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spk00: Greetings and welcome to the one group third quarter 2021 earnings conference call. At this time, all participants are in the listen only mode. A brief question and answer session will follow the formal presentation. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to Tyler Loy. Please go ahead.
spk09: Thank you, operator, and good afternoon. 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 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 refer to 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 in owned and managed and licensed units, the GAAP measures, along with the 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?
spk03: Thank you, Tyler, and hello, everyone. Thank you for joining us today. We sincerely appreciate everyone's continued interest in the one group. I would like to begin by thanking our team members who continue to work exceptionally hard in driving our world-class operations. It is because of their commitment to operating the best restaurants in the industry that we have been able to strengthen our leadership position in high-end and upscale casual dining, and that we can move forward with great confidence in the long-term opportunity we see for the one group. Today, I'd like to provide some detail on our recent results, strategic initiatives, and then discuss our robust development plans. Then I'll turn the call over to Tyler, who will walk you through the quarterly financials in greater detail. Finally, I will provide closing remarks and open up the call for Q&A. We are thrilled to report that during the third quarter, we achieved record-setting revenue with almost $72 million in total GAAP revenue, reflecting $100 million in total food and beverage sales at owned and managed locations. We were able to leverage this sales growth to achieve restaurant margins in excess of 17% despite commodities headwinds and labor shortages across the industry. Also, we were able to reach over $10 million in adjusted EBITDA, which brings our year-to-date adjusted EBITDA to 29.4 million. Our third quarter U.S. average weekly sales were equally impressive at $285,000 for SDK compared to $184,000 in the same period in 2019, and 99,000 for Kona Grill compared to 78,000 in the same period in 2019. Our recent comparable sales have been extremely strong, building on our long history of outperforming the industry. During the third quarter, consolidated comparable sales for the one group increased 44.7% when compared to 2019. Comparable sales at FTK increased 63.8%, and Kona Grill comparable sales increased 26.9% compared to 2019. all meaning each and every one of our domestic SDK and Kona Grill restaurants were positive for the third quarter versus 2019 sales performance. The sales momentum continued through October as consolidated comparable sales increased 59.2% for the month, including a 73.7% increase at SDK and a 42.9% increase at Kona Grill. All of these compared to 2019. This outstanding performance validates our position that guests are looking for the high energy, differentiated experience that our vibe-guiding offering delivers. Of course, without our team's hard work, none of this would be possible, and we wouldn't be prouder of the outstanding job that they are doing. Adding more color to the results, we are seeing strength across all day parts and days, but especially Thursday through Sunday. Sundays are becoming increasingly significant for both SDK and Kona Grill since the addition of the brunch day part. Several drivers continue to provide opportunities for us to differentiate and introduce guests to our SDK and Kona Grill brands and create incredible content for our robust digital marketing capabilities. The first has always been happy hour where we offer innovative food and drink specials. At SDK, we have compelling culinary options from $2 through $8 in addition to drink special, such as half-off special cocktails. At Kuna Grill, we have the $3, $6, and $9 menu in addition to our very successful Margarita Heaven program. Many of our happy hour guests transition to our main dining room and stay for dinner or get introduced to the brands via happy hour experience and return for a celebratory occasion an area which we truly excel. Second, we are using our takeout and delivery business to reach new and current guests and continue to be encouraged by this highly accretive revenue driver at both SDK and Kona Grill. Even with the restaurants at full capacity, we haven't seen a slowdown in our off-premises business, and we continue to market and innovate the business for further growth. We have carefully crafted the takeout and delivery menus to be an extension of the in-dining room menu and it provides a great introductory price point offering for both SDK and Kona Grill. To quantify the delivery sales at some of our top performing restaurants, we are generating an annualized rate of 1 to 1.5 million in takeout and delivery revenues. Third, our brunch program continues to grow and provides a great introduction to the brands where we offer differentiated and unique food and beverage options. We believe that we're still very early on the branch day part with a lot of opportunity ahead. And lastly, the fourth area of emphasis in an opportunity to introduce guests to the brand is holidays. Our added emphasis on each holiday has really expanded our base. We have seen a lot of people who will try us for a specific holiday meal and then will come back for more regular type of dining. Looking to the fourth quarter, we are excited about our lineup at both SDK