05 adjusted net income per share. Adjusted EBITDA for the first quarter attributable to the ONE Group Hospitality Inc. was $10.8 million compared to $6.5 million in the first quarter of 2021. We have included a reconciliation of adjusted EBITDA in the tables in our first quarter 2022 earnings release. Lastly, as a result of the ongoing challenges brought upon by the COVID-19 pandemic, we and our licensing partners have decided to permanently close the STK restaurant in Mexico City, Mexico. Based on a strong pre-pandemic performance, we know that STK can drive in Mexico City and look forward to new opportunities as they arise in that market. Now I would like to touch on guidance as it relates to the second quarter of 2022. For the second quarter of 2020, we expect the following: total GAAP revenues of approximately $76.5 million to $79 million, owned restaurant net revenue of $73 million to $75 million Management license and sentence revenue of $3.5 million to $4 million and total G&A of approximately $7 million. I will now turn the call back to Manny.

Thank you, Tyler, and thank you all for your time today. Let me conclude by saying I'm very excited about the strong start we have had in 2022 despite the challenging environment in which we are operating. 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. Above all, I'm grateful to all of our teammates who bring our mission to life every day to be the best restaurant in every market where we operate. We do this by delivering exceptional and unforgettable guest experiences to every guest every time. I also would like to thank our customers have visited and continued return to our restaurants so they can enjoy the highly differentiated fine-dine experience 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?

Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Nicole Miller from Piper Sandler. Please go ahead with your question.

Thank you. Good morning Great update. Wondering just a super quick modeling one. Were the STK average weekly sales total? And if so, do you have company-owned STK average weekly sales?

Yeah, Nicole. So the company owned is about $275,000 for the quarter.

And that's compared to like the 180 range, something like that in the prior year?

Yeah. We can provide you the exact a prior year number.

Awesome. And then just a big picture question. When you put together the pieces 2Q, just seasonally speaking, second quarter margin would get better. So it should be up quarter-over-quarter, yet last year was like quite strong. I would assume the revenues are robust enough to produce a similar margin, but is there anything you want us to think through in terms of COGS or labor that weigh on that one way or another just at a high level?

Hey, Nicole. This is Manny. No, I think that your comment there about the second quarter being better than first. And then just relative to last year, just remember that the cost of goods were very favorable, coming into the second quarter. So you just need to take a look and evaluate COGS year-over-year and adjust accordingly that trend.

Okay. Perfect. And last, just a big picture question. Things have been so robust in the segment, and you've absolutely just really changed, restructured the way the business is used today in terms of the cohort mix of social versus business and certainly by daypart. So I want to pause and ask the question if not even a recession, but just there's a slowing. What is going to happen the way you characterize comments today could see something like brunch and happy hour being, really, frankly, a value proposition, so people don't need to ease of your brands or ease out the category. But what is realistic as we are going through the market conditions? And could you also address Europe specifically, albeit that is an MOI segment at large? Thanks.

Yeah. I mean I think you said it well there our focus on the value layers should be important in any kind of a tougher environment. So we'll just continue emphasizing our marketing and our sales building resources around those layers, which has been our strategy to date. And then we also recently have built a very robust social occasion business for birthdays and anniversaries and date night. So I think even in a tough environment, a lot of those will continue as well as the holidays. So I think our strategy in -- even if the environment is a bit different, we'll still be intact clearly with total emphasis on value layers, which we already have been working on. So I think it's just a continuation of that. And obviously, as you know, we're very flexible on the operating side of the business. So we'll pivot, and we'll be flexible in that kind of environment.

Thank you.

Our next question comes from Nick Setyan from Wedbush Securities. Please go ahead with your question.

Thank you. Congrats on the great quarter. Just given sort of the inflationary headwinds out there, it would be really helpful to understand what your average check growth was in the quarter for each brand, maybe menu pricing, how you're thinking about menu pricing now and going forward?

Yeah. I mean I think looking at the quarter, menu pricing is in the 3% to 5% range. And we do have still a tremendous amount of pricing power in STK if we wanted to. So we feel very good about that. And -- but the majority of our growth has been traffic and significantly for STK brand, we've seen a pretty strong recovery on the event business and banquet business that we're not starting to see that layer coming back not to full recovery as it was before the pandemic, but we definitely have seen that business in big cities coming back. So we are pleased with that business coming back. And so -- but the growth has really been on the traffic and on the number of checks that we're getting in restaurant.

And what about for Kona?

Same thing majority is our traffic. I would say that the pricing there is around plus 5, so same as modest price increases on that brand as well.

Got it. And just in terms of the margins going forward, obviously, the Q2 revenue guidance is well above, I think, what we were all expecting. But cost of sales still think 25% to 26% range is realistic for the rest of the year? And then how should we think about the other OpEx line?

Yeah. I mean I think our COGS guidance stays in the same range. As you point out, there is still lots of challenges in there. And I think as you've seen from the other operating expenses, we've done a very good job of controlling labor and the other operating costs. So I don't expect any significant impact to our operating cost for the remainder of the year. Again, I'm not saying that it's super -- there's a lot of headwinds in both labor costs as well as on the opening lines. But I think the team is doing a very good job of staying ahead of that. So I don't see any material impact to any of those operating cost lines, not anything different from what we saw in the first quarter.

The STK openings, are we still expecting those to be in Q2 or to maybe in Q3?

Yeah. I mean right now, we're very cool in Dallas and San Francisco and as well as the kind of grow in end of the second quarter, right, beginning of the third. So we're coming to the final steps or getting those restaurants open now.

