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STKS - One Hospitality Group


lemsinge
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I wanted to start a conversion on this name. After changing up some of the management in late 2017, the company, driven by its STK restaurants (steak house) saw strong growth, and same store sales as high as 10% in January and February of 2020. FCF was expected to ramp up relatively quickly as well. Then came Covid, obliterating the company along with the entire industry, turning this company from a $100mm market cap to a $40mm market cap.

 

Alta Fox has a write-up here, but the fund has since sold out of its position in March.

https://static1.squarespace.com/static/5aaacb57506fbe4636414126/t/5cc7baa5eb39310fecbc7bdf/1556593318315/Alta+Fox+STKS+Long+4.28.19.pdf

 

While cash burn looked substantial with $4mm for q1, it has since reduced its employee workforce to under 100, and averaged $380k per week in takeout/deliveries, while paying $100k - $150k in G&A expenses per week in the same time frame. 85% of leases are currently renegotiated to where they are not paying rent, or paying fractional rent in locations that are able to provide takeout/delivery. Management is not currently commenting if this is actually a cash burn period or just neutral, but has continually referenced that they believe they have enough cash to come out alive.

 

At quarter-end, cash was ~$8mm + $18mm from a PPP loan. Current credit facility is undrawn (requires cash to be below $4mm before it can be drawn) and has capacity of $12mm (inclusive of ~$1mm in standby letters of credit). Definitely has a lot of balance sheet leverage in the form of capital leases. They've recently started opening up some of their restaurants for dine in with limit capacity and limited menus.

 

The company catches my eye as a sort of speculative punt. Its operations are heavily levered to its two new york steakhouses, its orlando steakhouse, and its las vegas steakhouse.

 

I've been to one of its location in NYC, and it kind of gave me a similar vibe to TAO (STK seemed a bit more reserved).

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From Alta Fox:

 

Combining the atmosphere of a high-end club/lounge with the menu and pricing of a high-end steakhouse, STK is a first mover in the steakhouse space to break out of the stuffy, male-dominated, hushed non-social atmosphere of traditional steakhouses. Female mix is over 50% of the customer base and liquor sales tend to be 40-45% of their yearly sales mix (higher than the average steakhouse of ~30%). The average check size in 2018 was ~$106. The company has 19 high-end STK steakhouses in major cities around the world (11 of them domestic).

 

This does sound like an interesting idea. If you're going to bet on restaurants though I think you would probably want to stick with a restaurant where you don't take the additional stock specific risk. In other words you don't want to be right on restaurants but wrong on this specific stock. Seeing as this is still below the 2013 IPO price it probably makes more sense to stick with other restaurants if that is the plan. From what I remember of Ruth's the main advantage of their stodgy restaurants was low reinvestment and high FCF.

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I've been watching this stock for quite a while.

 

It is higher on the "watch list" than it was...but I still have not pulled the trigger.

 

They took over Kona Grill, and they seemed to have gotten for a good price and were doing a good job of righting the ship and integrating it. 

 

Then the Wuhan virus hit....

 

I think they are going to pull through...but am not 100% sure.  They have a lot of business in NYC and Vegas.  Those locations are going to be hit and hit hard.

 

Then you've got the problem of declining interest both here and in general of small cap stocks.  Most people are just interested in discussing TSLA and such. 

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  • 2 months later...

Yes, I still like the name, although it is a small position for me. I was a bit concerned that winter would decimate them, however, they have 34/36 STK locations now open for indoor dining and mentioned they were cash-flow positive beginning Q3 (I believe they are still deferring rent though). Also $23mm of cash to eat through when it was running a -$2mm cash burn for Q2

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Yup. 19 of those 23M must be used for salaries.

I like the name, I like Manny, I'm not sure if there will be further lockdowns (does anyone know?) or if people will come back running to STKS if the recession is deep. For now,I believe the management has said that the demand is there. The issue is all the restrictions.

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