FOGO - Fogo de Chao

[chesko182]

Has anyone looked at this name? I started a small position after a friend recommended it and look at it more deeply.

 

Some highlights:

 

1) Has a long history of profitability and growth since it was founded in 1979

2) Seems to have strong brand power due to the differentiated dining experience

3) lower labor costs vs. comps due to the fact that the chefs are also servers (less training and staff required)

4) Strong margins vs comps and higher AUV (Average unit volume)

5) seemingly cheap valuation for a growth story

6) recently started opening JVs internationally (Dubai and Mexico city) at attractive terms because they don't put up any initial capital, also opening restaurant-owned locations

7) Finally, what really caught my attention was that the PE which took it public (Thomas Lee Partners) decided not to sell and currently owns 80% (the IPO was a flop, started trading at $20, went to ~26 it's at ~11 currently), This to me serves like a strong catalyst because I noticed the company is part of their 2006 vintage fund, which means it's been over 10 years and is in the final phases so they should be looking to sell this in the next 2 years or so at the best price possible (they have to give the money back to investors, but not sure on the specific timing for this fund). My guess is there will be some acquisition event here at some point, and in the mean time you can hold on to a good company trading at a discount to intrinsic worth.

 

Value Investors Club has two good write-ups on this and there's some decent ones in SeekingAlpha too, but none actually mentioned the PE ownership as a catalyst, am I missing something here?

 

Thanks

[DTEJD1997]

Has anyone looked at this name? I started a small position after a friend recommended it and look at it more deeply.

 

Some highlights:

 

1) Has a long history of profitability and growth since it was founded in 1979

2) Seems to have strong brand power due to the differentiated dining experience

3) lower labor costs vs. comps due to the fact that the chefs are also servers (less training and staff required)

4) Strong margins vs comps and higher AUV (Average unit volume)

5) seemingly cheap valuation for a growth story

6) recently started opening JVs internationally (Dubai and Mexico city) at attractive terms because they don't put up any initial capital, also opening restaurant-owned locations

7) Finally, what really caught my attention was that the PE which took it public (Thomas Lee Partners) decided not to sell and currently owns 80% (the IPO was a flop, started trading at $20, went to ~26 it's at ~11 currently), This to me serves like a strong catalyst because I noticed the company is part of their 2006 vintage fund, which means it's been over 10 years and is in the final phases so they should be looking to sell this in the next 2 years or so at the best price possible (they have to give the money back to investors, but not sure on the specific timing for this fund). My guess is there will be some acquisition event here at some point, and in the mean time you can hold on to a good company trading at a discount to intrinsic worth.

 

Value Investors Club has two good write-ups on this and there's some decent ones in SeekingAlpha too, but none actually mentioned the PE ownership as a catalyst, am I missing something here?

 

Thanks

 

I've eaten at some of their locations...very delicious food.  I've also looked at it and have concluded that it is an above average restaurant.  This is also on my short-list of ideas.

 

I do not currently have a position, as I think it can go lower.  I am always looking for a great bargain, so I want to pay even less than what it is quoted at.

 

Other players in the restaurant industry are facing difficulty.  Combine that with a slowing economy? and FOGO could still go quite a bit lower.

 

They also more debt than I would like to see.

 

I don't think their international JV will be contributing very much for the next couple/few years.  The local partner has to make back ALL their investment first.  After that, profits are split evenly I think.  So I don't think they get anything other than the base royalty, then they should start cash flowing nicely.

 

I think there was/is some insider selling.  They were locked up from selling shares due to the IPO...so that is putting some more pressure on the stock price.

 

All in all, a quality, well run company.  I'll be looking to get some in the near future at lower price points.

[Travis Wiedower]

FOGO is going to be the next write-up on my blog in the next week or two. There's not much I don't like about this company, but all the stock does is go down everyday so I keep thinking I'm missing something. I understand there are some short-term headwinds in the industry, but I don't understand why FOGO is getting crushed far more than their peers. And I don't see minimum wage increases, economic slowdown, or Brazilian forex really mattering to the value of the company over the long-term. Any thoughts on why FOGO has been hit so much harder than their competition?

[Foreign Tuffett]

My first thought is that this could highly positively correlated with the overall Brazilian market. At quick visit to Google Finance found that this is far from the case. I have no idea why it has been falling.

 

In situations where a stock is falling for reasons that aren't clear to me my default belief is that the market knows something that I don't. I think this is broadly consistent with Travis'  comment.

 

Seems like a good candidate for further research.

