Q3 2024 GEN Restaurant Group Inc Earnings Call
Speaker Change: Good day and welcome to the GEN Restaurant Group, Inc. third quarter 2024 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then 2. Please note that this event is being recorded.
Speaker Change: I would now like to turn the conference over to Tom Crole. Please go ahead, sir.
Tom Crole: Thank you, Operator, and good afternoon. By now, everyone should have access to our third quarter 2024 earnings release. If not, it can be found at www.genkoreanbbq.com in the investor relations section.
Before we begin our formal remarks
Tom Crole: I need to remind everyone that our discussions today will include forward-looking statements within the meaning of federal security laws.
including but not limited to
statements regarding how growth plans and potential new store openings
Tom Crole: as well as those types of statements identified in our quarterly report on Form 10-Q for the period ended September 30, 2024, and our subsequent reports filed with the SEC.
Tom Crole: These forward-looking statements are not guarantees of future performance and therefore you should not put undue reliance on them.
Tom Crole: 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 differ materially from what we currently expect.
Tom Crole: We refer you to our recent SEC filings, including our quarterly report on Form 10-Q for a more detailed discussion of the risks that could impact our future operating results and financial condition.
Tom Crole: 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.
Tom Crole: During today's call we will discuss some non-GAAP financial measures which we believe can be useful in evaluating our performance.
Tom Crole: The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAP.
Tom Crole: 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.
Speaker Change: Now, I'd like to turn it over to our board chair and co-CEO, David Kim.
Thank you, Tom, and good afternoon, everyone.
David Kim: The third quarter marked another period of successful execution as we continue to provide exceptional value and taste to our customers.
David Kim: while expanding our footprint to 43 locations nationwide and preparing to open a large slate of new locations before year-end.
David Kim: Overall, we delivered total revenue of $49.1 million for the third quarter, nearly an 8% increase year-over-year, driven by success of our newer restaurants.
David Kim: We also delivered $0.2 million in net income, or $0.01 of diluted earnings per share, and $0.9 million in adjusted net income, or $0.03.
David Kim: of adjusted diluted earnings per share while estimates had us losing money for the quarter.
David Kim: We have been very surprised at how well these three openings are doing.
We did not expect these restaurants to hit these levels.
David Kim: Furthermore, we achieved the restaurant level adjusted EBITDA margin slightly over 18%, meeting our expectations for the third quarter.
David Kim: With the steady profitability of our current stores, impressive revenue growth from our new locations, and our ongoing efforts to optimize cost, we're in a strong position to
David Kim: to successfully execute our strategic initiatives for the remainder of the year and beyond.
David Kim: Historically, Quarter 3 is a slower quarter across the restaurant industry as Quarter 4 benefits from the holiday season. With that, our same-source sales growth declined 9.6% year-over-year.
David Kim: Consumer environment remains mixed with ongoing inflationary pressures affecting discretionary spending. Additionally, our corridor was impacted by four hurricanes that caused temporary disruptions across several of our regions.
David Kim: extremely hot summer weather that we believe kept consumers at home.
David Kim: more, and we had some cannibalization in Texas and Hawaii with new restaurant openings this year. However, we have seen improvements in our October and November revenue.
David Kim: We are proactively working to increase our seeing store sales. We have been introducing training programs across our restaurants to drive premium menu sales, which we are measuring performance and starting to see improvements.
David Kim: We've also been working hard to drive additional drink sales, like the cocktail soju mixes.
David Kim: We're also testing a new concept called Gen Grills, which we go cook for our guests at their businesses or homes.
David Kim: Another test we're doing is participating in outdoor fairs in an effort to gain more sales regionally.
David Kim: Lastly, as I will continue further, we began a gift card program with Costco.
David Kim: As we mentioned previously, it's important to note that the focus of Jen's business model is on expanding our store count to capitalize on the growing demand for Korean barbecue.
David Kim: On a restaurant level, our model is expected to generate an average cash-on-cash return of 40% with a payback period of approximately two to two and a half years.
David Kim: The three new restaurants I mentioned earlier are all substantially exceeding these average unit level economics by a lot.
David Kim: Transitioning to restaurant level expenses, cost of goods sold decreased by 50 basis points to 31.4 percent of total revenue compared to 31.9 percent in the year ago period.
Payroll and benefits decreased by 120 basis points.
David Kim: to 30.5% compared to 31.7% in the third quarter of last year.
are General and Administrative Expenses
David Kim: excluding stock-based compensation for the quarter were 9.1% of total revenue compared to 8% in the second quarter of 2024.
