Published 9/23/24
One Group Hospitality(STKS): Steaks and Hibachi
One Group Hospitality is a restaurant operator of 4 main brands that includes STK a high end steakhouse, Kona grill a sushi grill bar, and recent additions Benihana and RA Sushi. The company over the past two quarters as been struggling as same store sales numbers have turned negative year over year and on top of that the companies acquisition of safflower holdings which was the holding company of Benihana and RA sushi has saddled the company with a lot of debt in a not so great interest rate environment. On the positive side, the company’s two main brands STK and Benihana have excellent unit economics with stores averaging 20% restaurant level operating margins. Also the company’s same store sales decline is more of a macro than a micro phenomenon as other restaurants have also reported negative SSS with the industry black box metric also in decline as of the 2nd quarter of 2024. And if the company can skirt though the headwinds One Group’s portfolio of restaurants has a vast growth opportunity as they only have 167 restaurants and a TAM of 800. And at a EV/Sales of .75 the company is quite cheap compared to its growth opportunity.
Macro
One Group Hospitality reported a 7% YOY decrease in same store sales in Q2 2024 this coincides with a general struggling in the restaurant industry with RICK, DIN, DENN, and CBRL. However not everyone is struggling for example Chilis and Wingstop are doing amazing though unsure why. Looking at Black Box which is a restaurant industry data collector they reported “industry same restaurant sales decreased 0.8% and industry same restaurant guest counts decreased 3.5%. And during our full fiscal year 2024, industry same restaurant sales decreased 1.4% and industry same restaurant guest counts decreased 4.7%”. Black Box attributes this to customers becoming increasingly price sensitive after the bout of inflation we experienced after COVID noting that brands focused on value have been performing better. Considering One Group is a luxury steakhouse and hibachi brand it makes sense that they would be struggling noting in their conference call customers are trading down to lower priced menu items. Dardens won high end steakhouse brand Ruths Chris is also in the same boat with SSS down 7% YOY. Considering at the end of the day this is a industry wide downturn though eventually things will turn around so to me this is just a great time to buy at least I always like to buy when things are falling apart.
Company
STK Steakhouse was first opened in 2004 and in 2013 the company was taken public through SPAC and named One Group Hospitality. Since 2017 the amount of STK restaurants went from 14 to 28 as of Q2 2024 of those total STK’s the company only owns 17 with 11 being under a managed or licensed agreements. The owned locations contribute the majority of the company’s revenue, and STK has nearly doubled its number of owned restaurants since 2017, when it had just eight. An average STK in the comparable base makes 17M which is a large increase from the 11M in 2017. If you divide STK’s total revenue for 2023 by the number of owned restaurants, you get an average of $11.7 million per location. This figure reflects the large number of openings in 2023, and the difference highlights the potential growth opportunity as these new locations mature. One of the main reasons I became interested in STK was the strong correlation between sales per owned restaurant and operating profit margin. As STK’s newer locations mature, their sales per restaurant tend to increase, driving higher margins. A 20% restaurant-level margin is considered excellent in the industry. For example Olive Garden owned by Darden which is one of the best restaurant operators has a restaurant level margin of 22%. Wingstop which trades at nearly 20 times sales has around a 26% restaurant level margin. STK’s unit economics are impressive, with each location typically costing $6-7 million to open (excluding landlord contributions) and generating $3-3.5 million in operating profit once fully mature. With a total addressable market (TAM) of 200 locations in the U.S., the company has significant growth potential ahead.