[glorysk87]

FOGO is going to be the next write-up on my blog in the next week or two. There's not much I don't like about this company, but all the stock does is go down everyday so I keep thinking I'm missing something. I understand there are some short-term headwinds in the industry, but I don't understand why FOGO is getting crushed far more than their peers. And I don't see minimum wage increases, economic slowdown, or Brazilian forex really mattering to the value of the company over the long-term. Any thoughts on why FOGO has been hit so much harder than their competition?

 

I actually wrote FOGO up 2 weeks ago as an application to VIC (and was denied...again).

 

I have some ideas as to why it's been hit so hard.

 

1) Brazilian economy is in the gutter. Brazil is ~25% of their restaurant base, so a weak economy there acts as a substantial headwind. To be clear, I'm not talking about currency impacts here, I'm talking about the Brazilian people pulling back on spending which directly reduces unit revenue at the restaurants in Brazil.  Inflation is running at 8%-10% in the country, consumer confidence bottomed at 65 earlier this year (vs a prior peak at 130 in 2012), and the unemployment rate increased from 8.2% in 3Q15 to 11.6% in 3Q16. So it's safe to say the company is in a rough spot right now, which heavily impacts FOGO's Brazilian restaurants.

 

2) Zika - fear of Zika has had a disproportionate impact on FOGO.  They have 1 restaurant in Miami (which has seen staggering drops in tourism due to Zika fears), 1 in Puerto Rico, and 10 in Brazil. That's a massive portion of their restaurant based that's going to see lower traffic due to Zika fears.

 

3) Energy layoffs lagged energy weakness, so layoffs are just now starting to hit the state of TX hard this year. This impacts mainly the Houston area restaurants (Houston and Woodlands).

 

If you think about it in this context, it's actually pretty remarkable that the company hasn't performed worse.  Also, in my opinion all of the above are temporary impacts that should dissipate over time. I think it provides a phenomenal opportunity.

 

If I've missed anything or haven't contemplated something feel free to post, I'm still continuing to look for a reason I might be wrong on this investment.

 

[Guest roark33]

Restaurants are just terrible businesses.  People like a concept for a while and then move on.  Very, very few succeed.  Unless you are interested in a quarterly beat or some trade, I think you have to convince someone why FOGO is different from a graveyard of restaurant businesses.  (And no, it isn't the next Chipotle). 

[Travis Wiedower]

2) Zika - fear of Zika has had a disproportionate impact on FOGO.  They have 1 restaurant in Miami (which has seen staggering drops in tourism due to Zika fears), 1 in Puerto Rico, and 10 in Brazil. That's a massive portion of their restaurant based that's going to see lower traffic due to Zika fears.

 

I somehow hadn't thought about Zika, that's definitely part of it. Though I agree with you, all these things are short-term in nature.

 

Restaurants are just terrible businesses.  People like a concept for a while and then move on.  Very, very few succeed.  Unless you are interested in a quarterly beat or some trade, I think you have to convince someone why FOGO is different from a graveyard of restaurant businesses.  (And no, it isn't the next Chipotle). 

 

A few things. Fogo has been around a long time and has never closed a store. Their Yelp reviews are remarkably consistent and positive across all units. Their oldest US stores (Addison, Houston, Atlanta, Chicago) all have high Yelp ratings >4.3 YTD. The average 2016 Yelp rating across all their locations is 4.26 (I've spent too many hours on Yelp the past few days). People really seem to like the idea of spending roughly the same amount as a high end steakhouse, but getting to try way more variety and being able to eat as much as possible.

 

More broadly, I think the Brazilian steakhouse concept is a unique one that any decently populated area can support 1-2 of. They are the only Brazilian steakhouse in town at six of their locations and there are very few cities where they compete with more than two places (and I mean directly compete, obviously they compete with traditional steakhouses and such). In the 11 cities they have one direct competitor, Fogo has a higher Yelp rating in seven of those cities. In the 14 cities with 2+ Brazilian steakhouses, they have the highest rating in six of those cities and the lowest rating in one (they're in the middle of the pack for the other seven). The only other national Brazilian steakhouse is Texas de Brazil which Fogo overlaps with in nine cities, all nine of which Fogo has higher ratings in (by a good margin I'll add).

 

I do have a lot of experience in the restaurant industry (not referring to serving/bartending lol) and have always avoided restaurants in the public markets for reasons you alluded to, but this is the first one I've been really interested in. The restaurant industry is tough and it's made worse by people who have no business opening restaurants doing so anyway, but I also know quite a few who have made 7-8 figures as restaurant owners so it's not all bad for smart people with good concepts. The Brazilian steakhouse concept also has far higher margins than other full service restaurants which gives it a nice leg up getting through downturns.

