Business context and reporting period
The ONE Group Hospitality, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2024. It operated 63 venues at quarter-end: 28 STK, 27 Kona Grill and 8 other food-and-beverage venues. The May 1, 2024 Benihana/RA Sushi acquisition occurred after the reporting period and is not included in Q1 results. Unless noted, financial amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q1 2024 | Q1 2023 | Change / context |
|---|---|---|---|
| Total revenue | $85.0 | $82.6 | Up 3.0%; owned restaurant revenue rose 3.7% to $81.5, while management, license and incentive fees fell 12.3% to $3.5. |
| Same-store sales | -7.9% | — | STK -6.8%; Kona Grill -9.7%. |
| Operating income (loss) | -$0.6 | $4.3 | Down $4.9. |
| Net income (loss) attributable to ONE Group | -$2.1; -$0.07/share | $2.6; $0.08/share | Moved to a loss. |
| Restaurant operating profit | $13.2; 16.1% of owned restaurant revenue | $12.9; 16.4% | Profit increased, but margin declined. |
| Adjusted EBITDA | $10.2 | $10.7 | Company-reported non-GAAP measure. |
| Operating cash flow | $10.4 | $6.6 | Increase primarily reflected timing of accrued-expense payments. |
| Capital expenditures | $15.8 | $11.9 | Primarily new venue construction and development. |
Cash and equivalents were $15.4 at March 31, down from $21.0 at December 31, 2023. Gross debt principal was $73.5; the revolving facility was undrawn, with $10.6 available subject to conditions. The weighted-average borrowing rate was 12.15% at quarter-end. The company reported compliance with its credit agreement financial covenants. Current assets of $38.0 were below current liabilities of $59.1. Operating lease liabilities totaled $120.7, in addition to debt.
Material changes versus the prior comparable period
- Revenue growth from six venues opened since July 2023 was partly offset by lower comparable sales. Management and license fees also fell, partly because the STK Westminster management agreement ended.
- Restaurant cost of sales improved to 23.0% of owned restaurant revenue from 24.0%, attributed to product mix, pricing and cost initiatives. Restaurant operating expenses rose to 60.9% from 59.6%, reflecting fixed-cost deleverage on lower same-store sales, wage and other cost inflation, and costs of new venues.
- Depreciation and amortization increased to $5.3 from $3.7; pre-opening expense rose to $2.9 from $1.3. Transaction and exit costs were $1.5, versus none in Q1 2023.
- Cash used in investing increased to $15.8 from $11.9. Cash declined by $5.7 during Q1.
Outlook, management commentary, risks and unusual items
- Management intended to open six to eight new STK or Kona Grill venues in 2024. STK Washington, D.C. opened in March; one STK, one Kona Grill and one Salt Water Social were under construction at quarter-end.
- Management said pre-acquisition operating needs, including planned openings, were expected to be funded for at least the next 12 months through operating cash flow and landlord construction allowances, with borrowing or equity issuance also possible. It expected $2.2–$2.8 of landlord contributions in the three months following the filing. These comments predate the acquisition financing.
- On May 1, 2024, the company acquired Safflower Holdings Corp., which owns most U.S. Benihana restaurants and all RA Sushi restaurants, for $365.0, subject to customary adjustments. Purchase accounting and pro forma financial information were not provided in this filing; management said they would be included in the next Form 10-Q.
- Acquisition financing included a $350.0 senior secured term loan, a $40.0 revolving facility (undrawn at closing), and $160.0 of preferred stock financing subject to a 5% original issuance discount. The preferred stock is non-voting and non-convertible, carries compounding dividends initially at 13% that increase over time, and has redemption provisions and specified holder consent rights. Warrants were also issued, creating potential dilution. The new debt refinanced the prior credit agreement and helped fund the acquisition and related costs.
- Management identified integration, realization of synergies, added indebtedness, financing costs, refinancing/redemption, restaurant openings and operating-cost pressures as risks. It cautioned that actual outcomes may differ from forward-looking statements.
- Q1 transaction costs included approximately $1.2 related to the acquisition. Other exit costs included accelerated depreciation and amortization associated with the Kona Grill Scottsdale lease expiration and REEF Kitchens licensing exit. The company also decided not to renew the STK Westwood lease, reducing the related right-of-use asset by $5.5 and lease liability by $5.7.
- The company disclosed ordinary-course litigation, including lease and employee-related matters, and said it did not expect the matters to have a material adverse effect, while noting litigation outcomes are uncertain. Management concluded disclosure controls were effective as of March 31, 2024.
Important facts for investors to verify
- Integration progress, acquired-company results and synergies, and the final purchase accounting and pro forma disclosures for Benihana and RA Sushi.
- Post-acquisition total debt, interest expense, covenant headroom, revolving-facility availability, and the impact of variable rates and repayment schedules.
- The preferred stock’s escalating compounding dividend, redemption terms, consent rights, and potential warrant dilution.
- Whether same-store sales stabilize and restaurant-level margins recover amid labor, operating-cost and inflation pressures.
- Cash generation versus restaurant construction and maintenance spending, including delivery and terms of expected landlord contributions.