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The ONE Group (NASDAQ:STKS) Misses Q4 Sales Targets, Stock Drops


Full Report / March 14, 2024

Upscale restaurant company The One Group Hospitality (NASDAQ:STKS) missed analysts' expectations in Q4 FY2023, with revenue up 1.8% year on year to $89.94 million. The company's full-year revenue guidance of $370 million at the midpoint also came in 11.4% below analysts' estimates. It made a non-GAAP profit of $0.17 per share, down from its profit of $0.19 per share in the same quarter last year.

The ONE Group (STKS) Q4 FY2023 Highlights:

  • Revenue: $89.94 million vs analyst estimates of $98.04 million (8.3% miss)
  • EPS (non-GAAP): $0.17 vs analyst estimates of $0.15 (13.3% beat)
  • Management's revenue guidance for the upcoming financial year 2024 is $370 million at the midpoint, missing analyst estimates by 11.4% and implying 11.2% growth (vs 5.3% in FY2023)
  • Gross Margin (GAAP): 23.6%, up from 23% in the same quarter last year
  • Same-Store Sales were down 4.3% year on year
  • Market Capitalization: $115.4 million

Doubling as a hospitality services provider for hotels and resorts, The One Group Hospitality (NASDAQ:STKS) is an upscale restaurant company that operates STK Steakhouse and Kona Grill.

STK, with locations in Downtown Manhattan and Dubai’s JBR Marina, has Japanese and Australian Wagyu steak dishes that will run you hundreds of dollars. You can complement these with some of the finest wines as well. Dark interiors featuring elevated art and plush seating give STK locations a luxurious feeling.

Kona Grill’s menu has much overlap with STK’s menu and features seafood, steak, and sushi. While prices are not as high as STK, Kona menu items are priced at a premium to the typical neighborhood chain of family restaurants. The Kona Grill ambiance is not as dark and intimate as STK, but it still exudes luxury.

In addition to owning and operating STK and Kona Grill, The One Group provides food and beverage services to hotels and casinos. The company generates management and incentive fee revenue from the restaurants and lounges it serves.

Sit-Down Dining

Sit-down restaurants offer a complete dining experience with table service. These establishments span various cuisines and are renowned for their warm hospitality and welcoming ambiance, making them perfect for family gatherings, special occasions, or simply unwinding. Their extensive menus range from appetizers to indulgent desserts and wines and cocktails. This space is extremely fragmented and competition includes everything from publicly-traded companies owning multiple chains to single-location mom-and-pop restaurants.

While no publicly-traded companies are as upscale in their restaurant offerings as The One Group, competitors include Darden (NYSE:DRI), Brinker International (NYSE:EAT), The Cheesecake Factory (NASDAQ:CAKE), and all the privately-owned luxury restaurants that have geographic overlap with STK Steakhouse and Kona Grill.

Sales Growth

The ONE Group is a small restaurant chain, which sometimes brings disadvantages compared to larger competitors benefitting from better brand awareness and economies of scale. On the other hand, one advantage is that its growth rates can be higher because it's growing off a small base.

As you can see below, the company's annualized revenue growth rate of 28.9% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was incredible as it added more dining locations and increased sales at existing, established restaurants.

The ONE Group Total Revenue

This quarter, The ONE Group's revenue grew 1.8% year on year to $89.94 million, falling short of Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 25.5% over the next 12 months, an acceleration from this quarter.

Number of Stores

When a chain like The ONE Group is opening new restaurants, it usually means it's investing for growth because there's healthy demand for its meals and there are markets where the concept has few or no locations. As of the most recently reported quarter, The ONE Group operated 63 total locations, in line with its restaurant count a year ago.

The ONE Group Operating Retail Locations

Over the last two years, The ONE Group has rapidly opened new restaurants, averaging 4.7% annual increases in new locations. This growth is among the fastest in the restaurant sector and gives The ONE Group a chance to scale towards a mid-sized company over time. Analyzing a restaurant's location growth is important because expansion means The ONE Group has more opportunities to feed customers and generate sales.