[theperksofbeinganINTJ]

Barron's would disagree with you, Roark... they used FOGO as a CMG comp this summer.  One sentence before using Taco Bell as another comp.  I'm not sure which is more amusing... (h/t Barbarian Capital - https://twitter.com/barbariancap/status/678980527299428356.)

 

Notwithstanding what I'd refer to as "macro" arguments - i.e. labor costs / softening restaurant comps / the generally fickle nature of consumers / etcetcetc - does anyone who has done real work on the stock actually have a credible FOGO-specific bear case at this valuation?  While short interest is small in absolute terms, it's actually decent relative to the float.  Why?  Are there any Bad Things about the business?  Are there any Bad Things about T.H. Lee?  Why will FOGO fail?  Why can FOGO not scale up to the size and location density of, say, RUTH?  These are questions I've been looking for answers to and haven't yet heard any good ones (other than "the stock might go down," which, well, welcome to value investing.) 

 

[arcube]

FOGO is going to be the next write-up on my blog in the next week or two. There's not much I don't like about this company, but all the stock does is go down everyday so I keep thinking I'm missing something. I understand there are some short-term headwinds in the industry, but I don't understand why FOGO is getting crushed far more than their peers. And I don't see minimum wage increases, economic slowdown, or Brazilian forex really mattering to the value of the company over the long-term. Any thoughts on why FOGO has been hit so much harder than their competition?

 

I actually wrote FOGO up 2 weeks ago as an application to VIC (and was denied...again).

 

I have some ideas as to why it's been hit so hard.

 

1) Brazilian economy is in the gutter. Brazil is ~25% of their restaurant base, so a weak economy there acts as a substantial headwind. To be clear, I'm not talking about currency impacts here, I'm talking about the Brazilian people pulling back on spending which directly reduces unit revenue at the restaurants in Brazil.  Inflation is running at 8%-10% in the country, consumer confidence bottomed at 65 earlier this year (vs a prior peak at 130 in 2012), and the unemployment rate increased from 8.2% in 3Q15 to 11.6% in 3Q16. So it's safe to say the company is in a rough spot right now, which heavily impacts FOGO's Brazilian restaurants.

 

2) Zika - fear of Zika has had a disproportionate impact on FOGO.  They have 1 restaurant in Miami (which has seen staggering drops in tourism due to Zika fears), 1 in Puerto Rico, and 10 in Brazil. That's a massive portion of their restaurant based that's going to see lower traffic due to Zika fears.

 

3) Energy layoffs lagged energy weakness, so layoffs are just now starting to hit the state of TX hard this year. This impacts mainly the Houston area restaurants (Houston and Woodlands).

 

If you think about it in this context, it's actually pretty remarkable that the company hasn't performed worse.  Also, in my opinion all of the above are temporary impacts that should dissipate over time. I think it provides a phenomenal opportunity.

 

If I've missed anything or haven't contemplated something feel free to post, I'm still continuing to look for a reason I might be wrong on this investment.

 

Hopefully you can post your write up here. I think you were spot on the energy market weakness as well as Florida issues. Similar issues noted in attached report. Look forward to Travis' write up as well. Thanks.

CS_FOGO_8-10-16.pdf

[johnny]

The only other national Brazilian steakhouse is Texas de Brazil which Fogo overlaps with in nine cities, all nine of which Fogo has higher ratings in (by a good margin I'll add).

 

I'll add that here in LA, the only similar place I know of is Samba, with a location in Redondo Beach and Universal City; both of them have worse Yelp reviews and are constantly running promotions.

[fareastwarriors]

I went to Fogo de Chao in SF for lunch during a weekday. The place was full but there wasn't much of a line.  Some meats were salty but for the most part, everything was good.

 

 

[Picasso]

Low public float works in both direction.  It went from $20 to $26 on the IPO but any significant selling can really put pressure on the stock.  I can't tell if any one holder is driving down the price versus just a mix of bad short-term headwinds.  The business is being hit from all the energy, Zika and Brazil issues which seems temporary but fairly long lasting in nature.  Then again, maybe not.  If I gave you some cool restaurant with 30% margins but a large chunk of their profits came from an area plagued with the swine flu or Ebola then I think you would probably be a little fearful.  But no one really talks about the Ebola outbreak anymore so maybe there's something to be said for investing during these plague like scares.