and Pune Grill for Thanksgiving, Christmas, and New Year's Eve. Now turning to our events business, which will be an additive layer and high margin business. This is the area of our model that still hasn't fully recovered from the COVID-19 pandemic, but we are seeing a greater and greater demand as we progress into the fourth quarter. We are focused on balancing this demand with our steady, robust a la carte dining in order to maximize each of our restaurants. Overall, we believe that both brands have recovered extremely well, and we feel optimistic about their opportunities for continued sales growth for the remainder of the year and beyond. Now turning our focus to development, we have an exciting pipeline of growth through both company-owned restaurants and managed and licensed deals for the remainder of 2021 and into 2022. We still plan to open 13 new SDK and F&B venues between 2021 and 2022. To date in 2021, we have seven new venues, all of which are off to an incredible start. These include a managed SDK in Scottsdale, Arizona, which opened in January, a licensed SDK at the Los Cabos Airport in Mexico, which opened in May, which we believe will be the first of many future airport locations globally. We open a managed SDK and two F&B venues in the Westminster area of London in May at the Westminster Imperial. On July 21st, we open a company-owned SDK in Bellevue, Washington. This is the first SDK to open in the Pacific Northwest. Weekly average sales volume of this restaurant are surpassing $240,000 per week. And finally, in August, we entered to a management agreement to manage operations in the River Shore Bar and Grill in Oregon City, Oregon. As a reminder, for those restaurants that are managed or licensed, we generate management fee revenue based on top line revenues and incentive fee revenue based on a percentage of location revenues and profits. As of today, we have three additional SDKs under construction. They include a company-owned SDK in Dallas, Texas, a company-owned SDK in San Francisco, California, and a managed SDK in the Stratford area of London. We expect all of these locations to open in late 2021 or early 2022. Lastly, we have entered into an agreement with Reef Kitchens to open pre-takeout and delivery-only venues featuring offerings from our SDK, Kona Grill, and Valium concepts. These will open either late 2021 or early 2022, in the Houston, Texas market. Turning to Kona Grill, we have set an initial target of three to five new Kona Grill locations per year beginning in 2022. With annual unit volumes exceeding $5 million and strong store level margins, Kona Grill produces highly attractive unit economics for us with potential 40% plus cash on cash returns on our investments. We continue to see high demand for new units from some of the most prestigious landlords in the country. We have identified the one group's first new opening for Kona Grill, which would be a company owned restaurant in Riverton, Utah, a high profile suburb of Salt Lake City, Utah. This location is already leased under construction and we expect that this restaurant to be open by May of 2022. Frankly, we are early in our growth strategy and lots of white space remains. Over the long term, we foresee a total addressable market of at least 200 SDK restaurants globally and at least 200 corner grills domestically. Combined, that's over 400 restaurants. Much of this growth will be asset-like and all company-owned restaurants will be self-funded through internally generated cash. Before I turn the call to Tyler... I wanted to touch briefly on what we are seeing regarding labor shortages that our industry is facing. While we are not immune to these challenges, we have done a very good job of recruiting and retaining employees. We have prioritized and invested in these areas during the quarter as we anticipate a very busy holiday season and believe that being fully staffed is a true differentiator and a competitive advantage in the industry today. Currently, we are over 100% staffed at both the manager and crew levels as if we're going to the busy fourth quarter, and our P&L reflects an investment in recruiting, training, and retention activities in the third quarter. In terms of what we're seeing from an inflation perspective, wages are up across the board, but we are managing these increases carefully. We are particularly seeing inflation for back-of-the-house employees as demand is high in the marketplace. We have rolled out the TOG perks program, an enhanced benefits program, and it has been beneficial in attracting people to us and retaining employees. We have also rolled TOG rapid deployment, an internal human resources initiative whereby our human resource team works with our restaurant teams in consistently executing a 24-hour from application to interview to offer process for new employment applicants. So in the toughest operating environment I can remember, we are focusing a lot of efforts on attracting and retaining talent. Our retention level, particularly for our general managers and executive chefs, has been excellent, which is critical these days, navigating through a complex and quickly changing environment. To conclude, our team has certainly proven their resiliency, and they're doing a fantastic job welcoming guests into our restaurants for a great vibe dining experience. Ultimately, Our focus on operations and day-to-day execution has proved effective in translating to a strong P&L, and we are very hopeful that our trajectory that we're fully on will continue to accelerate in the months ahead. Now I'll turn the call back to Tyler.
