Earnings Call Transcript - STKS Q1 2022

Operator, Operator

Good morning, everyone. And welcome to The ONE Group First Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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.

Tyler Loy, CFO

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. 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, 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, CEO

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, 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. We achieved $10.8 million in adjusted EBITDA or a $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 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, and 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 brunch daypart, which has driven incremental interest in both Kona Grill and STK on Saturdays and Sundays. Both our brunch and happy hour offerings showcase our commitment to culinary innovation and incredible value in a fun and vibrant atmosphere. This allows us to expose our brands to new guests at approachable price points, with an opportunity to convert those guests into the dining room in the evenings. While we are happy with our progress so far, we believe we still have lots of opportunities to grow the brunch and happy hour dayparts. In addition, we continue to focus heavily on holidays, which is 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 enjoyed. 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 our sales in this additive layer. For the STK restaurants that have takeout and delivery, it's approximately 5% of sales, and at Kona Grill, it's approximately 13% of sales. In addition to takeout and 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 to date. This year, we plan to open at least 90 venues, which include two company-owned STKs in Dallas, Texas, and San Francisco, California, and a managed STK in Stratford, London, U.K. We will have three company-owned Kona Grills, a Kona Grill in Riverton, Utah, a Kona Grill in Columbus, Ohio, and a Kona Grill in Paradise Valley, Arizona. Finally, we plan to open three licensed units in a partnership with Reef's Kitchen that will 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 Kona Grills. 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 costs 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 signing 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, while still delivering 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 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.

Tyler Loy, CFO

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 costs for regular sanitation of our venues, personal protective equipment, and sanitation supplies 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 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 a 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 thrive 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 2022, 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 incentive 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.

Manny Hilario, CEO

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 who have visited and continue to 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?

Operator, Operator

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

Nicole Miller, Analyst

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

Tyler Loy, CFO

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

Nicole Miller, Analyst

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

Tyler Loy, CFO

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

Nicole Miller, Analyst

Awesome. And then just a big picture question. When you put together the pieces for Q2, just seasonally speaking, the second quarter margin would get better. So it should be up quarter-over-quarter, yet last year was 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?

Manny Hilario, CEO

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

Nicole Miller, Analyst

Okay. Perfect. And last, just a big picture question. Things have been so robust in the segment, and you've absolutely 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 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 out of your brands or ease out of 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.

Manny Hilario, CEO

Yeah. I mean I think you said it well there. Our focus on the value layers should be important in any kind of 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. We have also recently built a very robust social occasion business for birthdays and anniversaries and date nights. So I think even in a tough environment, many of those occasions will continue, as well as the holidays. Our strategy even if the environment is a bit different will still be intact, clearly with total emphasis on value layers, which we have already been working on. 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.

Nicole Miller, Analyst

Thank you.

Operator, Operator

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

Nick Setyan, Analyst

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?

Manny Hilario, CEO

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

Nick Setyan, Analyst

And what about for Kona?

Manny Hilario, CEO

Same thing, the 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.

Nick Setyan, Analyst

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 operating expenses?

Manny Hilario, CEO

Yeah. I mean I think our COGS guidance stays in the same range. As you point out, there are still lots of challenges there. As you've seen from the other operating expenses, we've done a good job 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. There's lots of headwinds in both labor costs as well as on the opening lines. But I think the team is doing a good job staying ahead of that. So I don't see any material impact to any of those operating cost lines, nothing significant from what we saw in the first quarter.

Nick Setyan, Analyst

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

Manny Hilario, CEO

Yeah. I mean right now, we're very close in Dallas and San Francisco, and the Kona Grill is expected to open at the end of the second quarter or beginning of the third. We are coming to the final steps in getting those restaurants open now.

Nick Setyan, Analyst

And just last question, when we 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?

Manny Hilario, CEO

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

Nick Setyan, Analyst

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

Manny Hilario, CEO

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, such as Washington, D.C., Boston, and a couple of Florida opportunities. We do want to be able to open in these big markets as soon as we can.

Nick Setyan, Analyst

Great. Thank you very much.

Manny Hilario, CEO

Thanks, Nick.

Operator, Operator

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

Mark Smith, Analyst

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

Tyler Loy, CFO

Yeah, Mark. So right now, just due to the volatility, we're locking things in on kind of the shorter time frames, 30 to 60 days. 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 that 30- to 60-day lock period.

Mark Smith, Analyst

Okay. And then maybe, Manny, if you can talk just big picture. You've got a really solid customer base, but any impact as we saw gas prices spike during the quarter, primarily on that Kona customer? Did you see any pullback in check?

Manny Hilario, CEO

No. I mean, again, regarding Kona Grill, our emphasis, as you know, has been experiential. We have not seen any impact even as gas prices have tremendously increased in some of these markets. We are very aware of that. But again, I also remember that our emphasis on growth has been the value layer. We've put a lot of emphasis on brunch as well as returning to happy hour. We've seen a lot of success on those dayparts. 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 impact. Our research indicates we haven’t seen a lot of comments on pricing, if any at all. The value has not significantly changed based on our customer feedback. So I would say that to date, we haven't really observed anything describable in terms of people either trading down or just not coming to restaurants.

Mark Smith, Analyst

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

Manny Hilario, CEO

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. It feels like as people came back from the pandemic, some of the process flows changed, and it requires that you are more aggressive and do more pre-planning on permitting. I've noticed there's more of a difference there, but nothing significant that impacts the timing of our planned openings relative to opening restaurants. You have to consider longer lead times for equipment now; previously, we could time equipment bids in a six-month period. Now we're looking at a nine- to 12-month timing for the equipment, so you have to change your project management timelines. It has certainly changed how we do those things. But again, it's all about project management and getting ahead of the planning. In terms of real estate, I think we've seen a lot of availability; there are many malls with great real estate that are available in the big markets, as spaces have been vacated. So we have an opportunity right now to open where we want to with the brands, and there’s a lot of flexibility in taking the real estate we want. From a real estate selection standpoint, it's probably one of the better markets I've ever seen. Relative to costs, I think we're getting fantastic deals from landlords. I believe this is a testament to the success of our brand, as people are eager to get STKs into their projects because of our average volume and exciting programs like our happy hour and brunch. I am very excited about the go-forward development plans with the only caveat being we need to be more proactive and have longer lead times, as well as adjust our project timelines for this.

Mark Smith, Analyst

Exactly. Thank you.

Manny Hilario, CEO

Thank you.

Operator, Operator

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.

Manny Hilario, CEO

Thank you. 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 in the second quarter. Again, none of our results are possible without the incredible commitment of our team. I am very pleased and proud of the achievements of everyone on that team, and we look forward to continuing to provide unforgettable, exceptional experiences to every guest, every time and in every one of our restaurants. We appreciate everybody’s interest and see you out in our restaurants. Thank you.

Operator, Operator

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.