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- Gen Restaurant may be risky but the stock is too cheap to ignore at current prices
Gen Restaurant may be risky but the stock is too cheap to ignore at current prices
George Babis
October 04, 2023
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The restaurant industry has captured investor attention this year, primarily due to the high-profile listing of Cava ($CAVA), the Mediterranean restaurant chain. Cava's successful IPO has attracted more restaurant brands to the public markets this year, including Gen Restaurant ($GENK), a niche restaurant brand with a modest footprint but ambitious expansion plans.
Much like Cava, Gen's IPO in late June was quite successful. The stock made its debut with a 38% surge after pricing its listing at the high end of the expected range. However, as is typical with most IPOs, the initial excitement doesn’t last for long. As you can see below, the initial enthusiasm for GEN has waned, and the stock is now trading at all-time lows, hovering around $11.
While GEN is a relatively small company and carries inherent risks, its underlying fundamentals remain robust, with strong expected growth in the near term. At current prices, GEN stock is much cheaper than other niche restaurant chains, making it a good buy for risk-tolerant investors. Here’s why.
A Unique Restaurant Concept That Seems To Resonate With Consumers, For Now
GEN Restaurant is a fascinating restaurant chain due to its unique concept. It's a Korean BBQ casual dining chain with 34 locations and a cook-it-yourself dining model. Instead of employing chefs to prepare the meals, guests serve as their own chefs and cook the majority of their meals themselves on a grill embedded in the center of each table. Guests can also order unlimited amounts of food for a fixed price, generally ranging from $17.95 to $20.99 for lunch and $25.95 to $29.95 for dinner, except for the Las Vegas, NV, and Manhattan, NY locations where prices are slightly higher.
GEN stands out from most other restaurant chains due to its distinctive approach. However, it's still too early to say whether this unique experience is a competitive advantage or disadvantage for the company, as it could potentially be both. Guests might be drawn to this unique and memorable dining experience, but this concept might limit the company's expansion potential.
The management estimates that the company has the potential to open up to 250 restaurants across the US over the next 10 to 12 years, translating to a potential unit growth of 635% from current levels. While this goal is ambitious and exciting, its achievability remains uncertain. GEN's unique concept hasn't been tested in many states yet, leaving us unsure of its success across the entire US. Currently, 20 of the 34 restaurants are located in California, where the diverse population makes it an attractive market for the company.
For now, this unique restaurant concept appears to resonate with consumers not only in California but also in other markets. For instance, GEN has recently expanded into Florida and New York, where these new restaurants are performing well, according to management. This is a positive sign that GEN might have strong growth prospects across the US. As the company continues to expand, it stands to gain market share from mom-and-pop Korean restaurants, thanks to its appealing all-inclusive pricing and unique dining experience. Also, beyond the Korean and Korean-American population, GEN has the potential to attract Millennials and Gen Z individuals who enjoy exploring diverse ethnic cuisines.
Healthy Profits & Anticipated Growth Acceleration
The main reason GEN went public this summer was to raise funds and accelerate its unit expansion. The company, founded 12 years ago, expanded slowly but profitably as a private entity. Now, as a publicly traded company, it plans to significantly ramp up its footprint expansion, aiming to achieve its goal of 250 restaurants in the country over the next ten to twelve years.
This year, revenue is expected to grow 14%, reaching $186 million, and in 2024, growth is projected to pick up to 27%. This anticipated growth is a result of the company's plan to open 10 to 12 new restaurants next year, an acceleration compared to the nine new units expected to open by the end of this year.
Despite its fixed-price revenue model, GEN's restaurants are very profitable, showing that this model indeed works. In Q2, the restaurant-level operating margin reached 20.4%, which is a promising starting point. While this margin is slightly lower than that of other niche restaurant brands like Kura Sushi USA ($KRUS), it is a strong figure that has the potential to increase over time as the restaurants mature and the company boosts efficiency through scale and innovation. For example, GEN plans to install automated dishwashing machines, which will reduce staffing needs and boost profit margins.
Each restaurant generates over a million dollars in revenue per year (AUV), a figure significantly higher than the AUV of more mature chains like Chipotle ($CMG), which reported an AUV of $2.9 million in the most recent quarter. This is primarily because GEN restaurants have smaller kitchens than traditional establishments, thanks to the cook-it-yourself model, which frees up space for additional tables. Also, the average restaurant costs between $1.5 and $2.5 million, which is a low capex spending, allowing GEN to grow profitably. In Q2, the company delivered a net income of $4.5 million, or 9.6% of revenue, an impressive achievement for a small restaurant chain that grows rapidly. While profitability will decline in the midterm as the company accelerates its unit expansion, the current profitable operations underscore the strength of GEN's unit economics.
What About Valuation
$GEN's recent selloff has made the stock very attractive. With current prices hovering around $11 per share, the stock trades at a PS ratio of just 1.8x. This valuation multiple is much lower than those of other niche restaurant brands like Kura Sushi USA. This suggests that the stock may be significantly undervalued at its current levels, considering its strong performance on both the top and bottom lines, which justifies higher valuation multiples.
Investors are questioning whether GEN's unique concept can resonate with consumers across the US so they’re keeping the stock at low valuation multiples. If GEN can prove that its model appeals to consumers nationwide, the stock has substantial upside potential, given the current low multiples.
What Else
GEN is a relatively risky investment in the restaurant sector but has the potential to generate strong returns for shareholders. Its unique restaurant concept remains untested outside of a few multicultural locations like California. However, its current performance is impressive, showcasing robust growth momentum while generating profits at the same time. If this growth accelerates and unit economics remain strong, the bull case for GEN will become more evident. Given that the stock trades at a significant discount compared to other niche restaurant chains, it appears to be an attractive option for risk-tolerant investors.