spk09: Thank you, Manny. Let me start by discussing our third quarter financials in greater detail and then provide an update on our cash and liquidity. For the third quarter, total gap revenues were a record $71.9 million, increasing 81.6% from $39.6 million for the same quarter last year. Included in our total revenues for the quarter is our own restaurant net revenue of $68 million, which increased 79.7% from $37.8 million for the same quarter last year. The increase in revenue is primarily attributable to strong sales momentum resulting from our high-level execution of our sales initiative, along with the opening of new units. Domestic consolidated comparable sales increased 44.7% for the quarter compared to 2019. For SDK, comparable sales increased 63.8% versus 2019, and Kona Grow comparable sales increased 26.9% versus 2019. Management license and incentive fee revenues were $3.9 million, increasing 123.7% from $1.7 million in the third quarter of 2020. This increase is primarily the result of sales recovery from the COVID-19 pandemic, coupled with the opening of SDK Scottsdale in January, SDK Los Cabos Airport in May, and SDK Westminster with two F&B venues in May and another F&B venue in August. Owned restaurant cost of sales as a percentage of owned restaurant net revenue increased 210 basis points to 26.1% in the third quarter of 2021 compared to 24% in the prior year. As a reminder, our second quarter 2021 cost of sales were 25.3%, so our quarter-over-quarter increase was only 80 basis points, reflecting effective cost management in this inflationary environment. The increase in cost of sales quarter-over-quarter was primarily driven by beef and shellfish costs. We continue to work with our vendors and supply chain in order to control costs and continue to manage and engineer our product mix towards higher margin items. Owned restaurant operating expenses as a percentage of owned restaurant net revenue improved 250 basis points to 56.9% in the third quarter of 2021 from 59.4% in the third quarter of 2020. Increased sales volumes primarily drove the year-over-year decrease. Quarter-over-quarter operating expenses increased 480 basis points as we invested in fully staffing our restaurants, primarily hiring and training costs for new employees, and we also invested in stocking up operating supplies in anticipation of high demand for those products as fourth quarter sales volumes increased. Restaurant operating profit increased 50 basis points to 17.1% for the quarter compared to 16.6% in the prior year third quarter. On a total reported basis, general and administrative expenses were $6 million compared to $3.4 million in the prior year. The increase is related to our restaurants generating strong sales and returning to more normal operations, including normal support staffing levels. When adjusting for stock-based compensation, adjusted general and administrative expenses for $5.3 million in the third quarter of 2021 and $2.9 million in the same quarter last year. As a percentage of revenues, adjusted general and administrative expenses for 7.4% of total revenue in the third quarter of 2021 and flat compared to the third quarter of 2020. Additionally, as a percentage of total sales at owned, managed, and licensed locations, adjusted general and administrative expenses were 5.3%, which is right in line with our 5% to 5.5% target. We incurred approximately $1.1 million of direct costs related to COVID-19 during the third quarter, composed primarily of costs for regular electrostatic cleaning of the venues, personal protective equipment, and sanitation supplies to prevent the spread of COVID-19. This compares to $1.7 million of similar costs last year. Interest expense net of interest income was $0.8 million in the third quarter of 2021 and $1.3 million in the third quarter of 2020, reflecting lower average outstanding balance and lower interest rates. Income tax expense was $1.5 million for the third quarter of 2021 compared to an income tax benefit of $0.4 million in the third quarter of 2020. Net income attributable to the One Group Hospitality Inc. was $11.7 million, or $0.34 net income per share, compared to a net loss of $0.9 million in the third quarter of 2020, or $0.03 net loss per share. Included in this quarter's net income is a $10 million gain related to the forgiveness of CARES Act loans. When adjusting for the gain related to the forgiveness of CARES Act loans and COVID-19 related expenses, Adjusted net income was $3.7 million, or $0.11 net income per share, compared to an adjusted net income of $0.4 million in the third quarter of 2020, or a penny net income per share. Adjusted EBITDA for the third quarter attributable to the One Group Hospitality Inc. was $10 million in the third quarter of 2021, compared to $4.7 million in the third quarter of 2020. Our adjusted EBITDA does not include any gains related to the CARES Act loan forgiveness. We have included a reconciliation of adjusted EBITDA and adjusted net income or loss to gap net income or loss in the tables in our third quarter earnings relief. Finally, to touch on our liquidity, as of September 30th, we had $19.1 million in cash and cash equivalents on our balance sheet, and we generated positive cash flow throughout the third quarter. As we discussed on our previous earnings call, we amended our credit facility with Goldman Sachs and paid down $22.2 million in debt, resulting in a lower cash balance quarter over quarter. The amended agreement provides for a lower interest rate and extends the maturity date for both the term loan and revolving credit facility by five years. The amendment provides for a security revolving credit facility of $12 million and a $25 million term loan. Other key modifications include the removal of many limiting restrictions, including the cash accumulation provision that restricted our revolver ability, and the removal of all financial covenants except the maximum net leverage ratio of two to one. Under the amendment and calculated retroactively, we would have been compliant with this covenant throughout 2020, including throughout the toughest times of COVID-19. Most importantly, as a result of this new amendment, we will save $2.5 million in cash interest expense annually and are nearly debt-free when taking into account our cash balance. And lastly, as previously discussed, on July 13, the company received notice from its bank that its remaining CARES Act loan of $9.8 million had been fully forgiven by the SBA. As a reminder, due to the uncertainty of COVID-19, other than development, we have suspended all financial guidance for this year, but will provide further business updates as warranted. I will now turn the call back to Manny.
spk03: Thank you, Tyler, and thank you all for your time today. Let me conclude by saying I'm very encouraged with our results to date and our prospects for 2022 and beyond. Above all, I'm grateful to all our teammates who bring our mission to life every day to be the best restaurant in every market where we operate. They do this by delivering exceptional and unforgettable guest experiences to every guest every time. I also want to thank our customers that every day try and continue to return to our restaurants and enjoy the vibe dining experience that 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.