David Kim: The increase is in line with our expectations, reflecting investments in our team and infrastructure to support future growth.
David Kim: along with an increase in insurance costs as our footprint has grown.
David Kim: At this point, we're now investing in brand building through our incubator, which includes the gift card program with Costco, which we are also working on additional agreement with large big-box retailers.
International Expansion, Asian Food Distribution Channels, and Gen Grills.
David Kim: Given this pipeline of activity, we have started a marketing department to push these initiatives forward. Next quarter we'll give some updates to the initiatives from our brand building incubator projects.
David Kim: We remain focused on completing our goal of opening 10 to 11 new restaurants in 2024 while maintaining a restaurant level EBITDA margin of approximately 18%. We're well on our way to achieving this goal.
David Kim: Not only are we on track to hit our growth target for 2024, but we're also strongly positioned for even more growth in 2025.
David Kim: In fact, we have 17 additional locations lined up with leases signed or in the process of being signed.
David Kim: We also have 15 to 20 leases and negotiations, which should lead to having 75 to 80 total locations open by the end of 2026.
David Kim: We're seeing strong momentum in our expansion pipeline and remain highly confident in our ability to reach our long-term growth objectives.
David Kim: Now, I want to shift the focus of the call to one of our key incubator initiatives.
David Kim: This quarter, we launched Gen gift cards at Costco. Currently, the gift cards are available at 76 Costco locations, all within a five-mile radius of most of our restaurants across the U.S.
David Kim: The gift cards have been selling exceptionally well. In fact, our regional Costco representatives have reported that we are far and away the best-selling gift card they have seen at these locations.
David Kim: The information we have obtained from the rollout of our Costco gift card program shows that our brand is much stronger than we thought.
David Kim: We're very proud of the initial success we've seen with this initiative, and we look forward to expanding our gift card offerings to additional retailers.
David Kim: We're currently in discussion with Sam's Club for implementations in possibly spring of next year.
Speaker Change: To conclude, consumers' demand for the Gen Korean BBQ experience remains strong and our new stores are performing well above our expected per-unit range.
Speaker Change: Our operational initiatives are gaining traction, reinforcing our confidence in our ability to deliver consistent,
Speaker Change: Strong and Profitable Results for our Shareholders. Looking ahead, our promising pipeline of new restaurant openings and lease agreements underscore our commitment to expanding our footprint and reaching our growth targets.
Speaker Change: with a solid foundation, a profitable operating model, and a healthy balance sheet.
Speaker Change: We're poised for sustained success and dedicated to creating significant value for our shareholders in the years to come. Thank you for your continued support as we continue on this
Exciting journey.
Tom Crole: Now, we'd like to hand the call over to Tom for a deeper look at our third quarter financial performance.
Thank you, David.
Tom Crole: For the third quarter, revenue increased 7.8% to $49.1 million, compared to $45.6 million in the third quarter of 2023.
driven by the continued ramp-up of newer restaurants.
Turning to expenses.
Tom Crole: Costs of goods sold as a percentage of company restaurant sales decreased by 50 basis points.
Tom Crole: compared to the third quarter last year and 150 basis points compared to the second quarter of this year to 31.4 percent, largely due to our ability to control food costs.
Tom Crole: Payroll and benefits as a percentage of company restaurant sales decreased by 120 basis points compared to the third quarter of last year to 30.5 percent.
Tom Crole: Occupancy expenses as a percentage of company restaurant sales increased by 10 basis points compared to the third quarter of last year to 8.4 percent.
Tom Crole: due to the new restaurant openings over the last 12 months.
Tom Crole: Other operating expenses as a percentage of company restaurant sales increased 160 basis points to 11.7% compared to 10.1% in the third quarter of last year.
Tom Crole: This increase resulted from higher utility rates and usage during the hotter summer months, as well as increased operating supplies related to our new restaurants.
Tom Crole: G&A during the third quarter was $4.5 million or 9.1% of revenue, excluding stock-based compensation, compared to $3.1 million or 6.7% of revenue in the year-ago period.
Tom Crole: The increase compared to the third quarter of last year primarily reflects the hiring of additional personnel to support our new restaurant development.
and our brand growth initiatives.
Tom Crole: as well as increased expenses related to additional insurance costs as we grow the company.
Tom Crole: Early in the year we held back on GNA increases as we were trying to match the growth of new restaurant development.