And just last question, when we kind of think about '23, what are the growth rates we're thinking about? Is it three units in terms of STK? Could it be four? Do we wrap up to 5% for Kona? I mean just the environment out there, how are you thinking about 2023?

Yeah. So STK will definitely be more than 3 next year in the 4 to 5 range and Kona Grill will also be more than 3. Our pipeline is very robust right now. So it's just a matter of timing them out. So we will have, again, another record year in development relative to SDK and going to grow. But it will definitely be more than we've done this year.

And for the STK that company owned, now 4 to 5.

Yeah. Right now, I would say four company-owned and a couple of maybe one or two management sites, but it will be a majority company owned next year for STK. We have a tremendous amount of great new markets that we'd like to be in Washington, D.C., Boston, a couple of Florida opportunities. So we do want to be able to open in these big markets as soon as we can.

Great. Thank you very much.

Thanks, Nick.

And our next question comes from Mark Smith from Lake Street Capital. Please go ahead with your question.

Hey, guys. I just wanted to follow up on some of the inflationary pressure, could you just remind any contracts that roll off of contracts.

Yeah, Mark. So right now, just due to the volatility, we're locking things in on kind of the shorter time frames, 30-60 days. And so -- but I think we're seeing relatively stable protein prices that come off from some of the peaks from last year. But right now, we feel comfortable in kind of that 30- to 60-day lock period.

Okay. And then -- maybe, Manny, if you can talk just big picture, you've got a really solid customer base, but any impact in as we saw gas prices spiked during the quarter, primarily on that cone customer, did you see any pullback on check or [Indiscernible] as we saw gas prices move out?

No. I mean -- and again, it's a Kona Grill, our emphasis, as you know, has been experiential. So we have not seen any impact even as gas prices have tremendously increased in some of these markets. So we definitely are very aware of that. But again, I also remember that our emphasis on growth has been the value layer. So we have put a lot of emphasis on branch as well as returning to happy hour. So we've seen a lot of success on those dayparts. So to a certain degree, I would say that any difference in check has been driven by our emphasis on strategy rather than a broad economic and our research. And as we track people's comments has not been -- we haven't seen a lot of comments on pricing, if any at all. And value has not significantly changed as we do our research value with our customers. So I would say to date, we haven't really seen anything that is describable in terms of people either trading down on PEMEX or just not coming to the restaurant. So far, we haven't seen it. But again, I know the environment is super dynamic these days. And there's a lot of news, lots of macro issues. So again, we're just prepared as I speak with the team internally. We just have to be flexible and ready to pivot because there's a lot of just moving parts in the overall environment or not.

Great. And then last one for me. Just as we think about development, you've got a good pipeline, just spoke about next year potential pipeline. Are you seeing any delays as we think about pointing anything that's kind of getting in the way and maybe slowing down things a little bit? And then maybe just talk about kind of what you're seeing in kind of real estate and opportunities for expansion. Is it really attractive market or if it's tightening up at all out there as far as opportunities for the new units?

Yeah. I mean the development environment now is a bit more dynamic. The permitting does require for us to really stay on top of it. There's a lot more -- it feels as if -- as people came back from pandemic and changed some of the process flows, it just requires that you are more aggressive and do more preplanning on permitting. So I've noticed there's a little bit of a difference there, but nothing significant that impacts the timing of our rational openings relative to opening restaurants, yeah. I mean you have to -- for the future restaurants in terms of equipment. If you don't plan out longer lead times, you can't buy stuff last minute. So it does require that for the new restaurants, whereas maybe we timed in the equipment in the six-month period. Now we're looking at a nine-12-month timing for the equipment. So you do have to change your project management time frames on timing some of those things out. And so that's how we do. So it has -- we just have -- we have adjusted to those new no instances of doing business in this kind of environment. But it is different. That is different from -- in the past, you could go to equipment distributors and pick up four-five pieces relatively quick. Now there's things such as not enough chips, so you get a lot of people pushing back on equipment. We have to be flexible on some specs relative to kitchen equipment. So -- but again, it's all about project management and being sure that you get ahead of the planning. In terms of real estate, I mean I think what I've seen in the last 12 months is there's a lot of availability, lots of malls that have great real estate that is available in the big markets, there is spaces that people have vacated. So we do have an opportunity right now where we can go where we want to be with the brands, and there's a lot of flexibility in taking the real estate that you really want. So from a real estate selection, it's probably one of the better markets I've ever seen. And relative to costs, I think we're getting fantastic deals from landlords. But again, I think that's just a testimony to the success of the brand, so people like to get STKs and on the rolls and want to get them in their projects because of the average volume and the fact that we have exciting programs like our happy hour programs and our branch program. So I would say that I'm very excited about the go-forward development plans with the only caveat is that we have to be more proactive. And we have to have more lead time and adjust our project time lines for that.

Exactly. Thank you.

Thank you.

And ladies and gentlemen, with that, we'll conclude today's question-and-answer session. I'd like to turn the floor back over to Manny Hilario for closing remarks.

Thank you. And as I always do, I'd like to thank The ONE Group team for a fantastic execution in the first quarter and their continued execution to the second quarter. So again, none of our results are possible deducting incredible commitment of our team. And I'm very pleased and very proud of the achievements of everyone in that team. And we look forward to continue providing unforgettable exceptional experiences to every guest every time and every one of our ratios. So we appreciate everybody’s interest and see you out in our restaurants. Thank you.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.