GEN Restaurant Group, Inc. Q3 FY2025 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to GEN Restaurant Group, Inc. 3Q 2025 Earnings Call. I would like to turn the conference over to Mr. Tom Croal, the company's Chief Financial Officer.

Thank you, operator, and good afternoon. By now, everyone should have access to our third 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 September 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 also subject to numerous risks and uncertainties that could cause actual results to materially differ 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. The third quarter continued to be a very challenging environment for the restaurant business. In spite of this, we continue to implement our business plan, including opening new stores, continuing to deliver exceptional service, and building our brand recognition. Although macro pressures continue to persist, we strongly believe our value-focused experimental dining model resonates with guests and positions us for durable long-term growth and profitability. We opened 15 restaurants in the first 9 months of 2025, 8 of which opened in the third quarter. This includes 6 new restaurants in South Korea for a total of 57 restaurants in operation. The Korean restaurants use an operational model consistent with our restaurants in the U.S. at a fraction of the construction and operational costs. These 2025 openings represent a balanced geographic mix, including new, existing, and international markets and we are scheduled to open an additional 2 stores by the end of 2025. We have exceeded our initial estimate of 12 to 13 stores for a total of 17 stores in 2025. Recently, we announced the launch of ready-to-cook Korean branded meats for sale at Albertsons, Vons, and Pavilions grocery stores in California and Hawaii. These products feature the exact same meats and recipes used in our restaurants, bringing the true restaurant experience without compromising quality. Most other restaurant companies that sell food in the frozen section of grocery stores cannot replicate the same pace and quality of food like GEN can. These are not TV dinners, but are the same crafted meals and quality ingredients we serve in our restaurants, bringing our genuine quality restaurant food to your dining room table. With 4 product choices of ready-to-cook meats, we recently announced partnerships to sell at over 600 grocery locations. We took this challenge because we anticipate annual revenues from grocery stores could exceed $100 million over the next 4 to 5 years. This allows for expansion of our brand awareness as GEN is building a powerful ecosystem that extends beyond restaurants into a community of authentic Korean products, experiences, and digital innovation. During the third quarter, we generated a 2.7% year-over-year increase in total revenue to $50.4 million for the third quarter of 2025 due to our new restaurant openings over the last year. As we reported last quarter, during the month of April, after global tariffs were announced, we have continued to see a downturn in our restaurant customer traffic, which resulted in same-store sales dropping by 9.9% for the third quarter, and some of our peers have experienced the same downturn. In spite of the inflationary driven increase in cost, our restaurant level adjusted EBITDA margin was 15% in the third quarter of 2025 and 15.6% year-to-date. Consistent with our previous messaging, same-store sales are not the metrics that define our success. I can't stress that enough. Our AUV revenue is $5.2 million per restaurant in the casual dining space. This is a very elite level. Our AUV revenue levels drive our margins and strong cash flow. Our business model revolves around growing our footprint to capitalize on the short duration to recoup our initial investment in new restaurants. Since our IPO 2 years ago, we have added 24 new stores with total costs of approximately $2.5 million each, roughly increasing our store count by 73%. We believe this proves the value of our high free cash flow model. Although the restaurant industry is facing a softer environment, we remain confident in our strategy, our team, and our ability to drive long-term growth. Having said this, we still deeply focus on ways to drive growth at existing locations and have a number of initiatives to share as we continue the expansion of the GEN brand of products and services. Last year, we announced the launch of GEN gift cards at 95 Costco locations, all within a 5-mile radius of all of our current restaurants across the U.S. The gift cards continue to sell exceptionally well. Recently, we began selling gift cards at 92 Sam's Club locations. Access and expanding this initiative is a testament to GEN's brand strength and position as a leader in Korean barbecue. We're also expanding our reach beyond our restaurants through several exciting initiatives. These include: bulk sales of Korean BBQ meats, e-commerce business growth, sales of Korean beef, turkey, sales of Korean sauces developed in Korea and imported to the U.S., and sales of our proprietary Korean and other Korean-related GEN products under development. All of these products will be sold at our restaurants and/or through our distribution channels. Ultimately, we anticipate that most of these items will also soon be available in grocery stores. Each of these initiatives is created to build off of GEN's powerful brand recognition and enhance our margins through new revenue streams. With a solid operating model, meaningful expansion across both core and new concepts, and continued investment in our development pipeline, we're executing with focus and discipline. Now I'd like to hand the call over to Tom for a detailed look at our third quarter financial performance.

