Description

GENK is a fast-growing (~20% or higher unit count growth is likely) Korean BBQ restaurant concept trading at an attractive valuation (factoring the growth runway).  It offers not only delicious BBQ but also a potentially juicy return (~10% to 39 IRR). 

Product and Customer Value Proposition

GEN offers its patrons DIY Korean BBQ experience at a very attractive price: GENK offers its menu at a fixed price (~$20 to ~$22 for lunch and ~$29 to ~$31 for dinner;  there may be exceptions for certain locations).  Given that this is a protein-heavy meal, that’s an attractive price point. 

GEN also offers a fun experience for its customes.  Imagine this:

·         four friends come for dinner

·         they get seated at the table with a “cooking stove”

·         they make an order

·         since meat is not cooked at the kitchen, very little time needed for food to arrive to the table. 

·         then four friends cook together (fun part) and eat. 

Business Model

The differentiated customer experience also leads to compelling business model and strong unit economics because the concept requires less labor and a smaller kitchen footprint.

Less labor is needed

Since consumers cook for themselves, less kitchen personnel and waiters are needed.

Small kitchen footprint => more space for tables

Since most cooking happens at the table, there is no need for a large kitchen, which saves space that is instead used to put more tables and serve more guests, which improves AUV, store EBITDA, and cash-on-cash return. 

Unit Economics

AUV

AUVs are running above $5M, but management seems to softly guide for a $5M AUV.  That’s probably driven either by changing geographic mix or by desire to be somewhat conservative.

4-Wall Adjusted EBITDA margin

The 4-Wall Adjusted EBITDA margin was ~18.5% in 2023.  It dropped to ~16.6% in 1Q 2024, but recovered to ~19% in 2Q 2024.  The management 4-Wall Adjusted EBITDA target margin is ~20%. 

At an 20% margin, the 4-Wall Adjusted EBITDA = ~$1M (at $5M AUV).  If we take the current AUV, then the 4-Wall EBITDA would be even higher.

Unit Costs

Historically, the unit cost was sub-$2M.  Then the unit cost has increased, and management is guiding for ~$3M.  However, on 2Q 2024, the management seems to have hinted that the cost woud be below $3M (at least this is my interpretation of how they would get to ~40% cahs-on-cahs return).

ROIC and Payback Period

Using the assumptions above, the ROIC is ~30% - 33%.  But on 2Q 2024 EC, the management spoke about a 40% target.

It is worth noting that the math above may prove to be somewhat conservative.  For example, see this language from 1Q 2024 EC:

“We've been able to replicate this model over and over again by opening new restaurants with an average unit volume of $4 million to $5 million per year, generating $800 plus per square feet and 18% to 20% restaurant level adjusted EBITDA margin.  These attractive unit level economics allows us to generate on average, well, cash on cash return of 40% and a payback period of approximately 2 to 2.5 years which ranks amongst the best in the industry.”

Overall, the management is guiding key metrics that are less attractive than historical metrics. 

Current Unit Count Is ~40

GENK has 40 units as of the end of 2Q 2024.  The last (40th restaurant) opened in April 2024.  The table below shows how the unit count has evolved in recent years.

This is the full history of openings:

Concept Should Travel Well Across State Borders

The concept originated in SoCal where there is a significant number of consumers of Korean descent (and of Asian descent in general).  Over the years the company has expanded its footprint into other states and, in my opinion, has proven that the concept travels well across the state borders.

As a side note, I am not sure that I agree with the sentiment that “it was easy to get traction in California, but it may be more difficult to do so in other states” that I have read and / or heard a few times.  If you live in – let’s say – Midtown Manhattan, you can go to 32nd Street between 5th and 6th Avenue and you will find plenty of wonderful Korean restaurants, including BBQ (in all seriousness, do it!  You will have fun!).  Similarly, if you are in the SF / Bay Area, you can find plenty of wonderful Korean BBQ restaurants in Richmond area of SF.  I do not know LA as well as I know NYC and SF, but I suspect that the situation is similar there.  In other words, there are areas of the coutnry with excellent Korean cuisine options, which makes consumers incredibly choosy.  Succeeding in such areas of the coutnry may actually be more diffiuclt than succeeding in an area with very few Korean restaurants.  Again – that’ s a side note.

How Many Units Are Possible?

Management believes that ~250 units can be opened in the US.  There is a path to reach ~75-80 stores by the end of 2026 (e.g., doubling the unit count at the high end).  On 1Q 2024 earnings call management said:

“As we look at our broader expansion plan, we have strong forward momentum and remain highly confident in our ability to achieve our five-year plan that we discussed at the time we went public.  In addition to the 2024 and 2025 restaurant developments I mentioned, we expect to develop 20 to 30 additional new restaurants totaling between 70 to 80 by the end of 2026.  We will have more than double the size of the company since our IPO.”

However, on 2Q 2024 EC, the management raised the lower end of the guidance:

“raising the bottom end of our guidance for the end of 2026 and now expect to have 75 locations to 80 locations.”