Tom Crole: We are now in line with our GMA to be $18 to $19 million for the year, excluding stock-based compensation, meeting our expectations.
Tom Crole: In the third quarter, we had net income of $0.2 million, or $0.01 per diluted share of Class A common stock.
Tom Crole: compared to net income of $2.6 million or $0.08 per diluted share of Class A common stock in the third quarter of 2023.
Tom Crole: Adjusted net income, which represents net income plus non-cash stock-based compensation.
Tom Crole: was $0.9 million or $0.03 per diluted share of Class A common stock.
Speaker Change: As David mentioned at the onset of the call, these figures are better than the estimates that had us losing money for the quarter.
Speaker Change: We maintained adjusted restaurant level EBITDA above 18% for the third quarter of 2024.
Total adjusted EBITDA was $3.4 million net of pre-opening costs.
compared to $5 million for the third quarter of 2023.
Speaker Change: The year-over-year decline was primarily due to increased GNA and pre-opening costs.
Without pre-opening costs, adjusted EBITDA would be approximately $4.5 million.
Speaker Change: Overall, our adjusted restaurant-level EBITDA and total adjusted EBITDA for the third quarter were in line with our expectations, and we remain on pace for our 2024 goals.
Speaker Change: Turning to liquidity, as of September 30th, 2024, we had $22.1 million in cash and cash equivalents.
Speaker Change: and we carried no long-term debt except for approximately $4.4 million in government-funded EIDL loans.
Speaker Change: which we had when we went public in June of 2023.
Speaker Change: We also have $20 million available in our revolving line of credit.
Speaker Change: GEN continues to produce robust, free cash flow, enabling us to fund $17 million in new restaurant development costs and an additional $4 million towards the buyout of our GKBH restaurant.
Speaker Change: We don't expect this trajectory to change in the near future as we continue to focus on new restaurant expansion.
Lastly, turning to our fiscal 2020 for Outlook.
Speaker Change: We are reiterating our expectation to open 10 to 11 new restaurants in 2024, helping us to achieve total revenues between $200 million and $205 million.
Speaker Change: and restaurant level adjusted EBITDA margin approaching 18% for the year.
Thank you.
This concludes our prepared remarks.
Speaker Change: We'd like to thank you again for joining us on the call today, and we are now happy to answer any questions you may have.
Operator, please open the line for questions.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause for just a moment to assemble our roster.
Speaker Change: And our first question today will come from J.P. Woolham with Roth Capital Partners. Please go ahead.
Great. Good afternoon, guys. I appreciate you taking my question.
Hi J.P.
Speaker Change: Hey, Tom. Hey, David. If I could maybe start with maybe just dialing in on the comps a little bit.
Speaker Change: I know that in 2Q you had kind of telegraphed a little bit of...
Speaker Change: the weakness. And then I know you said today that October and November looked better. So just want to make sure that, you know, if you could share a little bit about how comps trended throughout the quarter, and then October and November, is that really, is that improvement there really just...
Speaker Change: Some of the weather issues going away, and therefore you saw a pickup in traffic Any color would be appreciated
I'm
Speaker Change: There's different factors that contributed to the larger than expected negative sales in the third quarter.
Speaker Change: There are some high-volume restaurants that were shut down, so because of a small grouping of restaurants we have, when you have a high-volume restaurant shut down, it impacts the percentage a lot.
Speaker Change: We have turned in our claims to our insurance companies and we haven't realized those insurance money that's due. We can only book in our books once we receive them.
Speaker Change: It was very unusual. We broke it down to some some areas. We had some hurricanes that hit Texas and Florida. Texas is a big market for us. We had some cannibalization amongst our own restaurants, one in Hawaii and one in Texas.
Speaker Change: Two very high-volume restaurants, those were all our cannibalization, but if you combine the two restaurants, we do much better than just one.
Speaker Change: So, we're fine with that cannibalization. We had two restaurants where a much larger competitor of a footprint came in, so that impacted, but that was more on the lower sales volume.
And this weather pattern.
Speaker Change: of these extreme heats. These aren't just regular heats. These are just very, very...
Speaker Change: very hot weathers that will come across like Texas and California. So that kind of impacted it. What's more important here is going forward.
Speaker Change: Are we seeing better improvement in sales in October and November for the
Speaker Change: 6 weeks. Yes, we do. Okay, it's much better than the third quarter numbers. So at least going forward we're not seeing these larger negative comp sales for the first six weeks on the fourth quarter
Okay.
