GEN Restaurant Group, Inc. Q2 FY2025 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the GEN Restaurant Group, Inc. 2Q 2025 Earnings Conference Call. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Wednesday, August 6, 2025. And now I would like to turn the conference over to Tom Croal, the company's Chief Financial Officer. Please go ahead.

Thank you, operator, and good afternoon. By now, everyone should have access to our Second Quarter 2025 earnings release. If not, it can be found at www.genkoreanbbq.com in the Investor Relations section. Before we begin our formal remarks, I need to remind everyone that our discussions today will include forward-looking statements within the meaning of Federal Securities Laws, including, but not limited to, statements regarding growth plans and potential new store openings as well as those types of statements identified in our quarterly report on Form 10-Q for the period ended June 30, 2025, and our subsequent reports filed with the SEC. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements represent our views only as of the date of this call and are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we currently expect. We refer you to our recent SEC filings including our annual report on Form 10-K and our quarterly reports on Form 10-Q for a more detailed discussion of the risks that could impact our future operating results and financial condition. Except as required by law, we undertake no obligation to update or revise these forward-looking statements in light of new information or future events. During today's call, we will discuss some non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are available in our earnings press release and our SEC filings, which are available in the Investor Relations section of our website. Now I'd like to turn it over to our Chairman and CEO, David Kim.

Thank you, Tom, and good afternoon, everyone. In the second quarter, our restaurant operations team successfully executed our strategic priorities in a challenging environment. This included opening new stores, delivering exceptional service and customer experience, and managing cost controls. Despite ongoing macro pressures, we believe our value-focused experimental dining model resonates with guests, positioning us for sustainable long-term growth and profitability. We opened 7 restaurants in the first half of 2025, representing a balanced geographic mix of new, existing, and international markets. I'm excited to share that one of the new stores opened this year is in a suburb of Seoul, South Korea, marking our first international expansion. We plan to open more locations in South Korea in the third quarter of 2025. These restaurants are being developed at approximately one-third the cost of our U.S. stores, using an operating model consistent with our U.S. locations. By entering the Korean market, we expect to gain insights into culinary and experimental trends that could work well in our U.S. operations. At the beginning of the third quarter, we opened 2 additional restaurants, bringing our total new restaurants to 9 year-to-date. We're on track to exceed our target of 12 to 13 new stores by the end of 2025, with 7 more under development expected to be completed this year. In April, after the global tariffs were announced, we experienced a significant drop in customer traffic, resulting in declining same-store sales. Furthermore, the current administration's immigration policies have led to the deployment of ICE agents in our key regions such as California, Texas, and Nevada, which together represent 35 of our 52 restaurants. The impact was widespread across all locations in these states. Nevertheless, we managed to quickly adjust our staffing and operations, leading to improvements in sales and costs starting in late July. We estimate that over 60% of our customer base in these regions is Hispanic. As mentioned in previous calls, same-store sales do not define our success. Our average unit volume is $5.3 million per restaurant in the casual dining space, which is exceptional. This level of revenue drives our margins and strong cash flow. Our business model is centered around expanding our footprint to quickly recoup our investments in new restaurants. We are set on an impressive 2.3-year payback period for our new stores opened in 2024, which is much shorter than most competitors and allows us to grow with limited debt, relying on our cash flow for most of our expansion. Since going public in June 2023, we added 19 new stores, increasing our store count by 58%, without taking on significant debt or equity. This highlights the strength of our free cash flow model. We're also focused on driving growth at existing locations, with several initiatives this year as we expand the GEN brand. One of our initiatives includes the sale of gift cards, which we launched at 78 Costco locations last year and which are performing well. In the second quarter, we started selling gift cards at Sam's Club, further demonstrating GEN's brand strength in the Korean barbecue market. Additionally, we have developed new product lines, including finished packaged GEN Korean Barbecue meats and sauces, which will be distributed through Cisco. We aim to create a comprehensive range of GEN products, extending beyond restaurant sales. We will also grow the Corn Sushi brand adjacent to GEN Korean Barbecue restaurants to leverage shared resources and minimize risk. Furthermore, we are enhancing our training programs to build the necessary skills for new restaurant openings. We've implemented new technologies and systems to support our operations. With a solid operating model, meaningful expansion plans, and continued investment in our development pipeline, we are executing with discipline. Backed by a healthy balance sheet, strong unit-level returns, and growing brand momentum, we believe GEN is well-positioned to achieve our 2025 goals and continue expanding both domestically and internationally. Thank you for your continued support. We are excited about the opportunities ahead and confident in our trajectory. Now I'd like to turn the call over to Tom for a detailed overview of our second quarter financial performance.

