GEN Restaurant Group, Inc. (GENK) This fall 2023 Earnings Name Transcript

GEN Restaurant Group, Inc. (NASDAQ:GENK) This fall 2023 Earnings Convention Name March 6, 2024 5:00 PM ET

Firm Individuals

David Kim – Chair and Co-CEO

Tom Croal – CFO

Convention Name Individuals

George Kelly – Roth Capital Companions

Jeremy Hamblin – Craig Hallam

Todd Brooks – Benchmark Firm

Operator

Good day girls and gents, and thanks for standing by. Welcome to the GEN Restaurant Group, Inc. Fourth Quarter 2023 Earnings Convention name. Right now, all members have been positioned in a hear solely mode and the strains shall be open to your questions following the presentation. Please word that this convention is being recorded at the moment, March 06, 2024.

And now I want to flip the convention over to Tom Croal, the the corporate’s Chief Monetary Officer.

Tom Croal

Thanks, operator, and good afternoon. By now, everybody ought to have entry to our fourth quarter 2023 earnings launch. If not it may be discovered at www.genkoreanbbq.com within the Investor Relations part.

Earlier than we start our formal remarks, I have to remind everybody that our discussions at the moment will embrace forward-looking statements inside the assembly of federal securities legal guidelines, together with however not restricted to statements concerning how development plans and potential new retailer openings in addition to these sorts of statements recognized in our annual report on Kind 10-Ok for the yr ended December 31, 2023, and our subsequent studies filed with the SEC.

These forward-looking statements are usually not ensures of future efficiency, and subsequently you shouldn’t put undue reliance on them. These statements characterize our views solely as of the date of this name and are additionally topic to quite a few dangers and uncertainties that might trigger precise outcome to vary materially from what we at the moment count on. We refer you to our current SEC filings, together with our annual report on Kind 10-Ok for a extra detailed dialogue of the chance that may affect our future working outcomes and monetary situation. Besides as required by legislation, we undertake no obligation to replace or revise these ahead looking-statements in gentle of recent data or future occasions.

Throughout at the moment’s name, we are going to talk about some non-GAAP monetary measures, which we imagine will be helpful in evaluating our efficiency. The presentation of this extra data shouldn’t be thought of in isolation or as an alternative to outcomes ready in accordance with GAAP. Reconciliations of the non-GAAP monetary measures to probably the most instantly comparable GAAP monetary measures can be found in our earnings press launch and our SEC filings, which can be found within the investor relations part of our web site.

Now I would like to show it over to our board Chair and Co-CEO, David Kim.

David Kim

Thanks, Tom, and good afternoon everyone. Throughout 2023, the corporate achieved report revenues of $181 million, representing development of over 10% versus 2022. This was pushed by the opening of six new eating places, together with three new eating places within the fourth quarter.

As we look forward to 2024, we count on double-digit income development pushed by eight new restaurant openings over the approaching yr. Earlier than I get into the main points of the quarter, let me remind you of what makes GEN Korean Barbecue actually distinctive. We’re a full service sit down, not a buffet informal eating restaurant idea, serving a wide range of proteins, together with steak, pork, rooster, seafood and salad throughout each lunch and dinner all at an inexpensive, all inclusive value.

Not like different restaurant ideas, each GEN Korean Barbecue expertise supplies our company with an environment friendly prepare dinner it your self at every desk mannequin. This eliminates the necessity for cooks at our eating places, enabling us to maintain our costs low, and permits us to supply one of the best worth proposition to our company. Furthermore, our smaller kitchen footprint additionally supplies us with extra area for tables, permitting extra company to get pleasure from our eating expertise.

With that background, let’s speak in regards to the restaurant growth. In the course of the fourth quarter, we opened three new eating places, one in Houston, Texas in October, one in Caple, Hawaii in November, and one in Arlington, Texas in December. This offers us a complete of six new eating places for yr 2023.

Looking forward to 2024, we anticipate opening eight new eating places throughout February of 2024. We opened two new eating places, each one in Dallas and one in Seattle. The six remaining eating places will open all year long with all year long with most anticipated within the fourth quarter.