Thank you, David. David discussed revenue in his remarks, so I will start with expenses. Cost of goods sold as a percentage of company restaurant sales increased by 334 basis points to 34.8% in the third quarter of 2025 compared to the third quarter last year. Cost of goods sold as a percentage of restaurant sales increased by 95 basis points compared to the second quarter of 2025. The increase reflects inflationary cost increases, more new restaurants in operation, and a minor impact from our premium menu. We have not taken any price increases since the end of 2024, and meat prices are at an all-time high. We have elected not to pass on these increases to our customers and will not raise our prices in the near term to show loyalty to our customers during these uncertain economic times. Payroll and benefits as a percentage of company restaurant sales decreased by 196 basis points in the third quarter of 2025 to 28.5% compared to the third quarter of last year. Payroll and benefits as a percentage of sales decreased by 155 basis points from the second quarter of 2025. This decrease is due to recently rolled out labor efficiencies. Occupancy expenses as a percentage of company restaurant sales increased by 238 basis points to 10.8% compared to the third quarter of last year due to 16 additional restaurant openings. This is primarily due to higher rent at our new locations, along with the start-up of several restaurants. Other operating expenses as a percentage of company restaurant sales increased by 58 basis points to 12.2% compared to the third quarter of last year. G&A, excluding stock-based compensation during the third quarter was $5.7 million or 11.4% of revenue compared to $4.5 million or 9.1% of revenue in the year-ago period. This increase is primarily due to increased personnel required for new restaurant development, and additional advertising, marketing, and legal expenditures. G&A expenses in the third quarter remained flat compared to G&A expenses in the first and second quarters of 2025. In the third quarter, we had a net loss before income taxes of $3.9 million, which equated to $0.11 per diluted share of Class A common stock. Compared to net income before income taxes of $300,000, which equated to $0.01 per diluted share of Class A common stock in the third quarter of 2024. The third quarter of 2025 reflects higher costs associated with new restaurant development, including $2.3 million in preopening costs. If you look at adjusted net income, a non-GAAP measure, we had a net loss of $700,000 or $0.02 per diluted share of Class A common stock in the third quarter of 2025 compared to adjusted net income of $2.6 million or $0.07 per share in the third quarter of last year. As David said, since going public in June of 2023, we have grown GEN from 33 stores to 57, a 73% increase. If we stopped all new restaurant development, we estimate that our net income, or loss, could have been profitable for the third quarter. This figure strips out all preopening costs and includes a reduction in G&A. Restaurant-level adjusted EBITDA for the third quarter of 2025 was $7.6 million or 15% of total revenue compared to $9 million or 18.2% in the third quarter of 2024. Total adjusted EBITDA for the third quarter of 2025 was $200,000 as compared to $3.4 million in the third quarter of 2024. After removing preopening costs from both periods, adjusted EBITDA for the third quarter of 2025 was $1.8 million compared to $4.5 million in the third quarter of 2024. Turning to our liquidity position. As of September 30, 2025, we had approximately $5 million in cash and cash equivalents. Additionally, we have full availability of our $20 million revolving credit facility. We anticipate using a portion of our revolving credit facility as we continue to open new restaurants in the future. If the current economic climate does not turn around in the near term, we will consider slowing our growth plans for 2026, and focus our efforts on improving operations and margins at our existing restaurants, and growth through our grocery store initiatives. Before concluding, I want to reiterate what we said on our last call. Our balance sheet reflects $165 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 $140 million in operating lease assets. We've also received 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 the operating lease asset of $140 million. This interaction assumption can artificially lower our return metrics. To wrap up, we anticipate opening 2 stores by the end of the year for a total of 17 new restaurants for all of 2025, which includes our 6 international units in South Korea. We're targeting full year revenue of $220 million to $225 million and achieving restaurant-level adjusted EBITDA margins in the 15% to 15.5% range. By the end of 2025, we anticipate being at an annual run rate of approximately $250 million of revenue when all our new restaurants are open. This does not include our new initiatives. This concludes our prepared remarks. We'd like to thank you again for joining us on our call today, and we are now happy to answer any questions that you may have. Operator, please open the line for questions.