| Year | 2023 | 2022 | 2021 | 2020 | 2019 | 2018 | 2017 |
| Sales | 198,679 | 187,402 | 151,436 | 60,932 | 89,857 | 71,203 | 58,654 |
| Operating Income | 38,890 | 40,343 | 39,863 | 5,973 | 15,242 | 10,450 | 6,034 |
| OP Margin | 19.57% | 21.53% | 26.32% | 9.80% | 16.96% | 14.68% | 10.29% |
| Owned STK Restaurant | 17 | 13 | 11 | 10 | 10 | 9 | 8 |
| Sales/Owned Restaurant | 11,687 | 14,416 | 13,767 | 6,093 | 8,986 | 7,911 | 7,332 |
STK is one of four brands under One Group, with Kona Grill being the second, acquired in 2019 out of bankruptcy. I remain skeptical about the success of this acquisition, as the brand has continued to struggle under new ownership. Kona Grill’s margins are much lower than STK’s, hovering around 9-12%. The company has separated its portfolio into core and non-core restaurants, with the latter representing underperforming locations. The current strategy is to close or renegotiate leases for struggling locations while opening new ones, which management claims are performing better. Despite a TAM of 200 restaurants for Kona Grill, compared to the 26 currently in operation, the brand has become a smaller part of One Group’s overall portfolio following the recent acquisition.
Source: Q2 2024 Report
In 2024, One Group acquired Safflower Holdings, the parent company of Benihana and RA Sushi. While RA Sushi represents a relatively small part of One Group’s portfolio, Benihana stands out as the key asset. With 86 locations, Benihana has become the largest contributor to One Group’s revenue. Benihana has similar restaurant level margins as STK which makes me feel alot better about this acquisition than of Kona Grill. Benihana is the company’s strongest performer in terms of same-store sales, with only a 1% year-over-year decline, compared to declines of 10% or more for the other brands. Management sees significant growth potential for Benihana, with a total addressable market (TAM) of 400 locations.
The strong restaurant-level margins of both STK and Benihana make the combination of these two brands particularly compelling and add to One Group’s appeal.
Customer Reviews
Another way to evaluate the company is to look at how customers feel about the product or in this case restaurant. Looking at a sample of 17 of the companies STK restaurants the results are glowing with an average google rating of 4.5 stars which is a pretty high mark to average. This is a lot better than another restaurant brand I purchased(and so far regret). The high ratings and also high amount of ratings gives me confidence that the unit economics of the brand will continue and that management might know what their doing.
| Address | Rating | Number of Reviews |
| 2000 McKinney Ave, Dallas, TX 75201 | 4.6 | 3319 |
| 2305 Collins Ave, Miami Beach, FL 33139 | 4.8 | 8919 |
| 1580 E Buena Vista Dr, Orlando, FL 32830 | 4.7 | 23460 |
| 26 Little W 12th St, New York, NY 10014 | 4.7 | 12404 |
| 1075 Peachtree St NW, Atlanta, GA 30309 | 4.5 | 14865 |
| 222 Berkeley St, Boston, MA 02116 | 4.8 | 4835 |
| 201 S College St, Charlotte, NC 28202 | 4.6 | 3933 |
| 9 W Kinzie St, Chicago, IL 60654 | 4.6 | 6262 |
| 1550 Market St, Denver, CO 80202 | 4.4 | 4273 |
| 600 F St, San Diego, CA 92101 | 4.3 | 1315 |
| 3708 Las Vegas Blvd S, Las Vegas, NV 89109 | 4.3 | 4049 |
| 930 Hilgard Ave, Los Angeles, CA 90024 | 4.3 | 1377 |
| 153 Yorkville Ave, Toronto, ON M5R 1C4, Canada | 4.2 | 2823 |
| 700 12th Ave S, Nashville, TN 37203 | 4.6 | 4831 |
| 1 Market St Suite M3, San Francisco, CA 94105 | 4.6 | 2205 |
| 901 Massachusetts Ave NW, Washington, DC 20001 | 4.7 | 1608 |
| 7134 E Stetson Dr, Scottsdale, AZ 85251 | 4.4 | 2770 |
| Average | 4.5 |
Ownership
Joathan Segal is one of the largest shareholders and is a cofounder of the brand and served as CEO for many years. Now in his early 60s he is now chairman of the board but still owns a 12.8% stake. His total number of shares owned has declined from 7.3M in 2017 to 4M as of 2024 unsure why. Recently he has been buying shares along with David Kanen who owns Kanen wealth management which is the largest shareholder in One Group. They have increased their holdings from 1.9M in 2017 to 4.8M in 2024. David Kanen with KWM claims to be a small cap value investor with a Warren Buffett quote on his website so we can assume he thinks this company might be undervalued. Management has done well in the past seemly timing the purchase and selling of their own shares. On openinsider I see purchases in the $3 dollar range in 2020 and lots of sales in the $11 dollar range in 2021. The good timing of management purchases and sales in the past give me confidence that the current purchases may bode well for the future. Also management has sufficient stake in the company to be incentivized to ensure the share price performs well.
