GEN Restaurant Group, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. The unaudited results are consolidated; Q1 2023 is a comparison period from before the June 2023 IPO and organizational transactions. GEN operates Korean barbecue restaurants. It had 39 restaurants at quarter-end and opened a Jacksonville restaurant in April.
Financial performance and liquidity
- Revenue: $50.8 million, up 15.7% from $43.9 million, primarily reflecting a larger restaurant base. Comparable restaurant sales fell 1.8% for the twelve months ended March 31, 2024, versus 3.9% growth a year earlier; average unit volume was $5.842 million versus $5.960 million.
- Profitability: Operating income was $0.1 million versus $3.2 million, and operating margin was 0.2% versus 7.2%. Consolidated net income was $3.7 million versus $4.5 million. Net income attributable to GEN was $0.5 million versus $4.1 million; Q1 2024 basic and diluted earnings per Class A share were $0.11. Q1 2024 included a $3.4 million non-cash gain from remeasuring the previously held GKBH interest.
- Margins and non-GAAP measures: Food costs were 33.4% of revenue versus 32.6%; payroll and benefits were 31.8% versus 31.1%. Adjusted EBITDA was $6.4 million versus $5.8 million, but its margin declined to 12.5% from 13.3%. Restaurant-Level Adjusted EBITDA was $8.4 million in both periods, with margin down to 16.6% from 19.2%. These company-defined measures are not GAAP measures.
- Cash flow: Operating cash flow was $3.5 million versus $2.8 million. Investing cash outflow was $7.1 million, including $4.1 million of capital spending and $3.0 million paid toward the GKBH acquisition. Financing cash outflow was $0.9 million, mainly member-advance repayments. Cash declined to $28.1 million from $32.6 million.
- Debt and liquidity: Working capital was negative $1.6 million, versus positive $5.5 million at year-end. Notes payable totaled $7.7 million, including $3.3 million current; related-party notes payable were $1.2 million and due in 2024. A $20 million revolving credit facility was undrawn at quarter-end and matures September 25, 2024. Operating lease liabilities were $137.7 million. Management said cash on hand and operating cash flows should cover lease obligations, capital expenditures and working capital needs for at least 12 months.
Material changes and outlook
- The company acquired the remaining 50% of GKBH on February 18 for $6.0 million, bringing ownership to 100%; results were consolidated from the acquisition date. The transaction added $9.5 million of goodwill.
- Operating costs grew faster than revenue: total costs and expenses rose 24.5%, versus revenue growth of 15.7%. Management cited food and labor inflation, increased occupancy and operating costs, higher pre-opening costs, and public-company expenses. General and administrative expense increased to $4.7 million from $2.1 million; related-party consulting and management fees ceased after the IPO.
- The company had signed leases for eight future locations and expected to open five during the remainder of 2024. Three leases were signed in Q1, and Jacksonville opened in April. The company reported 40 restaurants through April 2024.
- Q1 pre-opening costs rose to $1.9 million from $0.5 million. The company also had $19.2 million of future lease payment commitments for locations not yet in its possession, expected to commence later in 2024.
Risks, contingencies and controls
- Management cited food, labor and energy inflation, supplier concentration, and limited ability to offset cost increases with menu pricing. Sysco accounted for approximately 35.2% of food costs in Q1 2024; the company also noted possible supply interruptions and changing consumer behavior.
- The company disclosed lawsuits by former employees alleging California labor-law violations, which it intends to defend. It does not expect current proceedings to materially affect its financial statements, but outcomes are uncertain.
- Disclosure controls were deemed ineffective because of material weaknesses in management review of accounts and reconciliations, and in information technology controls and finance-team access segregation. Management cited material audit adjustments and significant post-closing adjustments.
- The company had $3.8 million of deferred Restaurant Revitalization Fund grants remaining, with no grant income recognized in Q1. It also reported a $0.6 million tax receivable agreement liability and described potential long-term payments to former owners; hypothetical cumulative payments through 2037 could be $99.6 million if specified tax benefits are realized.
Investor verification points
- Assess underlying operating performance separately from the $3.4 million GKBH remeasurement gain and from management’s non-GAAP adjustments.
- Verify comparable sales, restaurant-level economics, and whether new-store growth can offset cost inflation and margin pressure.
- Review the timing and funding of 2024 openings, related long-term lease commitments, and the September 2024 credit-facility maturity.
- Monitor remediation of the disclosed internal-control weaknesses and the status of labor litigation.
- Confirm the potential amount and timing of tax receivable agreement payments as taxable income and ownership exchanges develop.