Your first question comes from Jeremy Hamblin of Craig-Hallum.

I wanted to start by gaining insights into the Korean units. First, I need clarification regarding some locations like Kan Sushi and GEN Korean. I'm unsure if any of these are joint locations and would like to understand the economic details, specifically what you expect the average unit volumes to be for those stores in their first year, and what the construction costs for those locations will be.

Okay. So we have right now 4 GENs and 2 Kans. The Kans are way outpacing the sales of GENs at this point. We anticipate the Kans to do around, I would say, $3 million to $4 million, maybe more in the $4 million. The GEN side still needs more time. So we're probably going to do about $2 million to $3 million to GENs. What was the second question, Jeremy? I apologize.

Just the cost, yes, the cost to build.

Yes, the cost of build is coming out to be about less than $1 million a store. That's about $800,000. So substantially lower than the U.S.

Got it. And then in terms of the softer trends on existing locations, can we assume that, that's kind of continued here in Q4? I mean, are you kind of expecting down 10 or something like that in Q4?

Correct. Yes. Right now, we're seeing some softness. It began during the tariff days and intensified with the ICE crackdown, particularly affecting areas with a high Hispanic population, notably in California. We've also started observing some impact in Texas, but California remains the most affected. It's important to note that while we're not just comparing ourselves to other sit-down restaurants that are performing well, many are facing challenges with their comparable sales. As of last week, we have not seen any significant improvement in traffic.

Got it. And then I wanted to switch gears just to ask about the grocery store initiative, 600 locations. That's kind of an impressive ramp. What is the current run rate on kind of annualized revenue of that portion of the business? I mean getting to $100 million in 4 to 5 years, it would be quite impressive. But wanted to get an understanding of the velocity there. And then also in terms of the cost to run that business, right, I don't know if you're having to pay slotting fees or kind of what is the start-up cost of that initiative?

We conducted a test across 31 locations named Pavilions, and our analysis indicates that these locations experience significantly lower traffic compared to other brands they manage. The initial orders resulted in a strong reaction, with over 60% of consumers already familiar with or loyal to our brand. This has reinforced our brand's strength. The buying department in grocery stores is increasingly focused on merchandising Asian and Hispanic foods, which aligns with our product offerings. The data from the 31 locations indicates a high acceptance of new products on their shelves without requiring discounts. Our presence in 570 stores is due to the other brands they own, such as Albertsons and Safeway, which have higher traffic levels, suggesting that sales in these locations will exceed those at Pavilions. We entered Pavilions less than 1.5 months ago, and our rollout in the 570 stores will begin in November. Typically, retailers do not introduce new products during this period due to holiday preparations, but our brand's significant popularity led them to make special accommodations. Most retailers remain committed to their product placements until February, when they re-evaluate their plans. Although we don't yet have velocity data, feedback from the 31 locations shows satisfaction with our sales performance as a new brand. The operational costs for this initiative are considerably lower than those incurred by our restaurant division. We anticipate margin pressures once discussions about shelf space and discounts occur. Notably, this is the first time in their corporate history that they have allowed a brand entry without requiring a slotting fee in Southern California. In Northern California and Hawaii, we negotiated minimal slotting fees, and our products are already manufactured and stored in their warehouses. There are approximately 300 to 400 additional stores in the Midwest where we expect to be introduced, although we have been informed that margins in specific areas there are not significantly better than those on the West Coast. We have scheduled meetings with major retailers in two weeks, as our gift card program has seen considerable success. They are interested in exploring product collaborations that might integrate our gift cards with other meat products to enhance customer exposure.