It seems that opening 14 – 16 restaurants per year is what management envisions. 

GENK Should Be Able to Self-Fund Unit Growth … Absent Strong Unit Opening Acceleration

As of the end of 1Q 2024, GENK had ~$29M of cash on the balance sheet.  GENK generated cash flow from operations of ~$23.4M in 2022 and ~$22.16M in 2023. 

Management said that MCX is fairly low and runs ~$100K per month.  See 2Q 2023 earnigns call:

“I think on an ongoing basis, our maintenance CapEx is not huge as a company, but we're probably spending in the range of $100,000 a month for our existing restaurants.”

Thus, annual MCX should be ~$1.2M.  Let’s round it up to $1.5M.

Thus, internally generated cash flow should be sufficient to open ~7 restaurants per year.  The CFO is likely to grow as the company increases its unit count.  Hence, the internally generated cash available for Growth CapEx can be even higher than $22M - $23.4M. 

The balance of 7-9 units to get to 14 – 16 units per year can be financed by cash from the balance sheet (~$29M) that should be enough to open another ~9-10 restaurants (cumulatively). 

Finally, GENK carries almost no debt.  Given that its current operations are generating cash, I would think that bank financing should be avaialble as well.

However, if GENK decides to significantly accelerate its pace of openings or do an M&A transaction (let’s say buy a local competitor running just a few stores), then a funding gap may arise. 

SSS Have Been Weak Recently

Same store sales have been weak recently:

-          1Q 2023:                 3.9%

-          2Q 2023:                 1.4%

-          3Q 2023:                 negative 1.2%

-          4Q 2023:                 negative 1.7%

-          1Q 2024:                 negative 1.8%

-          2Q 2024:                 negative 5.6%

One of the reasons why SSS has been weak is management’s insistence on not raising prices.  It is not 100% clear to me what exactly stands behind such insistence.  It could be management’s desire to remain a value play for consumers or it could be a concern of losing traffic if GENK raises prices.

GENK SSS Could Turn Positive

There may be a light at the end of the tunnel though.  There are at least three factors that could help GENK boost SSS.

First and most important, during 2Q 2024 GENK rolled out its premium menu option.  There are at least two flavors of such a premium menu.  (1) There is a premium menu that costs $20 more (~$50 vs. ~$30).  (2) There is an option to order some meat items a la carte.

Management has been quite tight leaped about the “attach rate” of the premium menu, indicating that they may share more information with the investment world once they have more data points.  For example, on 2Q 2024, the management said:

“We haven't seen notable difference in certain markets other than we have restaurants that are it makes up 2% more in sales. Some stores make up 10%. It's very inconsistent right now. But one of the consistencies, again, we just only saw it in one restaurant. We'll find out more when we open the other one next month is the practice of upselling, as a company's culture, we were so focused on turning tables, we did not have a product line to train our staff to suggest these different higher priced products. So when we introduce and roll out these higher priced products, we had a little issue with our staff actually falling through the upselling process because they weren't used to it.  So we are still going through that process now. We're not nowhere close to executing that practice. But the ones that have came on board and followed our process to upsell and train staff and stay on top of staff, they actually are showing better results. Therefore, we are putting a lot of focus these days on training our staff to do more upselling of these new higher end products.”

Even with a fairly modest attach rate (10% at dinner time), the SSS uplift could be ~4.5% (holding all other factors constant).  You could, of course, play with your own assumptions.

Obviously, the attendance of 100 people per day is a purely hypothetical number. 

Second, GENK is working on coming up with more enticing drink options. 

Third, new restaurants open at a higher price point.  Once new restaurants enter the SSS base, their inclusion should put upward pressure on SSS. 

Napkin Valuation

Let’s do some napkin valuation and see how GENK could look like in 2026. 

Notes

·         F/D S/O (economic share count) = ~34M which includes both Class A and Class B.  I am increasing the share count to 35M.

·         2Q 2024 G&A = ~$5M.  I have increased it to ~$5.5M per quarter or ~$22M per year.

If the concept continues to resonate and GENK could grow its unit count beyond 70-80 in 2026, then (1) GENK has even more growth runway ahead of it and (2) the multiple could be higher than 12x EBITDA given high ROIC and a short payback period.

Miscellaneous Items

This is a catch-all section of the write-ups.  Some points would be more imporatnt than others;  some would be positive, some would be negative, and some would be neutral.

High Insider Ownership

Insider ownership is high and seems to be ~70%, if not higher. 

Insider ownership is important here not only because the founders should be aligned with public shareholders but also because it shows that two co-founders were able to grow from 1 unit to 40 in ~13 years while still maintaining the lion share of the company.

Up-C Structure

This is an Up-C structure. 

Fairly Low Liquidity

Partially a result of high insider ownership and dual-class share structure, the liquidity is fairly low (~50K - ~55K shares per day).

Catalyst

- Continuous unit growth

- SSS may turn positive