An Explosive Play on the Emerging Ghost Kitchen Megatrend
October 1, 2020
Back in late 2008 — in the midst of the Great Financial Crisis — Travis Kalanick had a brilliant idea.
Lower the cost of transportation, for everyone, by democratizing the taxi industry so that anyone with a car could provide a ride for anyone needing to go somewhere.
And so, the concept of ride-sharing was born.
Over the next decade, Kalanick’s company — Uber (NYSE:UBER) — went from idea to multi-billion-dollar disruptor of the transportation industry.
Today — amid another enormous financial crisis — Kalanick has, of course, come up with another brilliant idea.
Lower the cost of doing business, for all restaurant owners, by creating a new class of super-small, delivery-only restaurants that eliminate everything but the kitchen.
And so, the concept of ghost kitchens was born — a concept that has taken off amid the Covid-19 pandemic as more and more consumers have leaned into delivery channels, and as more and more restaurant owners have had to tighten their budgets and close stores.
Over the past year, Kalanick’s new company — Cloud Kitchen — has raised more than $400 million to help turn this idea into a ubiquitous reality.
Make no mistake. That’s exactly what will happen.
Super-small, delivery-only ghost kitchens represent the future of the fast-casual restaurant industry, because they:
Better align with shifting demand (U.S. meal delivery sales have risen ~300% since 2018)
Provide significantly more flexibility (traditional restaurant locations operate on 5+ year leases, whereas ghost kitchens are typically rented out monthly)
Allow for more rapid, cost-effective geographic expansion (traditional restaurants cost upwards of $250,000 to open, and such openings take several months; ghost kitchens cost about $20,000 to open and open in less than 90 days)
Thus, over the next decade, ghost kitchens are going to disrupt the several hundred-billion-dollar global food industry, much like ride-sharing has disrupted the several hundred-billion-dollar global transportation industry over the past decade.
One way to play this emerging fast-food megatrend is by buying a micro-cap fast food stock that is leveraging ghost kitchens to execute what is shaping up to be an enormously profitable turnaround.
Using Ghost Kitchens to Turn into a Delivery-Focused Health Food Brand
A tiny fast-food company that was on the brink of extinction last year, $16 million Muscle Maker Grill (NASDAQ:GRIL) appears to be on the cusp of a huge ghost-kitchen-powered turnaround that could turn the stock into a multi-bagger during the 2020s.
Here’s the story.
Muscle Maker Grill is one of those health-conscious fast-food chains that is trying to win by selling affordable, healthy foods in an on-the-go format, with the company’s core offerings being protein-rich burgers, sandwiches, wraps, and shakes.
Cool concept. But management hasn’t done a great job of executing over the past few years.
The menu and brand have grown stale. The food quality has dropped. The stores aren’t up-to-date. Revenues — which had been booming earlier in the 2010s — fell nearly 40% from 2017 to 2019. Management was forced to close stores. Losses were piling up.
Muscle Maker Grill looked doomed in late 2019.
Then… in early 2020… management did two big things.
They stopped cutting corners and started refreshing the brand. The company has converted two old and stale Muscle Maker Grill locations into new concepts — one a trendy, health-sandwich shop called Healthy Joe’s in New York City, and the other a modern healthy burger shop called MMG Burger Bar in Virginia. Per reviews on the internet, customers are raving about both locations.
They stopped closing stores and leaned aggressively into low-cost unit expansion with ghost kitchens. Early in the year, management announced intentions to renew unit expansion via ghost kitchens. They have accelerated this initiative as Covid-19 has emerged, with MMG announcing 7 new ghost kitchen locations in Chicago and Philadelphia over the past 30 days alone.
In doing these two things, management is modernizing Muscle Maker Grill, and essentially turning the struggling fast-food chain into a more relevant, more efficient, more profitable delivery-focused health food brand.
The numbers speak for themselves. In the first quarter of 2020 — before Covid-19 struck — Muscle Maker Grill’s revenues rose 21% year-over-year.
Early traction on these turnaround efforts has allowed Muscle Maker Grill to raise $5.6 million in a follow-on public offering in September. Upon closing of that offering, Muscle Maker Grill will have more cash on hand than the company has had in years.
Management plans to use all that cash to continue to modernize Muscle Maker Grill via… you guessed it… new concept expansion and a ton of ghost kitchen openings.
Now, I’m not saying that this turnaround will end with Muscle Maker Grill turning into the ghost kitchen version of Shake Shack (NYSE:SHAK) or Chipotle (NYSE:CMG).
No way. MMG would need a lot more capital to pull that off.
But I am saying that with these new food concepts, a hyper-focus on ghost kitchens, and ample cash on the balance sheet, Muscle Maker Grill does have a unique opportunity to become a much more profitable restaurant chain with a much broader retail footprint.
After all, Muscle Maker Grill operates just 33 locations today, with 6 locations in New Jersey alone and only 3 locations in California and Florida combined.
Assuming Muscle Maker Grill leans into ghost kitchens to replicate its New Jersey store density across America, then 200+ locations are likely within the next few years. Average restaurant sales should remain strong thanks to the new food concepts. Profit margins should expand meaningfully on the back of lower operating costs for ghost kitchens.
When you connect all the dots, my modeling suggests that Muscle Maker could do about $5 million in net profits within the next few years.
That may not seem like much.
But restaurant stocks typically trade around 25X forward earnings. A 25X multiple on $5 million implies a $125 million market cap for Muscle Maker Grill.
The market cap sits at $16 million today.
So… Muscle Maker isn’t the next big thing… but because shares are so cheap, even mild success with its new ghost kitchen initiative could spark multi-bagger returns in the stock.
And multi-bagger return potential is exactly why Muscle Maker stock should be on your radar today.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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