Valuation
One Group’s stock price has taken a hit since they peaked in late 2021 from a height of $15 a share to the current stock price of 3.46. The current market cap is 107M however their EV is closer to $640M. With the acquisition of Safflower holdings revenue for the company is now around $850M annually which means the company is trading around a .75 EV/Sales ratio. Most peers trade above 1 times and good ones like texas roadhouse and darden trade over 2 times. Consider STKS has better growth prospects than most of the companies below and great margins for their 2 main brands .75 times EV/Sales is very attractive. One reason this could be is due to One Groups profitability which is struggling this year due to acquisition related expenses and macro tailwinds though I expect this to clear next fiscal year.
| Ticker | EV/Sales |
| BJRI | 0.72 |
| BLMN | 0.69 |
| CAKE | 0.85 |
| CBRL | 0.55 |
| DENN | 1.60 |
| DIN | 2.41 |
| DRI | 2.15 |
| EAT | 1.10 |
| RICK | 2.37 |
| SHAK | 4.49 |
| STKS | 0.64 |
| TXRH | 2.54 |
| WING | 27.22 |
| FWRG | 1.23 |
| PTLO | 2.07 |
| LOCO | 1.31 |
Risks
The two main risks I see for One Group are below.
Acquisitions
The company likes to acquire brands and 3 of the 4 brands under the companies umbrella have been acquired. One Group is still new to acquisitions so it’s hard to evaluate their ability. As mentioned earlier, the acquisition of Kona Grill has been questionable, while the Benihana acquisition appears promising, though time will tell how it plays out. This acquisition strategy has resulted in significant debt, which is especially concerning given the unfavorable interest rate environment. A poor acquisition in the future, or the current debt load coupled with a challenging macroeconomic climate, could severely impact the company. I justify holding the stock because it is part of a diversified portfolio, and I’m willing to accept the considerable risk associated with this investment.
Recession
The macroeconomic environment for restaurants has been challenging, with most, besides Chili’s obviously, reporting declines in same-store sales (SSS). All of One Group’s brands have experienced declining SSS, with most seeing high single-digit drops, except for Benihana. A potential recession could further pressure the company and negatively impact its stock price. However, despite expectations of a recession over the past two years, it has yet to materialize.
Conclusion
In conclusion, while One Group Hospitality has faced challenges with negative same-store sales over the past two quarters and a burdensome debt load from the acquisition of Safflower Holdings in an unfavorable interest rate environment, the company’s core brands, STK and Benihana, remain strong with solid unit economics and restaurant-level operating margins of 20%. The decline in sales appears to be influenced more by broader industry trends than company-specific issues, as evidenced by negative industry metrics. With a relatively small footprint of 167 restaurants and a total addressable market of 800, One Group has significant growth potential. At an EV/Sales ratio of 0.75, the company appears undervalued, presenting a compelling opportunity if it can navigate the current macroeconomic headwinds. Due to this I have added One Group(STKS) to my portfolio.
Key Performance indicators
- Benihana and STK OP Margins
- Same store sales
- Restaurant openings
- Sales per owned restaurants