spk01: Thank you. If you'd like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speakerphone, please lift your handset before entering your request. Once again, that's 1-4 to register for a question. One brief moment for the first question. And our first question is from Nicole Miller with Piper Sandler. Please go ahead. Your line's open.
spk05: Thank you and good afternoon. Appreciate the update. I was going to ask a numbers question and then a high level question. Could you speak to the October, please, STK comp you shared and the Kona comp? And could you talk about the equivalent average weekly sales for modeling purposes?
spk02: Go ahead, Tyler.
spk10: Yeah.
spk11: So, you know, in terms of the average weekly sales, Nicole, average weekly sales, For all of North America, for SDK, it's $323,000. And then for Kona Grill, it's about $100,000. And then the stands for sale for October were 59.2% over 2019. Kona Grill was 43%, just shy of that.
spk09: And SDK was just shy of 74%.
spk05: Okay, so up 74 and 43 on STK. So the Kona comp of 40. I get the comp of 43. I'm just asking what is the average weekly sales dollar number associated with that?
spk11: Yeah, that equates to about $100,000 a week.
spk05: Okay, understood. I got that part. And then the... Yeah, the comp up 74%. I'm sorry, was that the 323 then? Yeah, that's 323,000.
spk09: Gotcha.
spk05: Okay. That helps out a lot. Thank you. And then big picture, I mean, there's an October acceleration. I mean, you had some commentary you provided. There's some in the press release as well. But, you know, what is the acceleration primarily a function of? Because it's certainly more than just, you know, any mandates lifting that were remaining. And what does it really suggest, you know, for the holiday season ahead, maybe talking about how an October average weekly sales, now that we can translate to that, compares to what is most likely a higher November and December historical range of average weekly sales?
spk03: Nicole, this is Manny. I think there was three questions in there, so I'll try to take – Sorry, Manny. No worries. So the first one is I think the acceleration in October, if you want to call it that, I just think that – In October, we did a very good job with our promotion windows in that particular month. So I think there's a lot of very strong promoting in there. And then the second thing is, you know, we have pushed our takeout and delivery business heavily in the month of October. So I think that has helped. with the numbers and we're seeing two benefits from our acceleration of on the takeout delivery marketing which is although we're marketing in engines like Postmates and Grubhub and working with those guys, we're actually seeing some of that translating to restaurant visits because we're coming out of top of mind when people are popping into those takeout delivery vehicles and they're actually coming to the restaurant. They'll go and book a reservation, come down to us. So That takeout delivery promoting is actually both helping the takeout business as well as the dine-in business. In terms of the fourth quarter, I would say that what we've seen in general is that the event business demand for November and December has been off the charts. Frankly, one of the highest I've seen since I've been with the company. So we're seeing a lot of demand there. for parties, and we're also seeing a lot of demand for restaurant buyouts. So we're starting to see people wanting to spend big premium dollars to get access to the properties to host big parties. So we're very bullish and we're very pleased with how the books have been filling up for the fourth quarter. So I would say that this is one of the biggest demands I've seen, which is one of the reasons why, as you saw from our prepared comments, we've spent a lot of time building up our employee base because we think we're going to need every single one of those employees to make sure that we can take care of the takeout, delivery, and event business and dine-in. So All put together, we think our fourth quarter is going to be extraordinary relative to sales, and we really geared ourselves up in the third quarter to get there.
spk05: Thanks. Appreciate it. Thanks for taking my questions.
spk02: My pleasure.
spk01: If you'd like to register for a question, please press 1-4 on your telephone. We do have a question from Mark Smith with Lake Street Capital Markets. Please go ahead. Your line is open.
spk06: Hi, guys. First off, I just wanted to dig in a little bit deeper on the restaurant-level margins. Maybe, Tyler, if you can just talk about, first, the labor component. It sounds like everybody's seeing pressure out there, but was any of this in Q3? Could it be viewed as kind of one-timish as you invested in systems and ways to kind of keep this labor around?
spk03: So, Mark, this is Manuel. Get me for the initial part of that question, and I'll turn it over to Tyler for additional color. So in the third quarter, we took our hourly employee base up about 300 people. So we finished the second quarter with around 2,900 restaurant-level employees, and we took it up to 3,200. So think of a 300-plus net increase. to the count, just because, as I said earlier, we needed to get employees available to take care of what we think is going to be an incredible fourth quarter. So we really bulked up on the number of employees. The average employee that we brought in was working around 30 hours a week and just getting up to speed. And we did that throughout the whole quarter. So just taking those numbers, you probably could figure out a number of what we think that number looks like. And a lot of it is training. So it takes an average of 50 days to 60 days to really get our employee base proficient. So I would say that we did have a pretty large dollar amount in training and development of the new staff to bring him up to standard. Tyler, you want to add anything else to that?