Same-Store Sales

Same-store sales growth is a key performance indicator used to measure organic growth and demand for restaurants.

The ONE Group's demand within its existing restaurants has generally risen over the last two years but lagged behind the broader sector. On average, the company's same-store sales have grown by 5.6% year on year. With positive same-store sales growth amid an increasing number of restaurants, The ONE Group is reaching more diners and growing sales.

The ONE Group Year On Year Same Store Sales Growth

In the latest quarter, The ONE Group's same-store sales fell 4.3% year on year. This decrease was a further deceleration from the 3.1% year-on-year decline it posted 12 months ago. We hope the business can get back on track.

Gross Margin & Pricing Power

Gross profit margins tell us how much money a restaurant gets to keep after paying for the direct costs of the meals it sells.

The ONE Group's gross profit margin came in at 23.6% this quarter. in line with the same quarter last year. This means the company makes $0.20 for every $1 in revenue before accounting for its operating expenses.

The ONE Group Gross Margin (GAAP)

The ONE Group has weak unit economics for a restaurant company, making it difficult to reinvest in the business. As you can see above, it's averaged a 20.4% gross margin over the last eight quarters. Its margin has also been trending down over the last year, averaging 6.4% year-on-year decreases each quarter. If this trend continues, it could suggest a more competitive environment where The ONE Group has diminishing pricing power and less favorable input costs (such as ingredients and transportation expenses).

Operating Margin

Operating margin is an important measure of profitability for restaurants as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

This quarter, The ONE Group generated an operating profit margin of 5.5%, down 1.2 percentage points year on year. Conversely, the company's gross margin actually increased, so we can assume the reduction was driven by poor cost controls or weaker leverage on fixed costs.

The ONE Group Operating Margin (GAAP)

Zooming out, The ONE Group was profitable over the last two years but held back by its large expense base. Its average operating margin of 3.9% has been paltry for a restaurant business. On top of that, The ONE Group's margin has declined, on average, by 2.4 percentage points each year. This shows the company is heading in the wrong direction, and investors are likely hoping for better results in the future.

EPS

These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.

In Q4, The ONE Group reported EPS at $0.17, down from $0.19 in the same quarter a year ago. This print beat Wall Street's estimates by 13.3%.

The ONE Group EPS (Adjusted)

Between FY2020 and FY2023, The ONE Group's adjusted diluted EPS grew 205%, translating into an astounding 45.1% compounded annual growth rate. This growth is materially higher than its revenue growth over the same period, showing that The ONE Group has excelled in managing its expenses.

Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 34% year-on-year increase in EPS.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).

Although The ONE Group has shown solid business quality lately, it historically did a subpar job investing in profitable business initiatives. Its five-year average ROIC was 7.7%, somewhat low compared to the best restaurant companies that consistently pump out 15%+.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, The ONE Group's ROIC has stayed the same over the last two years. We still think it's a good business, but if the company wants to reach the next level, it will need to increase its returns.

Key Takeaways from The ONE Group's Q4 Results

We were impressed by The ONE Group's EPS this quarter, which topped analysts' expectations. On the other hand, its revenue missed as its same-store sales declined 4.3%, and due to the weaker demand, the company shared full-year revenue guidance that missed analysts' expectations. Overall, this was a mediocre quarter for The ONE Group. The company is down 7.6% on the results and currently trades at $3.3 per share.

Is Now The Time?

The ONE Group may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We think The ONE Group is a solid business. First off, its revenue growth has been exceptional over the last four years. And while its brand caters to a niche market, its new restaurant openings have increased its brand equity. On top of that, its EPS growth over the last three years has been fantastic.

The ONE Group's price-to-earnings ratio based on the next 12 months is 10.7x. There are definitely things to like about The ONE Group, and looking at the consumer landscape right now, it seems to be trading at a reasonable price.

Wall Street analysts covering the company had a one-year price target of $8.50 per share right before these results (compared to the current share price of $3.30), implying they saw upside in buying The ONE Group in the short term.

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