Along with the eight new eating places in 2024, we now have 10 extra leases in numerous phases of negotiations that we might count on to be 2025 new eating places. We’re excited and dedicated to increasing our footprint and rising GEN Korean Barbecue. We imagine the expansion alternative forward of us is substantial. We stay happy with the efficiency of our 4 eating places from 2022 and early 2023.

As we said on our final name, the storage continued to collectively generate annualized common unit quantity of roughly 5 million and stay on observe for a median payback interval of roughly 2.2 years. Inside our eating places, we’re at the moment in a testing section of recent menu gadgets and drinks choices that we’re within the works of a rollout operationally. In the course of the quarter, we accomplished a integration of the 2 working firms into one. We additionally accomplished a change from U.S. Meals to Cisco. Whereas these operational in initiatives concerned extra prices above what we had been anticipating within the quarter and impacted our profitability. I am happy to say that each of those initiatives are accomplished.

Importantly, we imagine we now have a strong basis to create an amazing visitor expertise and drive additional development for GEN Korean Barbecue as we add new eating places all through the nation. In closing, we imagine we now have an thrilling development pipeline forward of us. Not solely will we count on to open eight new eating places, however we’re additionally funding these new eating places primarily via the free money movement, additional demonstrating the power of our enterprise. Couple with the enticing new unit economics which are among the many finest within the trade, we imagine we now have the mandatory basis to seize the alternatives forward and improve long-term worth for our shareholders.

With that, I might now like to show the decision over to our CFO, Tom Croal to debate our outcomes.

Tom Croal

Thanks, David. For the yr ended December 31, 2023, revenues elevated 10.6% to $181 million in comparison with $163.7 million in 2022, pushed by new unit openings and a 0.6% enhance in similar retailer gross sales. For the fourth quarter, income elevated 10.4% to $45.1 million, in comparison with $40.8 million within the fourth quarter of 2022, pushed primarily by new unit openings. Similar retailer gross sales decreased by 1.7% within the fourth quarter of 2023 as in comparison with the fourth quarter of 2022.

Turning to bills, price of products offered as a proportion of firm restaurant gross sales decreased by 20 foundation factors to 32.6%, primarily as a consequence of extra favorable commodity pricing and ongoing negotiations with our distributors. Payroll and advantages as a proportion of firm restaurant gross sales elevated by 90 foundation factors to 32.1%, as a consequence of will increase in minimal wage charges in sure markets, which we function primarily California.

Brief-term excessive labor prices in newly open eating places as practice employees and administration and upgrading the standard of our restaurant managers. Importantly, we imagine we now have a strong basis to proceed to create nice visitor experiences going ahead and drive additional development for GEN Korean Barbecue.

Occupancy bills as a proportion of firm restaurant gross sales elevated by 89 foundation factors year-over-year to eight.4%, primarily as a consequence of 2022 and 2023 new restaurant openings, which embrace greater hire markets. Different working bills as a proportion of firm restaurant gross sales elevated 176 foundation factors year-over-year to 11.2% as a consequence of price totaling roughly 110 foundation factors to standardized restaurant working provides and providers throughout all eating places, and roughly 40 foundation factors associated to elevated utilities, which primarily in California.

In abstract, adjusted restaurant stage EBITDA as a proportion of complete revenues was 16% in comparison with 19.3% within the fourth quarter of 2022. As I mentioned, the foremost variations are elevated payroll and advantages of roughly 90 foundation factors, elevated occupancy of roughly 89 foundation factors, elevated working bills of roughly 176 foundation factors partially offset by lowered price of products of roughly 20 foundation factors.

Please discuss with our earnings launch for a reconciliation of non-GAAP measures.