spk11: Yeah, I would say that, you know, and really the bolting up of the staff with anticipation and of a very, very busy Q4. So I don't think it's a matter of being necessarily one time in nature, other than the fact that it's an investment in what we anticipate to be a very, very busy holiday season.
spk03: Yeah, I mean, last point on that is, I mean, our average volume for SDK is 300,000 plus average week per restaurant. So that requires that we bring in more employees. So we did have to make sure that we really loaded up the employees and the restaurants to take care of that business, particularly when our objective is not just to take care of the business, but we believe in building repeat business and frequency. So we want to make sure that as we bulk up on sales that we continue to deliver an outstanding experience and making each one of our restaurants the best restaurant in the markets they're in.
spk06: Okay. And then looking at just other inflationary pressure, I think, Tyler, you called out beef and shellfish. You know, what are you seeing today? And then if you can update us on anything that you've got kind of on contract or anything that's running out.
spk03: I mean, so seafood was probably the most important or most relevant to us because our seafood platters are a marquee item in the brand. But as you probably saw from our cogs, If you look at our third quarter COGS versus our second quarter COGS, I think we only went up 80 basis points as a company. So I would say relative to the pressure, I think we did very well managing that. And what we're doing to manage it is several things. One is substitute. So we've looked for alternative products that are a better cost. So for instance, think of Rat Crab. We switched Rat King Crab and we went to Dungeon's Crab, which is also a premium great product. So we're using substitution as a good idea in terms of creating, you know, being able to offset some of the increases we're seeing. And then in terms of contracts, we actually now have two vendors on meat that are fully engaged and that really allows us to work with each one of them and work on different parts of the P-Mix, so fillets versus ribeyes versus meat. New York Strip, so we actually have been enhancing our supply chain for that. And then the third thing that we've been doing is utilizing promotions to help with the PMICS effect. So in the month of October, we featured Welcome Back Bumpkin, which was our highlight promotion of the quarter. And I think I mentioned in Nicole's question that promoting had helped us. Well, that's an example where we were able to drive interest and sales, and then the costs on the pumpkin tortellinis that we actually had as a featured product was very good. So we got a positive benefit from that. So we really are utilizing P-Mix and then, of course, cocktails. We've done a lot of emphasis in the month of October and actually September as well, really hitting our beverages as a good profit opportunity for us. So we've been really emphasizing liquor sales in the restaurants. Tyler, anything else you want to add to it?
spk09: No, I think Manny touched on it just in terms of our overall quarter-over-quarter COGS number really only increased 80 basis points. And Manny touched on all the different activities that we've employed to really maintain that number and feel like we've managed that number very, very tightly for the quarter.
spk06: And the last one for me is just monthly cadence in sales, and thank you guys for giving us the October number, but I don't know if you have that readily available.
spk03: Well, we kind of reported July as being a very good month for us, so we know that was a very strong month. I would say that without giving specific numbers and not having them right in front of me, but I think August was the softer of the three months in the quarter, so we had a very strong – July, August was okay, and then coming back in September, it became strong again. I think the go-back-to-school timeframe was very good for us. We have a lot of, particularly with Kona Grill, we have lots of restaurants that have restaurants near major campuses, so I think the back-to-school period was very strong, and then, as I mentioned earlier, the promoting in October between both takeout and the and the welcome back pumpkin features have been very strong for us.
spk06: Okay. Great. Thank you, guys.
spk03: Thanks, Mark.
spk01: Again, to register for a question, please press 1-4 on your telephone. We do have a question from David Kanin with KWM. Please go ahead. Your line is open.
spk08: Hi, guys. Congratulations. Excellent job. Thank you, sir. So the first question is in regards to the events business. I know historically Q4, that's a large chunk of your overall revenue. How does it look versus 2019? At this point, just the bookings, I'm sure it's off the charts versus 2020. But how would you characterize it versus 2019?
spk03: So I'll speak about it from a bookings perspective right now. We're seeing just a superior number of events being asked for, and then we also are seeing a lot more demand for premium type of events like rush and buyout. So we're seeing less for entry-level events but a lot more for premium. So I think in this fourth quarter, our strategy on that is to book, on the high end because we also have a very robust a la carte business here. So really in the fourth quarter, our focus will be balancing the great premium business from events that we are getting demand for right now and then balancing that with a la carte. I would say it's the best demand I've ever seen since I've been with the company for fourth quarter. And I think that we've also bulked up our processes for booking events. So I think the combination of process and just demand will probably lead to a very strong event quarter for us.
spk08: Okay, that's encouraging. So, in other words, it's going to exceed 2019 despite the headwinds of COVID and so forth.
