Just when I thought the restaurant sector was dead on Wall Street, we see that fast casual, Canadian-born Freshii (FRII.TO) has pulled off an impressive IPO, offering shares recently at $11.50 each (CAD). With the stock near $14, Freshii’s market value is approaching $430 million (CAD). Adjusting these figures into a U.S. dollar equivalent, FRII stock fetches around $10.25 with a total equity value of $320 million.
Today the company reported 2016 revenue of $16.1 million and EBITDA of $3.7 million (both in USD). Based on those numbers, it would appear that Freshii shares are quite overvalued, but there are reasons that many investors are impressed with the company.
When I reviewed the IPO prospectus, what jumped out at me was the extraordinarily low unit build-out cost ($260,000). For a 99%-franchised fast casual chain, such a low initial investment requirement will make it relatively easy for the company to grow quickly. While average unit sales in 2016 were only $468,000 per location, a reasonable 10% margin would net franchisees a mid teens return on investment (including the initial franchise fee).
I recently visited the lone Freshii location here in Seattle and I was impressed with the food offerings. The average entree price point is pretty much in-line with the fast casual industry ($7.50) and seems especially reasonable given the quality and healthy nature of the food.
On the surface, the Freshii concept appears to be well suited for rapid growth, especially in younger, more health conscious urban areas. But when we look at the stock, it already reflects very high expectations. Freshii collects a 6% royalty on gross sales and system-wide revenue in 2016 was $96 million. If we assume that the company can earn industry-leading margins due to its high franchise percentage, EBITDA at maturity could rise to the mid 40’s in percentage of revenue terms.
Freshii predicts total units will surpass 800 by the end of 2019, which would bring in upwards of $25 million in annual recurring royalty revenue, and possibly ~$11 million of EBITDA. Accordingly, based on expected 2019 profits, Freshii stock currently trades at roughly 30x EBITDA. Yikes.
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