We at the moment anticipate our 2024 restaurant stage EBITDA margin will strategy the 18% vary as we enhance labor charges and our working bills. G&A through the fourth quarter was roughly $4.4 million or roughly 9.7% of income, excluding stock-based compensation. Compared to the steering we supplied final quarter of $3.1 million to $3.6 million. The rise from our steering vary is due primarily to the addition of recent personnel crucial for our elevated stage of recent restaurant growth. As well as, we had non-cash inventory primarily based compensation of roughly 760,000 through the quarter.

Adjusted EBITDA was $1.6 million, together with pre-opening prices. This compares to $5 million for the fourth quarter of 2022. The lower versus the fourth quarter of final yr was pushed by greater pre-opening prices as we constructed extra items, incremental public firm prices within the fourth quarter this yr, which we didn’t have final yr, and the gadgets I discussed beforehand. With out pre-opening prices, adjusted EBITDA could be roughly $2.9 million. Our internet loss was $193,000 or $0.01 per diluted share in comparison with internet revenue of $175,000 within the fourth quarter of 2022. This was pushed by the identical components I beforehand talked about.

Turning to liquidity. As of December 31, 2023, we had no long-term debt aside from $5 million in authorities funded EIDL loans and we now have a $20 million out there in our revolving line of credit score. Importantly, we keep a powerful stability sheet with $31 million in money and money equivalents and have generated sturdy money movement, permitting us to self-fund $17 million of capital expenditures in 2023.

Turning to steering. For 2024, we want to present the next steering gadgets; complete income between $200 million and $205 million, together with eight new eating places and common and administrative expense of $18 million to $19 million, excluding non-cash inventory primarily based compensation expense.

This concludes our ready remarks. We might wish to thanks once more for becoming a member of us on the decision at the moment, and we are actually joyful to reply any questions that you might have.

Operator, please open the road for questions.

Query-and-Reply Session

Operator

[Operator Instructions] Our first query comes from the road of George Kelly with Roth Capital Companions.

George Kelly

So first query for you. I am curious, you talked about in your ready remarks about testing new menu and drink gadgets. I used to be simply curious in the event you might give us a bit of extra element on what that’s?

David Kim

So the brand new merchandise that we’re testing is — it is a plus $20 incremental per visitor. And in for that value, they’re getting a a lot greater high quality meats. So we’re testing it proper now, due to the standard of those meats, our provide line are usually not in a position to meet the demand or our projected demand. So we simply began this about three weeks in the past, however they’re rolling out slowly. We do not have sufficient datas, however the preliminary datas which are coming in are or very constructive.

George Kelly

And only a observe up on that, is it one thing that, simply going again to your provide line level it, is it possible that if the information continues to come back again positively, that it is one thing you may have that rolled out throughout the bottom by midyear? Or will it take for much longer than that?

David Kim

No, we predict that by the tip of March or the third week or the fourth week of March, we should not be at a 100% rollout.

George Kelly

Okay. Fascinating. And I take it you in all probability do not wanna share with the information at this level. Perhaps it is too early to share the information or are you snug giving extra element on simply what you have seen?

David Kim

All I can say may be very constructive, nevertheless it’s not sufficient information pullwe want extra eating places.

George Kelly

After which a pair different questions for you. In your steering for fiscal yr ‘24, you stated 4 partitions ought to strategy 18% margin. And I am simply curious, it was 16% within the fourth quarter and I am confused. That is a reasonably large step up. And so I am simply curious what it’s that you just’re doing to drive one other 200 foundation factors. As a result of it looks like comp development ought to in all probability be flattish at finest. I might suppose it is nonetheless damaging in your steering. So how are you attending to that 4 wall margin enchancment?

TomCroal

The margin that we missed this quarter was a variety of one time expense as a result of integration of the 2 firms to 1, and we now have invested much more in human capital to not solely be prepared for the shops we’re opening this yr. We’ve a variety of on the pipeline, which we stated that we are able to in all probability open roughly 10 subsequent yr. However a variety of that 10 subsequent yr is definitely taking place. We’re beginning processes when it comes to drawings and metropolis approvals, which a variety of them will in all probability begin opening in 2025 first and second quarter. So, we’re placing up a variety of infrastructure prices, preparing for that.