spk03: Yeah, I mean, I would say that without creating a guidance number on it, I would say that the lead-in right now is that It will be a very robust, and like I said, it's the best bookings I've seen in a while or actually since I've been with the company. So I think that will translate into an incredible events business. Again, I'm only not mitigating it. It's just that as we get into the quarter, we will make sure that we don't lose the a la carte business. So we always have to make sure that we keep a good balance of that. So that's really the only – You know, the question is the capacity, right? How much capacity do we have relative to the demand for events and our car dining? So that's going to be what our very seasoned, experienced operations team will be working on, making sure that we get the best of both.
spk08: Understood. And then just getting back to labor. So it sounds like, and I'm trying to quantify it, it sounds like there was some pull-in and gearing up for Q4. You wanted to make sure. that you were staffed up. So do you think that part of your labor expense for Q3 reflected labor that perhaps you wouldn't ordinarily have taken on if you knew that you didn't need it on a go-forward basis? It was called one time, but I don't know if that's correct. But maybe pull in, is that a proper way to look at it?
spk03: Yeah, I mean, so David, the way I speak about it is that we'll probably put about a million and a half to two and a half million dollars in investment in just gearing up the hiring process. Because if you think about it, it takes about 60 days to maybe 90 days for our employees to be really proficient and really execute both models really well. So we didn't want to go into the busiest fourth quarter that we think we've ever experienced. As a matter of fact, I know that's going to be the case. with rookies and inexperienced staff going through it. So we took the advantage of the lower volume in the third quarter, and we decided to go hard on hiring. So we did hire plus 300 employees, which is quite a bit for us. And we took the time to train them, get them ready. So I feel like now going into the fourth quarter, we're actually going to be executing the business with well-experienced employees rather than trainees going through heavy volumes. And when you start getting volumes in the 300-plus level, you really need to make sure that your labor force is very well trained. So that's one of the things that we really emphasize in the third quarter is that We want to be ready and we want to really blow it out of the water in the fourth quarter. So that was our strategy with hiring and bringing people in.
spk08: Yeah, I get it. And I commend you for, for the forward thinking and the leadership thereof. Um, and then, uh, another question just on the airport biz. Um, you know, I, I've heard, I have some friends that have been in Cabo airport. They send me pictures. It seems like there's a line out the door. almost nonstop. Can you speak to just those unit economics? And then also you alluded to an opportunity. You said it's probably going to be the first of many. If we look out two to three years, can you quantify that opportunity, kind of a target of other SDK airport locations?
spk03: Yeah, so great question. Um, so it's so far experience has been fantastic, right in line with what we thought it would be. Uh, you know, we, we had a lot of excitement because we have a great bar business and that works very well with airport travelers. Um, so, uh, we're super excited about that. And then we also, the first deal that we did was with areas, which is a fantastic, uh, airport operator. And they have incredible footprint worldwide. So we think we've gotten a great partner. And now we have a great access to future opportunities with them. As a matter of fact, we are ongoing dialoguing with them. So that's great. And then on the standby, we have a couple other great operators that we've been talking to who are also interested in going into the airport business with us. So we think it's a great opportunity for us. We think it can be somewhere... between 10 and 20 restaurants and airports. And obviously, the big trick is to make sure that the airport business is also very strategic. So if you think of Cabo's, why that's a strategic play for us is that's because we're a lot of people from Arizona, Nevada, California go for vacation. So that was a great billboard type of restaurant for us because it keeps the brand top of mind of the traveler. So it's not just about the number of units, but it's also making sure that when you get to airports, it's a strategic business that you're getting to the right airports and to the right terminals and to the right occasion. So in Cabo's, we're by the international gates, which is the place you want to be at. So we're super excited about that, and the business has been very high volume, and our partners are very excited about the profitability of the business because of the bar component.
spk08: Sounds good. And then last question. This is, I guess, you know, looking out a year from now, it seems like you're going to be confronted with the high-class problem of, you know, having net cash pretty soon and generating significant pre-cash flow given, you know, the capital-like nature of the business. And it seems like CapEx next year – you know, based on development, shouldn't be a whole lot higher than this year. Am I correct in saying that?
spk03: Yeah, I mean, we're going to generate a lot of free cash flow is really the answer there, yes.
spk08: Okay, so this is the question. Is the high-class problem of generating so much free cash flow, how do you see you guys allocating that, you know, options being potential M&A, accretive M&A, dividends, stock buyback, all of the above. What are your thoughts thereof?
spk03: So my answer on that is that that's a good problem. As you said, high-class problem. We're anticipating that will happen very soon. My answer to that is we'll always do what's best for the shareholders and maximizing the shareholder return. So if we're in a good place to get the right acquisition, we can do that, just like we did with Kona Grill. And what I mean by that is we can get a great return and we can really make a difference with the asset. So that always will be in play. We also have the option of accelerating growth. As a matter of fact, we just did that. We added the three to five Kona Grills to our growth model. So that's another lever and level of flexibility that we have. And then after those options, we also have the option of you know, doing dividends and stock buybacks. So all of those things are all open, and obviously as the time gets, you know, as we get closer to those decision times, we will make the decision that's best to drive ultimate shareholder value.
