GEN Restaurant Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results cover a significant structural change: the company completed its IPO and related Up-C reorganization in June 2023. Unless noted, dollar figures below are in millions.
Business context and reporting period
GEN operates Korean barbecue restaurants. It reported 34 restaurants at September 30, 2023, compared with 30 a year earlier and 31 at December 31, 2022. The IPO raised approximately $46.2 million net. GEN Inc. held 12.8% of the Operating Company’s economic interests after the transaction; noncontrolling holders held 87.2%. Comparisons of GEN Inc.-attributable earnings are therefore affected by the post-IPO ownership structure.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $45.6 | $42.4 | $135.9 | $122.9 |
| Income from operations | $2.5 | $2.8 | $9.0 | $9.0 |
| Consolidated net income | $2.6 | $2.8 | $11.6 | $11.6 |
| Net income attributable to GEN Inc. | $0.3 | $2.4 | $8.4 | $10.5 |
| Operating margin | 5.4% | 6.7% | 6.6% | 7.3% |
| Consolidated net income margin | 5.8% | 6.5% | 8.6% | 9.4% |
| Adjusted EBITDA and margin | $5.0; 11.0% | $5.9; 13.8% | $17.2; 12.7% | $19.2; 15.6% |
Q3 revenue rose 7.4%, while operating income fell 13.5% and consolidated net income fell 5.0%. Nine-month revenue increased 10.6%, but operating income was nearly flat and GEN Inc.-attributable income declined 19.6%. Adjusted EBITDA is a non-GAAP measure; the company’s adjustments include items such as stock compensation, related-party consulting fees, employee retention credits and non-cash lease costs.
- Costs and margins: Q3 food cost was 31.9% of revenue versus 32.9%; payroll and benefits rose to 31.7% from 29.8%; occupancy rose to 8.3% from 7.5%. Nine-month payroll, occupancy and operating expenses also increased as a share of revenue. Management cited inflation, staffing and new locations.
- Comparable sales and unit metrics: Q3 comparable restaurant sales growth was negative 1.2% across 28 restaurants. AUV for the twelve months ended September 30, 2023 was $5.963 million, versus $5.886 million; revenue per square foot was $888 versus $876.
- Cash flow: Nine-month operating cash flow was $13.5 million versus $13.8 million. Investing activities provided $1.4 million, including related-party loan recoveries, partially offset by $9.5 million of capital expenditure. Financing activities provided $6.1 million, primarily reflecting IPO proceeds, offset in part by $26.5 million of member distributions.
- Liquidity: Cash was $32.1 million, up from $11.2 million at year-end 2022. Working capital was $10.9 million, versus negative $22.5 million. The company reported that cash and operating cash flows should fund obligations and needs for at least 12 months.
- Debt and leases: At quarter-end, third-party notes payable were $4.8 million and related-party notes payable were $1.1 million. The prior $8 million credit line was repaid; a new $20 million line, maturing September 2024, was undrawn at quarter-end. Operating lease liabilities were $113.8 million; the filing also disclosed $38.6 million of future lease commitments for leases not yet commenced.
Material changes, outlook and risks
- Management attributed revenue growth to menu price increases and additional restaurants. No restaurants opened during Q3; four opened during the first nine months. A new Houston restaurant opened October 26, 2023.
- At the filing date, management expected to open three to four additional locations during the remainder of 2023. It reported ten signed locations, four already open in 2023, and described continued restaurant expansion as a long-term strategy. These plans are subject to execution and profitability uncertainty.
- Related-party consulting and management agreements ended following the IPO. Q3 general and administrative expense increased 73.5% year over year, which management attributed in part to higher public-company and operating support costs as expenses shifted from those arrangements.
- The Up-C structure and Tax Receivable Agreement (TRA) are significant. GEN may owe former owners 85% of realized or deemed tax benefits. Management’s hypothetical estimate was up to $99.6 million of payments through 2037, assuming sufficient taxable income and other specified assumptions; actual amounts and timing may differ materially. No TRA liability was recorded at September 30, 2023.
- Management identified material weaknesses in internal controls: insufficient timely review of accounts and reconciliations, and inadequate IT control design and finance-team access controls. It concluded disclosure controls and procedures were not effective as of September 30, 2023.
- Risk factors include food, labor and energy inflation; limits on passing cost increases to customers; supplier concentration; and long-term lease commitments. U.S. Foods represented approximately 52.9% of Q3 food costs, while related-party suppliers also provided food and restaurant supplies.
- The company disclosed ongoing ordinary-course legal matters, including two labor-related lawsuits it plans to defend; management did not expect the cited claims to materially affect the financial statements. The $3.8 million deferred Restaurant Revitalization Fund grant remained on the balance sheet.
Important facts for investors to verify
- How comparable-store sales, labor and occupancy costs, and Adjusted EBITDA margins develop as recently opened restaurants mature.
- The effect of the 12.8% economic ownership and 87.2% noncontrolling interest on future income attributable to GEN Inc. and per-share results.
- Progress addressing the disclosed control weaknesses, including any subsequent filing updates or material adjustments.
- Actual borrowing availability, interest-rate exposure and repayment of the $1.1 million related-party note due in 2023.
- Timing and total cost of signed and uncommenced leases, and the actual cash impact of TRA payments as taxable income and unit exchanges occur.
- Whether expansion targets are met and whether supplier concentration, inflation or legal matters materially change.