I was really interested to learn more about the possibility of slowing or stopping unit growth in the future. From a cash perspective, that seems like a smart move. Have you and Tom looked into what the cash flow could look like? I understand you have around $9 million to $10 million in preopening costs this year, and CapEx is expected to be close to $30 million. I'm curious about how much you've considered this option, as with the strong performance of existing stores, it could be a promising approach to boost cash flow.

Yes. We definitely have ran that number. We still have 7 under construction; 2 or 3 will come on board this year, and we cannot stop those. The other ones can pause. We have another 11 because these locations, you have to be at least a year ahead of signing leases. So we will see how the year-end sales progress, and we'll watch it very carefully. If we can maintain the year's numbers, we will continue; if we think that the slowdown of the consumers on the restaurant sector gets a little behind and continuously slow, yes, we will, for sure, consider pausing the opening of new restaurants. And we have looked at all the financial numbers and the projections in detail.

The next question comes from Todd Brooks of Benchmark.

I have a couple of follow-ups to Jeremy's questions, along with a few others. I wanted to clarify that the industry has been experiencing a continued deceleration heading into the fourth quarter. However, David, if I understood your comment correctly, the trends so far this quarter have stabilized with the same decline of 10% that you reported in the third quarter. Have your trends also slowed down from the trend you presented for the entire third quarter?

Some weeks are better, some weeks are worse. So we're just into it now. I need a little more data. The true number actually for us starts in the second week of November because now we're going to the very high season for Thanksgiving and Christmas. Those are critical months for us. So I don't have that number for you right now.

Okay. Fair enough. Following up on the packaged food products, when you frame up a $100 million opportunity per year as you get 4 or 5 years into the effort, what assumptions do you put behind $100 million of revenues or SKUs expands to a multiple of that number of SKUs, 600 doors expands to what number of doors? What does it take from an operation and offering in a number of doors to generate $100 million in annual revenue?

We have a competitor selling a Korean barbecue frozen product through Trader Joe's, and we have some data regarding their performance. Trader Joe's stores have higher sales volumes, although they have fewer locations. We’ve analyzed the first month of sales at Pavilions and plan to introduce more products. We're in discussions with supermarkets to offer additional GEN branded items beyond just meat. This process is ongoing, and we will announce new products as they are ready. Initially, we will expand beyond the four current SKUs. As we gather insights from our buyers about their needs and recognize that their current products are costly and of lower quality, we can adjust our offerings. Our goal is to align our product range with their sales figures. Over the next year, with new SKUs launching and considering relevant competitor data, we believe we can achieve a solid sales target.

That's exciting. Good to hear. A few more for me if we have the time. The labor efficiency was very impressive in the quarter, especially given how much the traffic trends fell off and where sales came in relative to probably what was an original expectation. How are you generating 200 basis points of efficiency year-over-year?

I think we can generate more. I don't want to use loose words by saying AI technology and things like that. But we are actually deploying those right now. But there's going to be a certain point where I cannot run a store with no humans, right? So we're constantly deploying more technologies so that we can be more efficient. But there will be a certain line because we are going to drop off in service if we go too thin. I think there's a little more basis points to play with, but this is probably the extent of it, sort of us bringing Optimus from Tesla; it could serve customers, okay?

