When one is looking for growth, technology isn’t the only possible sector. Lots of businesses could be growth-friendly, including the possibility of a trendy new restaurant chain.
Today we’ll be looking at a smallish, but ambitious, west-coast restaurant chain, GEN Restaurant Group (NASDAQ:GENK), with a look at how they might be able to return value to shareholders, and the possibility of them being able to grow into a major nationwide restaurant.
Understanding GEN Restaurant
GEN Restaurant is a relative newcomer to the stock world, having its IPO in the summer of last year. The company is a chain of all you can eat Korean and Korean-American barbecue restaurants with nearly 40 company-owned restaurants currently, centered around California, and designs to grow dramatically in both existing markets and other markets around the US.
The restaurants operate with no chefs, they get their food ready-to-serve from their suppliers. They have personnel to process orders, but this lack of chefs allows them to have much smaller kitchens, with more of the space of their locations dedicated to dining space.
GEN Restaurant says it intends to open 7-8 locations throughout the year in 2024, and in the year 2025 and beyond the goal is to open 10-12 new restaurants annually. That’s an ambitious goal, and if they manage to do it profitably the company could become a big growth target.
Consolidated Balance Sheet
|
Cash and Equivalents |
$29 million |
|
Total Current Assets |
$33 million |
|
Total Assets |
$219 million |
|
Total Current Liabilities |
$31 million |
|
Total Liabilities |
$171 million |
|
Shareholder Equity |
$46 million |
(source: most recent 10-Q from SEC)
GEN Restaurant has a pretty secure balance sheet for a company so small, and a seemingly solid cash balance. The issue becomes whether they will have enough money from cash flow and existing cash reserves to be able to finance the planned growth they hope to experience.
The price/book is reported to be 3.29, which is a bit higher than the sector median. That might be able to be justified if GEN Restaurant experiences the kind of growth we’re talking, but it certainly isn’t the sort of cheap asset value I generally like to look for In a company.
The Risks
GEN Restaurant is a small company with big ambitions. Accordingly, that means the company comes with its share of things that could go wrong on the path to success.
Inflationary risks are potentially a big one. The company has to contend with the rising cost of food and labor, and passing the costs on to the customer, there is no guarantee such a fledgling company will meet with customer acceptance.
Inflation is also a potential hitch in the planned growth of GEN Restaurant in the form of construction costs, as putting together the supplies to build new locations to the expected specifications could end up costing more than anticipated.
To justify the company’s price, they have to keep expanding. As mentioned above the company has plans to do so. While the company is being well-received in the areas they are presently open, that is no guarantee that the relatively unfamiliar format of the Korean barbecue will be accepted easily in new areas.
Managing the planned growth is no easy matter either, and the question is whether new locations will be successful in general, and whether they will be able to be as quickly profitable as the company anticipates.
The restaurant business in general faces intense competition, and GEN Restaurant’s business may be a unique take on the restaurant experience, but there are plenty of alternatives for consumers to spend their dollar.
Economic conditions may also be a factor, as if the economy gets generally worse, people may go out to eat less, and may look for cheaper alternatives.
Statement of Operations
|
2022 |
2023 |
2024 (1H) |
|
|
Revenue |
$164 million |
$181 million |
$105 million |
|
Operating Income |
$12 million |
$8 million |
$2 million |
|
Net Income |
$11.7 million |
$11.4 million |
$5.8 million |
|
Diluted EPS |
pre-IPO |
8¢ |
17¢ |
(source: most recent 10-K and 10-Q from SEC)
As you can see, GEN Restaurant isn’t hugely profitable, but it is growing at a reasonable rate so far. The company’s most recent fiscal year gives us a P/E ratio of about 100, and the estimates are that that the current year, even after beating earnings in Q2 by 3¢, has an expected loss of 1¢ in each of the last two quarters. That would come in at an earnings per share of 15¢, and a forward P/E of 58.2.
Estimates for 2024 are to end up the year with revenue of $204 million, and 2025 revenue of $245 million. That’s a decent amount of growth to be realized going forward, but the earnings aren’t expected to improve, with 2025 earnings per share estimated at 12¢.
With such a focus on growth, it is unreasonable to expect the company to spend any money to directly return value to shareholders any time soon, whether in the form of dividends or share buyback. That’s understandable, with the money all committed to opening new locations.
Conclusion
GEN Restaurant has a lot of potential, with hopes that growing interest in Korean culture will extend to their restaurants being popular locations. If the company does grow dramatically, this could be a fairly reasonable price to pay for it.
That said, I’m only going to rate it a hold, and that’s because there are just too many questions about a company this size trying to grow at a rate that would virtually double it in size in the next 3 years. That’s just a lot to ask of any management team, and investors interested in getting into the company would have to be comfortable with quite a bit of risk going forward to even consider it. As for me, there is just too much risk to be palatable.
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