The ONE Group (STKS)

Upscale restaurant company The One Group Hospitality (NASDAQ:STKS) reported Q1 CY2025 results exceeding the market’s revenue expectations, with sales up 148% year on year to $211.1 million. Revenue guidance for the full year exceeded analysts’ estimates, but next quarter’s guidance of $207.5 million was less impressive, coming in 2.3% below expectations. Its non-GAAP profit of $0.14 per share was significantly above analysts’ consensus estimates.

Company Overview

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.

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.

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years.

With $799.5 million in revenue over the past 12 months, The ONE Group is a small restaurant chain, which sometimes brings disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale. On the bright side, it can grow faster because it has more white space to build new restaurants.

As you can see below, The ONE Group’s sales grew at an incredible 44.2% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts) as it opened new restaurants and expanded its reach.

This quarter, The ONE Group reported magnificent year-on-year revenue growth of 148%, and its $211.1 million of revenue beat Wall Street’s estimates by 3.8%. Company management is currently guiding for a 20.3% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 6.4% over the next 12 months, a deceleration versus the last six years. This projection is underwhelming and suggests its menu offerings will see some demand headwinds.

Number of Restaurants

A restaurant chain’s total number of dining locations often determines how much revenue it can generate.

Over the last two years, The ONE Group opened new restaurants at a rapid clip by averaging 3.9% annual growth, among the fastest in the restaurant sector. This gives it a chance to scale into a mid-sized business over time.

When a chain opens new restaurants, it usually means it’s investing for growth because there’s healthy demand for its meals and there are markets where its concepts have few or no locations.

Note that The ONE Group reports its restaurant count intermittently, so some data points are missing in the chart below.

Same-Store Sales

A company's restaurant base only paints one part of the picture. When demand is high, it makes sense to open more. But when demand is low, it’s prudent to close some locations and use the money in other ways. Same-store sales is an industry measure of whether revenue is growing at those existing restaurants and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

The ONE Group’s demand has been shrinking over the last two years as its same-store sales have averaged 3.2% annual declines. This performance is concerning - it shows The ONE Group artificially boosts its revenue by building new restaurants. We’d like to see a company’s same-store sales rise before it takes on the costly, capital-intensive endeavor of expanding its restaurant base.

In the latest quarter, The ONE Group’s same-store sales fell by 3.2% year on year. This performance was more or less in line with its historical levels.

The ONE Group’s unit economics are higher than the typical restaurant company, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see below, it averaged a decent 29.9% gross margin over the last two years. Said differently, The ONE Group paid its suppliers $70.06 for every $100 in revenue.

The ONE Group produced a 79.6% gross profit margin in Q1, up 60 percentage points year on year. The ONE Group’s full-year margin has also been trending up over the past 12 months, increasing by 14.7 percentage points. If this move continues, it could suggest a less competitive environment where the company has better pricing power and leverage from its growing sales on the fixed portion of its cost of goods sold

The ONE Group was profitable over the last two years but held back by its large cost base. Its average operating margin of 4.6% was weak for a restaurant business.

On the plus side, The ONE Group’s operating margin rose by 3.5 percentage points over the last year, as its sales growth gave it immense operating leverage.

This quarter, The ONE Group generated an operating profit margin of 5.1%, up 4 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

The ONE Group’s full-year EPS turned negative over the last five years. We tend to steer our readers away from companies with falling EPS, especially restaurants, which are arguably some of the hardest businesses to manage because of constantly changing consumer tastes, input costs, and labor dynamics. If the tide turns unexpectedly, The ONE Group’s low margin of safety could leave its stock price susceptible to large downswings.

In Q1, The ONE Group reported EPS at $0.14, up from negative $0.02 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street is optimistic. Analysts forecast The ONE Group’s full-year EPS of negative $0.11 will reach break even.

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

The ONE Group’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 8.7%, slightly better than typical restaurant business.

The ONE Group reported $34,100 of cash and $310.4 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $94.15 million of EBITDA over the last 12 months, we view The ONE Group’s 3.3× net-debt-to-EBITDA ratio as safe. We also see its $19.21 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly The ONE Group blew past analysts’ EPS expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates by a wide margin. On the other hand, its revenue guidance for next quarter missed significantly and its EBITDA guidance for next quarter fell short of Wall Street’s estimates. Overall, this print was mixed but still had some key positives. The stock traded up 4% to $3.23 immediately following the results.

Updated: May 21, 2025 at 10:41 PM EDT

Before investing in or passing on The ONE Group, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

The ONE Group falls short of our quality standards. Although its revenue growth was exceptional over the last six years, it’s expected to deteriorate over the next 12 months and its declining EPS over the last five years makes it a less attractive asset to the public markets. And while the company’s new restaurant openings have increased its brand equity, the downside is its projected EPS for the next year is lacking.

The ONE Group’s EV-to-EBITDA ratio based on the next 12 months is 1.1x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $5.50 on the company (compared to the current share price of $3.62).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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