Speaker Change: And maybe if we could just talk about, you know, it sounds like there are a few pretty impressive new units. If you could just maybe talk about kind of what factors you think are responsible for the success and maybe also if there's any kind of understanding of what to do as more new markets come online.
Thank you.
Thank you.
Thank you. Thank you.
Speaker Change: We are very shocked too. I mean, we project what we think we'll do when we open restaurants, but...
These three totally just blew it out of the water.
Speaker Change: If you don't focus with details they can go sideways fast, but we're maintaining, which is very shocking to us,
Speaker Change: and we have all our best management in there now because these three restaurants, if you put some EBITDAs together, it can make up for 10 plus EBITDA stores without any problem. So.
Speaker Change: Why are they doing so well? I wish I had a crystal ball. I mean, we have stores that don't do well, so, you know, we're working hard on those. There's only one.
Speaker Change: In terms of doing so well, you know, we count our blessings and we just, we keep focusing on the details, but this is just a day in, day out in our hard grinding business.
Thank you.
Speaker Change: Okay, and if I could just squeeze one last one in. If I'm thinking about kind of some of these
Speaker Change: additional initiatives it sounded kind of Jen Grills maybe a sort of catering and the participation in outdoor fairs and I think there is something about a an agent distribution channel but
Speaker Change: What is the way, could you maybe elaborate on sort of the way you're thinking about
Speaker Change: the trade-off between what kind of investment in labor and staff is required for these versus sort of what the revenue, or maybe it's more of a marketing opportunity. Could you just discuss those trade-offs, please?
Speaker Change: They're not marketing opportunities. They're very straightforward revenue and EBITDA generation.
So we're, uh, the biggest, uh, right now...
Speaker Change: response we got was the gift card, and we can go into more details if you have more questions on that. But these other launches of we'll call it incubator projects, are pure increases in sales to us.
Speaker Change: and we're looking for that. We're not just waiting for customers to come in, we're actually going out there and starting to be on the offense of this.
Speaker Change: Brand is is very well known now and more than what we expected so we are actually
going and trying these other venues to bring more revenue.
So, it's purely a revenue and a...
project in terms of
Speaker Change: The corporate overhead, we're pretty much 90% there. We're doing all this within the same corporate infrastructure that we have now. So it's not like something we're gonna be adding a bunch of more people. This is about where we're comfortable in having to tackle these projects the way we have our corporate overhead right now.
Okay, understood. Thanks for taking my questions.
Thank you.
Speaker Change: And our next question today will come from Jeremy Hamblin with Craig Hallam Capital Group. Please go ahead.
Speaker Change: Thanks for taking the questions and I want to come back to the commentary around improved results in October and November and wanted to get a sense if you could share maybe magnitude of how much things have improved.
Speaker Change: And then, is it traffic driven? Is it being driven by more mix into the premium menu or just a little more color would be great?
Speaker Change: Jeremy, I think it's a lot of both, but in terms of
The improvement of negative, we were negative nine, I think.
Truncate by
Speaker Change: at least 50% so far. So, yeah, in terms of percentage, it's substantial, but we just don't know how the next, because it's a high season for us now.
Speaker Change: starting in two weeks, we go to the peak. I mean, it is where we make all our money. So if this season does well, we should be fine. So it's still hard to gauge that, but as of now,
Speaker Change: The third quarter negative is behind us in terms of the large negative comp that we've experienced.
Speaker Change: And then just as a follow-up, in terms of the premium menu, where is that mixing as a percent of total?
Speaker Change: now and is that improving as this initiative has rolled out or you know staying the same or people any any color you can share on that?
Sure, it is improving.
Speaker Change: It's not improving as fast as we want, but for sure I can state that it is improving much better than we thought. So it is continuously increasing.
Speaker Change: So that is helping a lot. What was the second question?
Just a portion of TotalMix.
is it 5%? 6%? It's around 5% right now.
Speaker Change: Our goal is to hit 10% and once we get to that 10% stage we'll start now focusing more on the drinks because the drinks are a little low and we want we think there's a lot more to capture on the drink side.
Speaker Change: Can you talk a little bit if there were specific initiatives?
Speaker Change: driving that and you know exactly like how sustainable is that here as we look ahead into Q4 and beyond.
Speaker Change: And then on the food cost side as well, given you haven't taken menu pricing, you know, saw that improve 40, 50 basis points year over year.
