There’s a case to be made that the events of those fifteen months haven’t so much changed the world as much as they’ve magnified the issues with which it was already contending. This is true in society, and even more so in the restaurant business. In focusing so intensely on “old normals”, “new normals” and just how “unprecedentedly unprecedented” everything was, we began to gloss over the fact that there’s basically never an “easy” time to run a restaurant.
At the same time, we can look back at the past year, and find that certain companies have found success through resilience, adaptability, and ingenuity. That these operators are nimble and forward-thinking has certainly helped them weather one of the worst storms the industry has ever faced. However, we should acknowledge that resilience and adaptability have ALWAYS been vitally important traits for any restaurant operator to possess. Also, these companies succeeded not because they prepared specifically for a pandemic, but because they recognized the future is inherently uncertain and prepared themselves to adapt to different scenarios in that future.
We’ve recently looked at what the future may hold for the casual and fine dining segments. A couple of weeks ago, BurgerFi, an extremely of-this-moment brand, provided a glimpse into the future of fast-casual dining.
BurgerFi Acquisition Basics
The Palm Beach, Florida-based burger chain, began trading on the Nasdaq exchange under the symbol “BFI” on December 17, 2020, upon the completion of a merger Opes Acquisition Corporation, a $100 million SPAC formed by Axis Capital Management. (We’re keeping it light on broad SPAC talk this time around (for those of you in need of a bit of background, take a look here or here).
The Company had originally intended to report the results of its first full quarter as a publicly traded company (Q1 2021) on the morning of April 14. However, in late March and early April, the Securities and Exchange Commission (SEC) issued multiple statements “reminding market participants that SPAC IPOs and de-SPAC transactions are subject to existing federal securities laws that must be considered carefully in the context of these transactions.” The last of these statements, the SEC’s “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies”, released April 12, sent sponsors, lawyers, and bankers scrambling to consider the clarity, transparency, and thoroughness of their disclosures.
As this was just two days before the planned earnings call, BurgerFi’s delayed the release of its results and set about ensuring the completeness and transparency of its audited financials. As a result of the delay in releasing its results and filing those financials, BurgerFi’s filing status slipped into “overdue” territory – and out of compliance with Nasdaq listing requirements. It’s not entirely shocking that the delay and questions about listing status, combined with the overarching implications of the SEC’s statements prompted a one-month drop in share price, from nearly $16 to less than $9.50.
An investor would be forgiven for being a bit spooked by the SEC announcing that they’d like a closer look at precisely the type of transaction in which he or she had invested. And yes, the subsequent month of suspense while said company double-checks to make sure that its house is in order would be, at best, unnerving.
Not all assets are created equal
Earlier, I referred to BurgerFi as “of-this-moment”. That wasn’t only because of the SPAC connection. The Company’s most notable and impressive feature is a commitment to eco-friendliness and sustainability that is visible and – by every available account – legitimate and sincere.
For starters, the burgers consist of hormone-, antibiotic-, steroid- and additive-free Black Angus beef. Plain and simple. In fact, in a 2018 Consumers Union report that graded 25 top U.S. burger chains based on antibiotic use policies, BurgerFi was one of just two chains (along with Shake Shack) to earn an “A” – 22 of the other 23 received an “F” grade. And, since 2017, thanks to a partnership with Beyond Meat, the Company has offered cholesterol-free, vegan “Beyond Burger” patties.
Perhaps equally impressively, the efforts extend beyond the burger. Walk into a BurgerFi location and waiting to greet you are: chairs and tables made from upcycled Coke bottles and milk jugs, wall panels made up of highly renewable wood, ultra-efficient fans, and countertops made entirely from compressed recycled paper.
This is a company that is cognizant of the society and the world in which it exists and is making a concerted effort to minimize its negative impact.
The deal that brought BurgerFi to the stock market did so at a valuation of 2.4x anticipated 2021 net revenue and 13.6x estimated 2021 adjusted EBITDA. According to research conducted by NYU, as of January 2021, that’s basically in line with the broader market, and well below the marks for the restaurant industry. However, in June 2020 – at the time of the deal’s announcement, and well before the equities markets shook off all manner of catastrophe a decided that things are apparently better than they’ve ever been – that represented a premium.
Why pay up for a small burger chain in the most fraught moment the restaurant industry has probably ever seen?
Because BurgerFi is neither a stale if internationally-recognized brand looking to de-SPAC its way out of debt, nor a mega-bucks escape hatch for existing shareholders.
By the end of April, BurgerFi had announced that the review of its financials was complete, that the Company was back in compliance with Nasdaq regulations, and that a rescheduled earnings report was forthcoming. Then, on May 20, the Company announced operating results for Q1 2020 (the three months ending March 31).
After Q4 and full-year 2020 same-store sales declined 5% and 15%, respectively, and system-wide sales (BurgerFi has 125 locations, 90 of which are franchised; these are mostly in the United States, with locations in Mexico and the Middle East as well) declined 7% and 11%. Q1 2021, BurgerFi resumed its near-decade-long run of sales growth, reporting system-wide sales of $39.8 million, a year-over-year increase of 19%, with same-store sales growing 4%, and total revenue jumping 32%, to just over $11 million.
Adjusted EBITDA fell, from $1.1 million to $700,000, though this was largely the result of costs associated with becoming a public company and increased investment. Operating margins, meanwhile, remained essentially unchanged at 13.5%, compared 13.6% a year ago. BurgerFi wound up Q1 with $34.7 million in cash on the balance sheet, compared with a long-term debt load of under $2 million, after the repayment and termination of a revolving credit line in January.
Though the company declined to provide projections for the remainder of 2021, CEO Julio Ramirez did little to hide his optimism. In his statement, Ramirez noted that he is “optimistic about our expansion efforts on the eastern seaboard and internationally”. At the time, BurgerFi had opened 15 new locations since the start of 2020, with 21 more in various stages of development, with plans for 30 new locations in total in 2021. Ramirez added, “We anticipate that our growing presence will deliver strong results”, and that company-owned locations will be used as a base of support for franchisees, in order to show that “we have skin in the game”.
Ramirez also referred to 2020 as “a transformative year”, which isn’t terribly surprising, given, well, 2020. However, but a look inside the numbers sheds some light on his claim. In 2020, even as overall sales fell, digital boomed, with growth in order volume and sales volume of 41% and 64%, respectively. The digital channel found yet another gear in Q1, with sales nearly doubling (+98%) year-over-year to $13 million – nearly a third of all system-wide sales. And there is no plan to ease off the gas.
At the end of Q1, BurgerFi had nine ghost (or “delivery only”) kitchens in operation. In his statement, Ramirez confirmed that the Company not only remains committed to the ghost kitchen model but is actually ramping up that commitment, with plans to leverage partnerships with leading ghost kitchen providers Reef Technology and Epic Kitchens to add another 15 to 20 delivery-only locations in 2021. This channel is seen as vital to driving growth in areas in which BugerFi already has brick-and-mortar locations, and as a low overhead means to enter into new markets – namely, Seattle, Nashville, Minneapolis, and Houston.
The SEC’s deliberations regarding the disclosure requirements and accounting for warrants are ongoing. Where the Commission lands on these matters remains an open question. An unfavorable verdict will hamper deal-making for SPACs, and could deal a blow to lesser companies that have already made their way to the public markets via a merger with a SPAC. What these concerns should not do is obscure our ability to recognize genuine quality in a young, growing, sustainable, financially stable, forward-looking company.