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Finance of Startups: For Dummies (Part 8 – Fogo de Chão S-1)

If you know me, you know for my love for soccer, startups, working out, and meat. Beautiful, red, rare meat… so when Fogo de Chão announced its intentions to raise about $91M through an IPO, I have to study its S-1 Filing for my Finance for Startups series – see link for the S-1 Filing.
Note: this write-up is actually a little late as Fogo went public on Friday, June 19th opening at $20 and raising $88M vs. the $18 as purported in the S-1.
A quick intro, first, of Fogo de Chão (“Fogo”)… Fogo is a Brazilian churrascaria restaurant chain serving all-you-can-eat cuts of various meats including beef, lamb, chicken, etc. The restaurants are famous for their servers (“gauchos”) who walk around the restaurant serving meat via skewers. Gauchos visit tables where patrons have “medallions” flipped to their “green” side meaning “keep ‘em coming”. If a patron wishes to defer gauchos (pause service), patrons simply need to flip to the “red” side. I’m reciting this from my own personal experience as it’s one of my favorite restaurants.
Okay, so here are some notes from the S-1…
  • Proposed offering price per share of $18.00 at 5,073,528 shares = $91,323,504 aggregate price
  • Restaurant metrics include: average unit volumes (“AUVs”) – average sales of all restaurants that have been open for a trailing 52-week period or longer; restaurant contribution – revenue less restaurant operating expenses (COGS, labor, etc.); restaurant contribution margin – restaurant contribution as a percentage of revenue; cash-on-cash returns – for an individual restaurant, ratio of restaurant contribution to initial investment (net of pre-opening costs and tenant allowances)
  • First restaurant opened in Porto Alegre, Brazil in 1979 à36+ years since. First restaurant in the U.S. was in Addison, TX in 1997
  • 26 restaurants in the U.S. alone, 10 in Brazil, one in Mexico
  • FY 2014 – $8.0M AUV with restaurant contribution margin of 32.5% (FY = fiscal year)
  • YTD 2015, opened restaurants San Juan, Puerto Rico, Rio de Janeiro, and Mexico City, Mexico (a joint-venture)
  • FY 2014, average per-person spend was $59. As of today, the dinner cost (includes the Market Table) per person is $51.95
  • Guachos are both chefs and servers, and are mainly focused on a specific cut [of meat]
  • Mentions simple, space-efficient cooking technique which reduces the kitchen footprint; thus, maximizes space for tables for guests àdrives up revenue per square foot
  • FY 2014, ~137,000 guests per restaurant (~60% higher than competitors)
  • Since 2007, restaurants open for at least three years have average third-year cash-on-cash returns in excess of 50%
  • Prospectus cites further growth in the U.S. (100+) and Brazil, but also beyond
  • $4.5M investment per restaurant net of tenant allowances and pre-opening costs with average restaurant size of 8,500 sq ft, AUV of $7.0M and 40%+ cash-on-cash return by year 3
  • Aim to increase per-guest receipt through initiatives like Bar Fogo… FY 2014, alcohol accounted for 16.7% of sales… introduce small plate foods at the bar
  • Thomas H. Lee Partners, L.P. is the private equity entity with 96% ownership of Fogo’s common stock (~82% post offering) – acquisition occurred in May 2012
  • FY 2014: Food and beverage costs = $78,330K with 34 restaurants at year-end. Let’s make an assumption the 34 restaurants were open the whole year. So cost per restaurant ~2,303K. At 137,000 patrons per year per restaurant, that’s ~$16.82 of cost per patron
  • Estimated the World Cup of 2014 which was held in Brazil positively impacted Fogo to the tune of $5.0M FY 2014 additional revenue (~11.4% growth for comparable restaurant sales of Brazilian restaurants)
  • Fiscal quarter comparison (ending 03/2015 vs. 03/2014): $1,903K increase, 68.9%. $4,665K or 7.2% net income Q1 2015
  • Food and beverage costs decreased from 30.6% (FY 2013) to 29.9% (FY 2014) as a percent of total revenue