Thank you, David. We generated a 2.2% year-over-year increase in total revenue to $55 million for the second quarter of 2025 due to our new restaurant openings over the last year. Cost of goods sold as a percentage of company restaurant sales increased by 97 basis points to 33.8% in the second quarter of 2025 compared to the second quarter last year. This increase reflects more new restaurants in operation, inflationary cost increases, and a minor impact from our premium menu. Payroll and benefits as a percentage of company restaurant sales decreased by 29 basis points in the second quarter of 2025 to 30.1% compared to the second quarter of last year. Payroll and benefits as a percentage of sales decreased by 163 basis points from the first quarter of 2025 due to recently rolled out labor efficiencies. Occupancy expenses as a percentage of company restaurant sales increased by 116 points to 9.3% compared to the second quarter of last year due to 10 additional restaurant openings. Other operating expenses as a percent of company restaurant sales increased by 78 basis points to 10.7% compared to the second quarter of last year. G&A, excluding stock-based compensation during the second quarter was $5.7 million, or 10.3% of revenue compared to $4.3 million, or 8% of revenue in the year-ago period. G&A expenses in the second quarter remained flat compared to G&A expenses in the first quarter of 2025. In the second quarter, we had a net loss before income taxes of $1.8 million, which equated to $0.05 per diluted share of Class A common stock compared to net income before income taxes of $2.1 million, which equated to $0.06 per diluted share of Class A common stock in the second quarter of 2024. The second quarter of 2025 reflects higher costs associated with new restaurant development, including $2.1 million in preopening costs. If you look at adjusted net income, a non-GAAP measure, we had net income of $1.2 million or $0.04 per diluted share of Class A common stock in the second quarter of 2025 compared to adjusted net income of $4.4 million or $0.13 per share in the second quarter of last year. Remember that we have 33 million shares outstanding, including our A and B shares. The Founders' Group owns approximately 85% of the company and the public investors own 15%. Our Founders' interests are aligned with those of the public shareholders, and they are fully invested in successfully growing GEN. Restaurant level adjusted EBITDA was 16.3% for the second quarter of 2025 compared to 15.6% for the first quarter of 2025, an increase of 0.7% or 70 basis points as we continue to improve our labor costs. Restaurant level adjusted EBITDA for the second quarter was $9 million compared to $10.2 million in the second quarter of 2024. Total adjusted EBITDA for the second quarter of 2025 was $1.9 million or 3.4% as compared to $4.9 million in the second quarter of 2024. After removing preopening costs from both periods, adjusted EBITDA for the second quarter of 2025 was $3.3 million compared to $5.9 million in the second quarter of 2024. Turning to our liquidity position, as of June 30, 2025, we had $9.6 million in cash and cash equivalents and the only long-term debt we carry is $7 million in bank debt. We also have fully available all of our $20 million revolving credit facility. Before concluding, I want to reiterate what we said on our last call. Our balance sheet reflects $166 million in lease liabilities as required under GAAP through the new ASC 842 lease accounting standard. These are not financial obligations in the form of long-term debt, but rather the accounting recognition of our future lease commitments. Importantly, they are offset by $142 million in operating lease assets. We've also received several questions about our return on tangible asset metrics. It's important to note that using total assets as a proxy for invested capital is inflated because it includes an operating lease asset of $142 million. This incorrect assumption can artificially lower our return metrics. All these points highlight the fact that GEN carries no material debt and has strong returns from restaurant development. This concludes our prepared remarks. We'd like to thank you again for joining us on the call today, and we are now happy to answer any questions that you may have. Operator, please open the line for questions.

Operator Instructions. Your first question comes from Jeremy Hamblin with Craig-Hallum Capital.

This is Will on for Jeremy. I just wanted to start off by asking if you could help quantify the same-store sales progression throughout the quarter and then maybe the magnitude of improvement you've seen in July? And then second, I don't know if you took any price during the quarter, but anything you can call out in terms of traffic check composition would be super helpful.

Okay. Thanks, Will. I think we were really down in April, May, and June. We did see some bounce back in the month of July. But we did have a price increase at the beginning of the year of about 2.8%, I think we announced on the last call that we had. That helps.

Yes. That's helpful. And then just switching over to thinking about new units. I guess now that those 6 openings from Q1 have had a few months under their belts. Just curious about how those have been performing? And then just a follow-up, any more color on performance in that South Korea location? Or any update to expansion plans there would be great.

Yes. Our openings in the first quarter are average. They are performing adequately, but not exceptionally. The opening in South Korea marks a new market for us, and we are navigating that transition. Our sales are currently slow but are improving. We plan to open a few more new restaurants in Korea by the end of this month.

Got it. I wanted to ask about the premium menu adoption and how it's performing in terms of mix. Where do you see that mix heading, and how should we consider the implications for COGS with increased premium adoption?

We see that there's a COGS of probably a 0.5 basis point to 1% differential. It's probably going to average around a 5% to 6%, maybe up to 7% increase in sales. We are starting to add other products aside from the upselling of just the mix of our menu. So we will be rolling out other product lines to enhance that.

Your next question comes from J.P. Wollam with ROTH Capital Partners.

If we could just start, maybe just wanted to offer the chance, any updates to kind of the guidance you shared last quarter in terms of kind of the revenue and 4-wall margin? And maybe just along with that, anything you can share about what's baked into that number or your expectations there, whether comp or new unit productivity?

We're still holding our projections that we gave at the beginning of the year. I think we were looking at 17% to 18% on 4-wall margins. We're not revising any of that, because of a challenging quarter. We're going to stay on course. So that has not changed at all.

Got it. And then in the press release, I think there were comments about being able to offset the ongoing macro challenges through some operational efficiencies. I'm just kind of wondering, as we think about that 17% to 18% in sort of 4-wall margin, like any more detail you can provide on behind the scenes about what the team is doing to really maximize some efficiencies there?

Yes. We made quick directional changes to deploy more automation, and we are using some AI tools to have our labor in a more efficient cost. So we'll probably see a lot more benefits to the margins overall, definitely in the third quarter.

Got it. And then just the last one from me. I think that’s two quarters now where we’ve talked about ensuring that you have the right training processes to develop your next generation of general managers and restaurant leaders. As you consider unit development and potentially accelerating in the coming years, are quality general managers the main limiting factor for new unit development, or is it more related to real estate capital or other issues?

It's all of the above. Getting managers is still a challenge, but we're dealing with that. We will definitely talk more about the efficiencies that we have run and tested now, which we're getting good results, but we'll definitely give you a better understanding of how those implementations, i.e., managers, new technologies, and better training that we have implemented.

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Kim for any closing remarks.

Well, thank you all again for joining the call. We look forward to speaking with you all when we report our third quarter of 2025 results in November. Thank you.

This concludes today's conference call. You may now disconnect your lines at this time. Thank you so much for your participation.