George Kelly

After which final query, after which I am going to hop again within the queue. Tom, you stated, $18 million to $19 million of G&A XSBC and I am simply curious, are you able to quantify what your expectation for inventory primarily based comp is in ‘24?

TomCroal

The inventory primarily based comp must be round $3 million per yr for 2024.

Operator

Our subsequent query comes from the road of Jeremy Hamblin with Craig Hallam.

Jeremy Hamblin

So I wished to only hone in a bit extra on the present traits that you just’re seeing on the market. You are type of greater than 2/3 of the best way via the March quarter. I think about you in all probability have had some damaging affect from the heavy rains in your greatest geography. However wished to see in the event you might give us an replace on the place similar retailer gross sales are trending after which as a type of a observe up on that, I do know it is type of a small take a look at case, however whether or not or not within the markets the place you have got added the premium menu gadgets, whether or not or not these shops within the current weeks have seen comp traits flip constructive.

David Kim

The California shops make up roughly 50% of our complete gross sales. Sure, we now have been impacted by the climate. However that’s simply yearly we will have mom nature in some capability hit us. January did not look excellent. February was okay and March we’re beginning to enhance.

Jeremy Hamblin

I used to be simply going to say, if you say I enhance, once more, I used to be simply attempting to hone in on whether or not or not the take a look at places, whether or not or not they’re seeing — they’ve seen similar retailer gross sales time period constructive. As a result of I think about it is feels like possibly similar retailer gross sales down mid-single digit or one thing like that. Right here given the powerful begin in January,

David Kim

The identical retailer gross sales is popping constructive. So if it to illustrate if it was a double-digit damaging is now double-digit — a single-digit damaging. Any shops that had been a single-digit damaging is popping to constructive. So it will proper course.

Jeremy Hamblin

After which, when it comes to simply — I need to come again and ensure I understood the cadence of your unit openings and the expectations round that. So you have opened up a few places right here in Q1. You are searching for eight complete for the yr. And simply wished to seize, it sounds just like the overwhelming majority of the remaining six are going to be in This fall. Do you intend to open one or two or one every and quarters two and three, however simply wished to see in the event you might share some coloration there.

David Kim

So this yr we have already opened two. We aren’t certain if we are able to open on the finish of March, possibly to be secure we’ll be opening one in April, and we in all probability have the remainder of them, we simply began building and two of them. So in the event you put like a 4 to 5 month timeframe, that ought to end out on the third quarter. Perhaps yet one more. We’re undecided about that. And the remainder are all within the metropolis approval phases. So if we are able to get some extra accredited this quarter, possibly the second quarter we is likely to be be capable to put some extra into third quarter. However we’re telling the road we’ll put we are going to obtain them within the fourth quarter.

Jeremy Hamblin

You highlighted a bit of bit across the premium menu choices even $20 enhance possibility there. Additionally, I believe you famous in your feedback that you’re making some adjustments in your drink combine or in your alcohol combine. Hoped that you just may be capable to share a bit of bit extra coloration on that initiative?

David Kim

We have rolled out a brand new initiative. It is a blended drink with a product referred to as Soju. And that is doing very effectively. New restaurant openings, we now have determined to roll all of them out besides Boston with liquor licenses, as a result of the footprint of the Boston of how small it’s and never having a bar and the price to get a liquor license is round $300,00 to $500,000. We will not make these numbers pencil out however the remainder of them going ahead as an organization, we could have liquor licenses. We have rolled out some liquor licensed eating places that do not have bars with new merchandise. And we’re seeing not quite a bit however small incremental gross sales enhance within the liquor facet of the enterprise.

Jeremy Hamblin

After which simply when it comes to interested by your the combo of enterprise. So, I believe you have got menu very restricted menu pricing at this cut-off date, possibly 1%. However wished to only perceive when it comes to the composition of what you’re seeing in your type of your test versus site visitors and whether or not or not there’s consideration for the prevailing or the legacy places to take any menu pricing right here in 2024.

