GRIL 2.0: Ghosting their way into profitability

Muscle Maker, Inc. (NASDAQ:GRIL) is much more than a muscle bound, protein packed, military grade food trough. They fell into this typecast because they are currently the only healthy food option on 6 military bases. In a time of upheaval in the restaurant marketplace, GRIL is dominating the non-traditional fast casual food market. Muscle Maker Grill along with its first food concept was founded in 1995 in order to offer healthier versions of mainstream-favorite dishes that taste great, yet made it easy, affordable, and enjoyable to eat healthy. The new restaurant chain quickly grew to over 70+ locations throughout the U.S. but their transformation into a public company didn’t come easy.

Bumpy Capital Road Beginning to Smooth

Their first attempt at a Reg-A offering in 2018 failed miserably primarily to a poor choice of investment banker. This put them in a tough position financially, but the old adage, “one man’s trash is another man’s treasure”, as a savvy new investor came across the company, did their due diligence, and discovered the amazing opportunity to morph the business. The investor restructured the company, eliminated all the debt, pumped it full of cash, and eventually hired a rockstar management team.

Leadership

Leading their team is none other than their current CEO, Michael Roper, who was part of the team responsible for taking Quiznos to several thousand locations while opening more than 1000 restaurant per year for three years in a row. This level of achievement was reached by only two other brands (Starbucks and Subway). During Quiznos peak growth phase, the team was opening a new location every 8 hours! Roper followed up that hyper growth experience by taking over a struggling TexMex brand called Taco Bueno. One can watch him on an episode of Undercover Boss. He was filmed while in the midst of the turnaround, with lots of blood, sweat and arguably too many tears in the episode. Within a few months Roper turned comps positive, achieved record EBITDA and sold the Company to one of the world’s most recognizable private equity shops. Investors that want the jockey to be part of their investment thesis, Roper is world class quality.Roper and his team of operators have been brought in to steer the ship, and they successfully completed an IPO on the Nasdaq in February of this year. Being a tiny IPO with a lesser known underwriter, the transaction has garnered no fanfare and the stock fell heavily as it and every other restaurant stock tanked as a result of the COVID induced malaise. Regardless, during this downswing, the company has mapped out an aggressive, non-traditional location focused, fast casual restaurant growth strategy. Now what exactly does “non-traditional” mean you say? It means the company has identified opportunities where consumer trends are less economically sensitive, and while we are all learning that almost nothing is pandemic proof, they have chosen to pursue “recession resistant opportunities.” Management has identified three initial verticals that meet those characteristics and they have begun to expand in all three channels: Military bases, Delivery-Only ghost kitchens and Universities.

Targeting Military Bases

On the military front Muscle Maker currently has food concepts on 6 military bases throughout the U.S., and that number is growing as the opportunity to expand into the other branches of the armed forces have also presented themselves. The food options on military bases until now, have been very unhealthy. We’re talking Taco Bell, Burger King, KFC, and many others. If you want fighting troops in tip top shape then these fast food brands are clearly working for the enemy. Following the old saying of “you are what you eat,” time and poor nutritional options has created a very real problem forcing the armed services to declare that the inability to attract sufficient recruits within their physical standards as a national safety issue, leading to the creation of “Operation Live Well”. Muscle Maker is a contributing player in leading the charge to help troops get back into shape.

Targeting Colleges & Universities

The second leg of growth is the recently announced push into colleges and universities. This is another market, similar to the Military, that allows the Company to target captive audiences, with limited competing offerings, and consumers whom either through meal plans, grants, loans...etc have consistent disposable income, with allocated food/board budgets. The company detailed its plans to enter 5 initial college and university locations including Texas Tech University Health Sciences Center El Paso and 4 locations with the Northern Virginia Community College system. Typical campus offerings consisted largely of typical greasy fast food full of carbs leaving you wanting more. This is a land grab opportunity and these initial wins could lead to a much larger opportunity as momentum builds in the sector. This leaves GRIL in a power position to point out their success in all subsequent university pitches. Once they crack the code to get on campus and prove out that students like healthy options, the other locations begin to fall in line.

Ghost Kitchens

The third leg of growth is coming from Ghost Kitchens. Luckily, the Company had a jump start on the competition and was fine tuning the model before the pandemic hit. The recent lockdowns seem to prove out just how far in front management was to identify these concepts. It goes without saying that things in the restaurant marketplace are a mess. Business as usual is not an option for almost all restaurants. Restaurants have been forced to deal with the stark reality that they need to face structural change in order to survive. This process has prompted them to revisit their operating model, and how they interact with customers and their changing consumer patterns. Muscle Maker has been researching and developing relationships with alternative ways to feed healthy food to people for quite some time. Restaurant Business described Ghost kitchens, as “cloud kitchens”, “dark kitchens” or “virtual kitchens” trim the costs of real estate, labor and menu innovation by condensing the restaurant model to accommodate off-premise food sales without a traditional dine-in space. Instead of seating guests indoors, deliveries made by the restaurant or by a third-party service are the mainstay.On July 30th, GRIL announced it has opened its first, of 10 previously announced, delivery-only ghost kitchen in the Chicago market. GRIL guests can order healthier for you dishes from any of their three concepts through third party delivery platforms providing ease of ordering and the option for contactless delivery. Ordering platforms include: DoorDash, GrubHub, UberEats, Postmates, ChowNow and Caviar. As the demand for delivery increases due to social distancing, many restaurant concepts are looking toward ghost kitchens to expand quickly while meeting the growing need for fast options. With approximately 29% of Americans as of May 2020, using third party delivery services to order food, GRIL is certainly on the right track to capture a large portion of that market.Muscle Maker is not the only business taking advantage of the changing market conditions and this looming pandemic. If you’re aware of the online food delivery space, then you’ve probably heard of the likes of Uber Eats, DoorDash, Postmates, Caviar and GrubHub. But you may not have heard of Waitr (NASDAQ:WTRH).The $250 million online food delivery company does exactly what Uber Eats and DoorDash do: provide online food ordering and delivery services. But the company does it at a much smaller scale. In May 2020, the platform owned just 1% of online food delivery sales in the U.S. – versus 45% share for DoorDash, 23% share for GrubHub and 22% share for Uber Eats.This smallness is by design. Waitr is hyper-focused on serving under-penetrated, smaller-town markets across the Southeast and Midwest, like Baton Rouge, Columbus, Ga. and Gainesville, Fla. Because those are smaller markets, they are less attractive to the likes of DoorDash and Uber Eats, and therefore, attract less investment and resource focus from those bigger players.

Investment Summary

Investing in restaurants during pandemic times is not for the faint of heart but with this increased risk there is increased reward. Finding the winning combination in a sea of failures is not an easy task. What makes this investment so palatable is the management team, the current valuation, and their evolving strategy. Restaurant investing is tough, success in this industry usually revolves around location and or fad and concept; but even then, that success is often fleeting, and the positive returns short lived. All one needs to do is look back in recent history and one-time highflyers like Boston Markets, Lone Star, and Krispy Kreme eventually slid into bankruptcy. In stark contrast to these once hot, but very narrowly focused businesses, Muscle Maker has chosen niche markets, with limited competition and a captive market. This strategy is working and profitability seems attainable. Small cap restaurants are almost entirely unprofitable as a sector, they trade at multiples of revenues, attracting broad based investor interest in the hopes of catching the next wave. Given the recent growth in sales it is expected that they can quickly become profitable, pull away from their comparables, and deliveron financial performance.

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Disclosure: Insider Financial and its owners do not have a position in the stocks posted and have posted this article for free without editorial input. This article was written by a guest contributor and solely reflects his opinions.