Okay. Fair enough. And then the 6 stores in South Korea across the 2 brands, is that your near-term footprint for South Korea? Thoughts on further growth there? What it takes to know if that warrants more capital, especially looking at kind of the multiple uses for the capital that you do have from an availability standpoint?

We plan to study the Korean market, and we are quite optimistic about the Kan side of the business. If we do undergo a capital restructuring, it would likely focus more on expanding Kan, as building in South Korea is quicker and less costly. For now, we are just continuing to refine our operations to improve our EBITDA.

Okay. Great. And the final one for me, and I'll jump back in queue. David, on prior calls, you've spoken about the composite environment and some of these maybe ankle biters that have followed very successful GEN locations with their own kind of either mom-and-pop or maybe branded Korean offering. What are you seeing from activity from these competitors? How are they dealing with a slowing environment? And is their pace of opening new stores? Is there any evidence of that slowing yet, so you'll see maybe less competitive intensity as you look out to '26?

Yes, we hear information from our bankers. These are local community banks, minority local community banks, and yes, they say because their borrowers of the SBA program who are our competitors. Yes, they say their sales are substantially down but it still has not stopped the entrepreneurs wanting to have the same American dream of GEN 3 and barbecue, so we are continuously having to deal with competitors, for sure.

For your last question, you will hear from George Kelly of ROTH Capital.

Just 2 more for you. First on your South Korean units. Can you give a margin of 4-wall margin by brand.

I don't have that. We've probably been open 2, 2.5 months. We had some changeover in senior management in a very short period of time. So we have to go in since some executive in, our margins are not good right now because we need to stabilize it. I don't have that data today. But on the next quarter call, I will have that data.

I wanted to follow up on the earlier questions regarding your expectations for openings next year. To confirm, there are 7 locations currently under construction, with 2 to 3 expected to open this year. That leaves 4 to 5 openings for next year. Are those confirmed? Additionally, you mentioned an 11-number figure. Does that refer only to the 11 that might be paused, or does it also include the 4 to 5 beyond this year?

No, there's 4 to 5 beyond this year. So the 6 are under construction. So I cannot stop that. But the next 11 are not under construction; maybe 1 or 2 might come on board. But the rest, we can put a pause if we wanted to.

Okay. And then the premium menu, I forget if it was in the Q or in the press release, it sounds like there was a margin, negative margin impact from that menu. Can you quantify that? Did I read that right? Like what have you seen from the premium menu? And also, what is the current penetration of that offering?

The current penetration of the offering is about 4% to 5% because of how expensive the products that we serve on that. I think you rolled about 1% in food cost.

So you're saying the impacts from that 4% to 5% was a 1% impact on 4-wall, consolidated 4-wall margin?

On the food costs, less than 1%, but yes, approaching 1%, right?

Do you plan to retain it? Are you comfortable with the figures?

No, we're not comfortable. We are working on another. We think that our menu presentation needs an uplift and an update. We are working through it now. We have to be very careful when we roll it out because if we roll it out during this busy season, and we don't execute well, it might backfire. So once the new menu comes out and we reorganize the presentation of it with different products, we'll probably test it first before we roll it out throughout the country.

And the new menu might or might not exclude the premium menu, does that...

No, it will include the premium menu in a different way. We have competitors right now that are offering a much better quality Wagyu meats. And we are right now thinking if there are some thoughts and some discussions about it, if there's progress, we will test the higher meats. But we are definitely almost set to go forward with it.

Okay. My final question is about your 2025 cohort of U.S. openings. How would you describe them? Are they opening significantly smaller than previous cohorts due to macro challenges, or have you noticed any geographic trends where certain areas are performing better or worse? I would appreciate any insights you can provide regarding these openings.

The new markets we have entered are not performing as we had hoped, but in the markets where we are already established, we are doing well.

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

Thank you very much for your time today.

Thank you all. Appreciate it.

Ladies and gentlemen, this concludes today's conference. You may now disconnect your lines at this time. Thank you for your participation.