David Kim

We’re nonetheless very — we’re involved that if there’s a downturn within the financial state of affairs, we at GEN do not need to be priced out when it comes to our visitor expertise and their perceived worth proposition that we give to our company. Going ahead with new eating places in new places, they’re considerably greater than the 50% of our eating places that we now have in California.

So, for instance, if Seattle, we’re opening that — we have opened that retailer with a dinner value at $34.95 in comparison with $29.95. So we now have pricing power in different markets, and we are going to proceed that development as we’re opening majority of our eating places exterior of California. The visitor test common by default will go up as a result of we’re charging extra in different states.

Jeremy Hamblin

After which simply final one right here for me. On California particularly, there are some adjustments when it comes to labor legal guidelines actually concerning focused, I believe extra chain eating places. However simply wished to get an understanding as you checked out labor carried out higher than we anticipated in This fall, that was good. However when it comes to what our expectations must be right here, as we get into type of that April date the place there’s going to be some change within the California labor legal guidelines, what ought to we expect when it comes to affect to your P&L right here all through the rest of 2024?

David Kim

As a result of we’re nonetheless very steadfast in not pricing ourselves out as a result of our rivals are very, aside from our pricing, that means they’re in all probability wherever from in all probability wherever from 10% to twenty% greater than our pricing construction.

This April enhance in minimal wage does not legally affect us however the market, the labor market are saying if I am getting $20 from a quick meals restaurant, why would I compromise at getting paid the minimal wage of $17, $18 plus. So there may be stress due to the encompassing labor — the labor {dollars} which are required by the quick meals trade, it should affect us.

We have considered maybe possibly elevating costs in very regional retailer by retailer bases, as a result of a variety of this are totally different areas. They don’t seem to be all all through the identical areas. So we’re it, however we nonetheless imagine in constantly tightening our belts to search out extra environment friendly methods to convey our labor prices down. And sure, there’s going to be a breaking level at one level, however we nonetheless are trying and we’re discovering small areas to constantly reduce.

Operator

Our subsequent query comes from the road of Todd Brooks with Benchmark Firm.

Todd Brooks

Congrats on first yr beneath the belt right here. Nicely executed. Needed to kick off on the true property facet and it was good to listen to that ‘22 and early ‘23 opening class, you are hitting these $5 million AUVs and the payback interval is type of under that two and a half yr hurdle that you just had set out and that is even in some greater price places. I suppose, David, are you able to speak to the combo of the openings in ‘24 so far as completely new markets versus densifying markets the place you are getting some scale just like the Texases of the world or backfilling in Florida or Hawaii? After which are you attending to sufficient scale in these markets the place you have got a number of items now that the economics and how briskly these shops mature is probably going to enhance going ahead?

David Kim

We’re opening new shops in current markets, particularly those which are doing effectively. So let’s simply take an instance like Texas, the place we’ll be rising a variety of eating places there. Our margins are nice, our gross sales are nice. So we are going to fill in all these markets that we’re very snug that we just like the labor price construction, we just like the gross sales construction. So the areas are Arizona, Texas, Florida, New York, Hawaii. We shall be filling these in aggressively, and we now have staffing that we have got to able to take these on comfortably.

New areas we now have to be forward of the curve right here. So we’re testing and getting into the place we simply signed North Carolina. We’ll go into Tennessee. We’re within the works of that and Seattle, we simply opened, we’re going to begin building in Oregon, and most definitely in 2025 opening, it should begin — we’ll begin going into Colorado.

We’re filling in our good markets for certain. Which means we are going to open these markets and we are going to begin opening the opposite outskirts and see how that works. However with the advance of personnel, the funding that we put in to usher in folks in building, in actual property choice has dramatically improved a lot that the problems that we confronted proper after COVID of the hardships that we had within the website choice and the method to push the development out faster has improved dramatically. That’s the reason we’re getting extra snug proper now within the growth section as of at the moment.