spk08: I like that. All right, thank you, and good luck in Q4.
spk03: Thanks, David. Be well.
spk01: We also have a follow-up question from Nicole Miller with Piper Sandler. Please go ahead. Your line's open.
spk05: Thanks. I wanted to come back. Digging into the back of the release here, there's the operating profit by brand. It just has to be store level. That's what that is, right, Tyler? The $8.3 million and the $3.4?
spk10: You're talking about the 17% and the 11%? Yeah, the 22.6% and the 11%. Yeah, exactly.
spk05: Okay, so on STK, the 22.6, how much of that was this labor you're talking about getting fully staffed and getting ahead of what's going to be a great holiday? And, you know, how does that kind of taper? It doesn't probably entirely taper in a quarter, but does it stick with you just for a couple of quarters or do you have to annualize it?
spk03: I think so the majority, I would say about 75%. of the labor investment was Kona Grow and 25% of the labor.
spk05: Oh, I was just going to say, and then I'll ask the same question on Kona. So this was the whole store level margin was brought down by Kona then?
spk03: Yeah, I would say on the overall average, I'd say Kona was the bigger proponent of that because that's what we, of the 300 employees that we went up, I think about 200 plus was Kona Grow and about 100 or so was SDK. So Kona Grow was the one where we put the more investment behind on the labor. And as I mentioned on David's question about the range of value, I figured about $1.5 million to $2 million of onboarding and initial training costs. And in terms of how long that lasts, I don't think that lasts more than 60 to 90 days. So it will be a very short-term, one-time investment in labor.
spk05: And then is the whole idea big picture, long-term, no timeline attached? that Kona is still like a 17% store-level margin, and SDK with all of its modifications and certainly higher volume enhancements is like a 27% store-level margin?
spk03: Yeah, I mean, if I adjust for the labor just this quarter alone for Kona Grill, we probably would have been in the 15, 14, 15 range once you adjusted. for everything associated with bringing in individuals and so forth. But then also remember that the third quarter is an average quarter in volume for Kuna Grill. So seasonally, that is not the best quarter for Kuna Grill. I think the second quarter is actually the best quarter for Kuna Grill. So I would look at the quarter dip mostly as a factor of seasonality as well as the investment in labor.
spk05: All right, thanks for clearing that up for me. And sorry, I had to repeat some of it. Appreciate it. Thanks.
spk03: No worries. Thank you, Nicole.
spk01: We have a question from Greg Cohen with Rambleside. Please go ahead. Your line's open.
spk07: Hey, guys. Congrats on the amazing performance. Thanks, Greg. Question on the Reef Ghost Kitchen project. Can you just kind of walk through the economics of that agreement in Houston just so we can understand the potential EBITDA contribution? And then is that just a trial market and this is something we could expand across the country in kind of these secondary and tertiary markets where we don't want to have a store, or how should we think about how meaningful that deal could be?
spk03: Sure. So that's a great question. So our initial agreement with Reese is currently for the state of Texas, and we specifically narrowed down to Houston because that's the one market that we currently don't have a restaurant, and we're Based on our development plan, it's going to take us... We will get to Houston with the street store, but it's not in the next year or so, so there's going to be a window of time to get there. And then we also know that Kona Grill had a really good presence in Houston at one point, and it was a very good brand accepted there. So we're utilizing Reef right now as an opportunity to bring the brands to a place where we don't have a street store, and... And we're looking at that as kind of an auxiliary, complementary opportunity for us. So it's interesting. I think as we've talked about internally, we think the reef opportunity could be pretty big. We've spoken about 300 to 500 type of vessels just in the U.S. So we think it could be a very big business for us. But I don't want to overpromise on that. The reason that we did our deal with them, although Reef would like to have done a whole U.S.-sized deal, we decided that as we do with everything, we want to test it and see if it works or not. I also want to have a good understanding of what the brand acceptance is when we take an SDK and a Kona grill to a place where really there's not a street store, so I'm excited. Tyler is super excited. He's over here smiling a lot when we talk about this. But the reality is, as you know, we take risks and we're all about growing the business, but we also don't want to overcommit on it. But it certainly looks promising there. They have a lot of places that we can go with them and a lot of places that we probably don't want to take the mortar cost of doing a street store. So this could be a very interesting complementary growth strategy for our street store strategy. Economics on it, it's all top line. So we get a royalty off the revenues, and it's in line with our typical 5% to 7% deal on top. So there's no risk on the bottom line, if you will. It's a full top line deal.