[Travis Wiedower]

My investment thesis on FOGO: https://traviswiedower.com/2016/10/04/fogo-de-chao-is-looking-tasty/

 

Anything I missed or overlooked?

[glorysk87]

The link is broken  ;D

[Travis Wiedower]

:facepalm: try again, it's working for me now.

[Sionnach]

Great write up Travis. Giving your background in foodservice I'm trying to have an open mind with this one.

 

My biggest concern is whether their competitive advantage holds in a pessimistic economic scenario. In their presentations their EBITDA margins look pretty next to the peer set they selected. If times are tough, I think FOGO's competitor set really becomes lower-end steakhouses such as Outback or Longhorn as consumers pull back spending. Per Factset, longhorn has an operating margin of ~17%.

 

Am I totally off base to think the high-end steakhouses would compete with lower-end? (is that like comparing chipotle to taco bell?)

[Picasso]

The Travis bounce! Better than Barron's.

[Sionnach]

CFO also bought 1,000 shares. Potentially because of travis' writeup ;)

[awindenberger]

Great writeup Travis. This definitely got my attention to do more research on.

 

I'm fully expecting at least a small recession over the next two years. I wonder how much lower this could go if that plays out. It doesn't seem like it could be much more given current valuation, but on the other hand, recessions tend to send most stocks down.

 

 

[DTEJD1997]

Hey all:

 

I'm watching this one closely.

 

I think there is a good chance there could be end of year tax loss selling (and insider selling too).  So I think it will be under pressure between now and the end of the year.  In mid-December, assuming the economy hasn't blown apart, I'll be looking to get some!

 

I've also been to their restaurants.  A great meal & experience!

[GregS]

Anyone know why their alcohol sales are low relative to peers?  Has management said anything about it?

[glorysk87]

Anyone know why their alcohol sales are low relative to peers?  Has management said anything about it?

 

Yea. They traditionally haven't optimized their bar. They're aware it's a source to drive margin improvements. From the May earnings call:

 

"As we have discussed previously, we are reimaging older restaurants to reposition the bar area and to add capacity. Historically, the bar has not been a focal point. We believe by revitalizing this space, it will highlight our distinctive cocktails and our award-winning wine offerings, and ultimately result in an increase in our alcohol sales. Restaurants opened since December of 2013 include these bar elements and have a higher level of alcohol sales mix."

[Travis Wiedower]

Anyone know why their alcohol sales are low relative to peers?  Has management said anything about it?

 

To add to glory's comment, it's also a quicker meal than other high end places like Ruth's Chris (quicker turn probably helps explain Fogo's high AUVs). I can easily spend 2+ hours at Ruth's with appetizer, entree, and dessert whereas my last trip to Fogo was 1.5 hours and that was stretched. We got our second drink just before dessert and we only got the second drink because we knew we'd sit there after dessert to kill time before meeting friends.

 

If you haven't eaten at Fogo, the meal starts with a server taking your drink order within minutes of sitting down. While the drinks are coming, you go to the salad/app bar which doesn't take long. And then as soon as you're done eating those, the meat starts coming out. You can control the pace of the meal, but I'd bet the vast majority or people are in and out quicker than a traditional steakhouse. After eating at Fogo I understand the low alcohol sales much better. There's probably room to emphasize it more, but it'll never be as high as Ruth's.

[Travis Wiedower]

If times are tough, I think FOGO's competitor set really becomes lower-end steakhouses such as Outback or Longhorn as consumers pull back spending. Per Factset, longhorn has an operating margin of ~17%.

 

Am I totally off base to think the high-end steakhouses would compete with lower-end? (is that like comparing chipotle to taco bell?)

 

I don't have any special insight here, but I'd be surprised if RUTH/FOGO compete much with TXRH or Outback, beyond maybe some fringe cases. I think TXRH is great value (Outback sucks), but RUTH and FOGO are in a completely different league. There's no doubt high average check places like RUTH and FOGO get hurt in downturns worse than cheaper places, but it makes me feel better that FOGO's comp sales performed far better than RUTH and DFRG during the financial collapse. Probably from a combination of lower check and more unique concept (if times are rough you can buy a nice prime steak at Kroger, can't replicate FOGO though).

[Guest roark33]

here is another write-up.  not from me....can't remember his name (included in write-up) and yes, I am that lazy....

2016-09-01_Askeladden_Capital_Q3_Letter_-_Lucky_or_Smart_FINAL.pdf