Todd Brooks

And clearly the expertise and sources that you’ve got introduced in are an enormous a part of that, however the setting itself, if you get to allowing and landlord works and issues like that, are these getting higher simply due to the expertise that you’ve got introduced on employees or is that setting itself loosening as much as and making you constructive on possibly shorter lead instances to get items open as you get to ‘25, ‘26?

David Kim

I believe it is each, however I actually attribute that to the employees, the people who work for GEN. The extra you — there is a saying, the squeaky wheel will get oiled and will get extra consideration. We’ve nice skilled guys, they know what they’re doing, in order that course of is getting simpler and shorter.

Todd Brooks

After which the ultimate one on the true property facet, I do know that, you have laid out the eight items for this yr and the ten leases which are beneath — or the ten websites which are in course of for getting locked up for ‘25. Ideas about buffers, are you continue to feeling the necessity to construct buffers of potential places given how far more skilled that growth staff’s getting for you? And in the event you’re trying in the direction of ‘25, is the governor to 10 items extra, how briskly you’ll be able to develop the restaurant stage expertise, particularly when you are going to newer markets?

David Kim

Maybe in the event you can assist me outline if you imply buffer? I do not fairly perceive. Are you able to?

Todd Brooks

So ask the place you had been concentrating on, to illustrate you are concentrating on the eight items for this yr and when allowing landlord lead time provide chains had been actually powerful. You virtually needed to have 11, 12 items within the works for a yr to have the ability to ship the eight, nevertheless it sounds just like the setting and the staff are a lot tighter. So do you are feeling like it’s worthwhile to nonetheless run type of a few items in course of at any given time? If one washes out in a given yr, you run right into a everlasting snafu or simply how a lot much less friction are you seeing within the total building setting the place you might not want that anymore?

David Kim

We’ve a a lot larger buffer due to our potential that we predict we now have due to the upfront funding we’re making on personnel. We’re okay having much more buffer. Even when we had been environment friendly in getting that 10 constructed and we had extra the place we’re in a position to take that on as of at the moment. So we’d, for instance, that is simply an instance. For instance we stated that we are able to open 10 in 2025. Perhaps we are able to find yourself at 15 as a result of the buffers grew to become a actuality, proper? So we’re snug having extra buffer as a result of the extra environment friendly we get these buffers truly can now will flip into new retailer openings.

Todd Brooks

After which yet one more query. I do know distributor switches are by no means straightforward on a staff and the availability chain professionals as you attempt to accomplish these, as we’re interested by that approaching 18% restaurant stage EBITDA margin, how ought to we be interested by meals prices with a full yr beneath Cisco and ramping into that system and likewise layering in, in the event you do have success from a gross sales combine standpoint with the premium pricing premium product right here, how ought to we be interested by meals prices with each of these realities doubtlessly taking part in out over the course of this yr?

David Kim

The switching of a significant distributor has to do with the techniques that they’ve and we get adjusted they usually have to regulate. We’re continually assembly with Cisco, at the very least the senior stage personnel to enhance on that, and it’s bettering. I truly sit on these conferences to guarantee that the late deliveries or the lacking product proportion drops. When it comes to merchandise, we do not — it is streamlined very effectively. We do not have that concern and the meals price is definitely stabilizing quite a bit. Once more, I imagine on the final quarter name I stated we’re actually not involved in regards to the enhance of meals price. It’s extremely a lot stabilizing. We’re at pre-COVID stage of stabilization.

Todd Brooks

After which the premium tier merchandise and the premium pricing, is that useful to meals price or is the $20 upcharge principally permitting you to carry meals price in type of that 32% vary?

David Kim

It is quickly to inform however the preliminary numbers which are coming in because it’s holding.

Operator

Thanks. And we now have reached the tip of the question-and-answer session. I am going to now flip the decision again over to administration for closing remarks.

David Kim

We might wish to thank everyone for being on the decision. We’re excited that finishing our first yr and our first submitting of our 10-Ok. Excited for 2024 and look ahead to talking with everyone quickly. Thanks very a lot.

Operator

And this concludes at the moment’s convention, and you might disconnect your strains right now. Thanks to your participation.