This Is Why FAT Brands Inc. (NASDAQ:FAT) $FAT Exploded To One Year Highs

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FAT Brands Inc. (NASDAQ:FAT) exploded, to one-year highs on a huge turnover of traded shares, on announcing plans to acquire Johnny Rockets restaurant chain. The acquisition will accord the restaurant chain access to over 700 franchised and company-owned restaurants around the globe. The purchase comes at the backdrop of a disappointing second quarter, where revenues and earnings took a hit.

FAT Brands Outlook

The multi-brand franchising company is trying to pick itself after a disappointing first half of the year owing to the COVID-19 pandemic. The company has seen its revenue streams hit hard as people stay clear of restaurants, owing to lockdowns and social distance policies put in place to curb the spread of the deadly virus.

Amid the challenges, the company has shown it is focused on strengthening its growth metrics and long-term prospects by carrying out a massive acquisition that would enhance its brand even further. The acquisition has already strengthened investor sentiments in the stock.

The stock is up by more than 100% since the start of the second half of the year. A bounce back following the March 23 market crash is complete with the stock powering to one-year highs on huge traded volume.

Going by the strength of the upward momentum, the $9 level could be the next resistance level curtailing further upside action. A breakout through the $9 a mark should pave the way for the stock to make a run for its all-time high of $11.7 a share.

What Does Fat Brands Do?

FAT Brands bills itself as a multi-brand franchising company. The company acquires, develops, and markets fast casual and casual dining restaurant concepts. The company currently owns eight restaurant brands, including Buffalos cafe, Hurricane Grill & Wigs, Elevation Burger, and Ponderosa.

Why Did FAT Brands Explode?

Johnny Rockets Acquisition

FAT Brands exploded on huge traded volume as investors reacted to a $25 million bid to acquire burger chain Johnny Rockets Group. The acquisition should expand the company's stable of restaurant brands ahead of recovery of casual dining in the aftermath of COVID-19 pandemic.

The acquisition, from private equity firm Sun Capital Partners, would be funded through cash on hand and proceeds from a securitization facility. The transaction should be complete in September. The acquisition is poised to strengthen the FAT Brands pipeline with over 700 franchised and company-owned restaurants. In addition, it will strengthen FAT Brand's revenue streams in excess of $700 million.

"This acquisition is a transformative event for fat brands in terms of scale and brand awareness. We see a lot of synergy with Johnny rockets and our current restaurant concepts and we are eager to take the brand to new heights," said FAT Brands CEO Andy Wiederhorn.

Second Quarter Earnings

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The acquisition could not have come at a better time as FAT Brands is trying to bounce back after feeling the full force of the COVID-19 pandemic. The company is one of the hardest hit, its revenue streams having come under pressure as people stay clear of restaurants in the aftermath of the epidemic.

The second quarter's revenue was down to $3.1 million compared to $5.9 million reported last year. The decline reflects a drop in royalty revenue and lower franchise fees compared to the previous year.

Cost and expenses in the quarter more than doubled to $8.9 million from $3.7 million. The increase is attributed to, among other things, a $3.2 million goodwill and trade name impairment charge related to the Ponderosa and Bonanza brands.

Net loss in the quarter increased to $4.25 million or $0.36 a share compared to a net loss of 508,000 or $0.04 a share reported a year ago.

Improving Fundamentals

Amid the disappointing Second quarter results, things are slowly improving with business picking up. Starting June local restrictions owing to covid-19 eased leading to the opening of more dining rooms. Similarly, the same-store sales improved significantly, 44%, setting the stage for a better second half of the year.

In addition, FAT Brands continues to optimize operations having already opened 15 new stores with plans to open an additional 18 before the end of the year.

The burger chain giant has already completed an underwritten public offering, conversely raising $9 million in gross proceeds. With the raise, the company remains well-positioned to carry out future acquisitions and pursue other growth opportunities.

Bottom Line

The tide is slowly turning in favor of FAT Brands after a first half of the year to forget. The company is slowly bouncing from the COVID-19 shocks seen by an increase in in-store sales with the opening of new dining rooms.

The acquisition of Johnny Rockets for $25 million underscores focus on pursuing long term growth while shrugging off the COVID-19 uncertainty. Likewise, the stock look set to continue its solid performance as underlying fundamentals show signs of improvements.

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