spk07: Okay, great. No, that's interesting. I mean, if we couldn't grow that, that's kind of a second franchise pillar, you know, and given the fact that it's no capital from us, I mean, it doesn't seem inconceivable this could be a business that does well into the tens of millions of EBITDA in short order. So that's good clarification. The second question I have is around street stores. I think historically we've spoken about opening stores in secondary markets, maybe not even secondary markets, but Boston, D.C., Minneapolis, and then getting into secondary markets and second locations within primary markets. Can you just kind of walk us through where we are with that, with STK in particular, as we think about the pipeline next year and maybe the year after?
spk03: Yeah, I mean, so great question in terms of talking about, you know, the strategic development of the footprint. I mean, I guess if you're in New York, everything else is kind of a secondary market. That's kind of like the old definition of secondary markets. But I think actually what we've seen the last couple of years actually are mid-sized markets like Denver, markets like San Diego, markets like Nashville. They're just killing it. I mean, actually in those markets, our volumes have become, frankly, incredibly attractive and, you know, in the $250,000 range. And we also saw that when we opened in Bellevue, we're also around that $250,000 level. So we're seeing now that, frankly, this idea of secondary market is really nonexistent for us because I don't think there's other brands in America that open at $250,000 paces and keep it there. So right now I'm looking at least from an SDK perspective that, you know, the... the white space for us is actually wide open right now because once you can be successful in this type of market, it just gives a lot of comfort that markets like Houston, Boston, Washington, D.C., Minneapolis, Charlotte, Philadelphia, all those markets now are really in play for us. And what we're also doing now is we're looking at markets like Denver and Chicago, which we're just destroying in those markets. We're looking at those markets as a second and third store opportunity. So We're really seeing kind of frankly right now a very wide space for SPK. And I frankly don't really see anything as a secondary market anymore. It's kind of like really trying to get to market as fast as you can in these markets to have the opportunities. Then on Kona Grove, the opportunity is there's a lot of great markets in America that don't have a clear player in the sushi category or that in great college campuses type of towns. I think there's a tremendous opportunity for us to go ahead, you know, now that our definition of secondary markets is more the high-profile suburbs and really cities in the 500,000 population range where we think that Kona Grill can do really well, particularly with its broad grill offering, complemented with unique sushi programs. So I think that Right now, pretty much the map is wide open in the U.S., and I think we have a tremendous amount of white space ahead of us. As a matter of fact, I think we stated that we're excited about the fact that our white space now is 400-plus restaurants, so we're super excited and, frankly, really busy right now just getting through managing our real estate pipeline.
spk07: Okay, that makes a ton of sense, and that's helpful, Keller. And just one final question. Given what you're saying about how we have industry-leading sales, industry-leading growth, industry-leading margins, industry-leading brands, industry-leading food quality, and I guess three separate high-growth business lines, including a growing franchise component, with ghost kitchens, cloud kitchens, and just traditional franchise and management, what do you think the market is missing or what do you think the company could be doing better to kind of tell its story? Because the math that I do, Manny, and I hope that Nicole updates her model to reflect this, but We should be doing $70 million in EBITDA next year if you think about the EBITDA contributions from the franchise channels, the new store growth, and the contributions from Kona. And if you look at the recent IPOs of various fast casual restaurant chains and where premium high growth, kind of low capex businesses are trading, which frankly have worse unit economics, worse margins, you know, worse product, worse growth, et cetera, are trading at 15 to 20 times EBITDA out of the gate. And if you apply that to the EBITDA I just mentioned, our business should be valued between a billion and a billion and a half of enterprise value. And that could get you to $30 to $40 a stock. So I guess the short answer to the long question is, Why are we trading at $15, $14, or $13 a share, whatever it is, when we should be trading at least two, if not three times that value? And what are we going to do about it?
spk03: All right. Well, let me answer the question this way. And this is going to be my answer to that question. So we as a business, you know, internally we focus on strategy and we focus on execution. And we focus on driving great results. And then we circle that back with telling the story, which is what we're doing today. So we tell you what we're doing and what we plan to do. We don't, you know, so what we can do is focus on our business. So that's what we do here. And we go out and tell the story now relative to everything else that you said. That's really the market. And so that's something that as we go forward, we will continue working on it. Also, don't forget that for the last year, our TSR is over 400%. So there's a lot of good things to say about a business that's delivering 400 plus TSR. So my focus as a CEO is to keep the business on track, keep executing, delivering great results, and then I'll let the market evaluate the business.
spk07: Fair enough. I'll turn it over and thanks again.
spk02: Our pleasure. Thanks, Greg.
spk01: And there's no further questions at this time.
spk03: All right. Well, I want to thank everyone for taking the time and interest on the one group. As I always do, I want to thank the fantastic contributions of our teammates. Frankly, in my opinion, the best team in the industry. They have frankly done some things that are extraordinary and I look forward into the fourth quarter and beyond. And, uh, I look forward to running into you in our restaurant. So everyone have a great day, and I'll turn it back over to the operator.
spk01: Thank you. That concludes the call for today. We thank you for your participation, and I ask that you please disconnect your line.
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