Speaker Change: also, you know, pretty solid. So I don't know if that's just driven by, you know, some deflation on the, you know, food costs or if there's other factors going on there.
Okay.
Speaker Change: November on labor costs was, we missed a little bit, I'm sorry, in October, I'm sorry, October, we had a company conference and when we do conferences like this we have to move people around so, but we'll make it up.
Speaker Change: The room of better margins is just purely us continuously focusing on details.
Speaker Change: We're still operators. We still focus on the day-to-day operations. We think we can maintain this in terms of food cost.
Speaker Change: I think on the last call I mentioned that the commodity prices have stabilized, that we don't have big fluctuations these days, so that's improving a lot. One of the areas that we've seen improve is
Speaker Change: The gift cards. The gift cards that are coming in from the sale of the Costco.
Speaker Change: When a customer brings a gift card and they use it.
They're actually buying more.
the premium menu.
Speaker Change: So that's increasing a lot of our guest check average for those who are using the gift card.
We thought by having the gift card
Um...
Speaker Change: And our redemptions are very low. In fact, we've talked to our auditors
Speaker Change: They said that maybe another quarter they'll actually have us book the unused gift card portion to breakage to revenue.
Speaker Change: So, but, you know, we're being very conservative about that. But the numbers that, but we prefer not to disclose it, but it is some outrageous numbers of how much gift cards we're selling right now.
Speaker Change: So maybe that's helping with the margins, too. But, again, we have so many restaurants, it's not like the gift cards are, you know, taking 10% of our sales. It's not like that at all. But, you know, everywhere it helps. So...
Speaker Change: Having said all this, it's just, I wish it was just one area of where we thought we found. It's just many small areas that we're just attacking every day.
Speaker Change: Got it. A follow-up here on Costco. What's the kind of average redemption timeline from purchase to usage?
Speaker Change: And then the second question is, you mentioned that you're getting a higher spend when using the gift card. Can you quantify that in terms of if it's $10 more per check or any color you can share and the magnitude would be great?
Speaker Change: The magnitude of how much more they're spending, we're actually gathering that data now. So we have a team of
Speaker Change: of Junior Analysts that are getting that, so perhaps on the next call we can give you a little better. But we do random checks now, and random checks are telling us that people using the cards are spending more money.
I think on a random check it's like maybe
Speaker Change: seven out of ten are just buying more drinks and they're ordering all the premium menus. But we'll get you a better color.
Speaker Change: and the timing of usage, the timing of usage, we are, the redemption is only like less than 50% so far, which is great. The industry says that.
Speaker Change: redemption should be around 80% between 75 and 80 percent so we still have long ways to go
Speaker Change: But what we've heard from the buyers of Costco because how they evaluate
Speaker Change: the selling of the cards. In fact, Costco in their quarterly call said one of their most improved areas of their sales had to do with gift card sales.
Speaker Change: Now, they're all regional because they don't put these gift cards throughout the country. They only put up, like, five miles away from where your restaurants are.
Speaker Change: So, they calculate by how many they sell, by how many stores around, and there's a math they do. And they're telling us that we're like number one right now.
So,
Speaker Change: In terms of sales, we're very impressed. In terms of redemption rate, we're very impressed with it too. But eventually, the guests are gonna use up.
Speaker Change: the cards. But the good thing about this is once they use it up, they're going to go acquire more of these cards, right? So we have all this cash that starts sitting on the balance sheet that, you know, it's free cash for us. And it doesn't impact our food costs at all right now.
Speaker Change: So now if it if it impacts our food cost and that's an issue But we're not seeing that at all. So it's improving So there are some metrics that we're still looking at this figure out whether that is really making a big difference
Speaker Change: Great. Thanks for taking all my questions. Good luck the rest of the year.
Thanks. Thanks, Jeremy.
Speaker Change: This will conclude our question and answer session. I would like to turn the conference back over to David Kim for any closing remarks.
David Kim: Okay, we'd like to thank everybody for being on this call. And as always, we'd love to meet you at any of these conferences that are coming up. We're going to be at the Craig Helen Conference in New York on November 19th.
David Kim: the Wolf Small and Mid-Cap Conference in New York on December the 4th, and the Ross Conference in Deer Valley in Utah on December 12th.
David Kim: So hopefully we'll see some of you there. If not, we look forward to speaking with everybody when we report our fourth quarter and a full year 2024 results in March of 2025.
David Kim: And thanks again for joining us, and I hope everyone has a great upcoming holiday season. Operator, back to you.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.