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Rave Restaurant Group, Inc. (NASDAQ:RAVE) - One Pager
"A Microcap Turnaround Play"
This write up / one-pager was done in collaboration with Inbox Alpha.
100% of the research was done by Inbox Alpha, I just added couple of final touches.
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Disclaimer is at the end.
Rave Restaurant Group, Inc. RAVE 0.00%↑ is a ~$31 million microcap turnaround play. The company owns two pizza franchises:
Pizza Inn – primarily a pizza buffet serving residents in the Southeast,
Pie Five – a fast-casual make-your-own pizza concept.
Pizza Inn had a large presence in the Southeast back in the late 90s and 2000s (over 500 restaurants at the time), but has slowly dwindled in number over the last 20 years. A combination of poor management as well as decreasing demand for buffets has left the company with 75 Pizza Inn buffet locations today (123 locations total – including their Delco/Express locations and PIE locations). Rave had a few resurgences along the way, with the creation of Pie Five in 2010 or so. The Pie Five franchise grew quickly, but ran into serious competition in the fast-casual pizza space, eventually causing Rave to burn significant cash in 2014-2016.
By 2019, the company had started to refocus on its Pizza Inn buffet concept. They brought on a new CEO – Brandon Solano – who was instrumental in the Domino’s turnaround, and has turned around and grown other brands like Pei Wei Asian Kitchen, helped with Wendy’s (including playing a role in the creation of the 4 for $4), and has been an executive at Papa Murphy’s.
The pandemic was tough for the buffet industry, but, with the new management team, was really the turnaround point for Rave. Franchise revenue has grown to $11.8 million in 2023 from $8.5 million in 2021. Average revenue per Pizza Inn buffet location has increased to $1.26 million in 2023, compared to a traditional average of $700K-$800K for at least the last decade, if not longer. FCF margins are at 20%, and the company has seen Pizza Inn buffet location growth for the first time in 20 years (albeit slowly) in 2022 and 2023.
Brandon Solano and team have serious ambitions to grow the Pizza Inn buffet brand by 10x simply by expanding back into the areas it used to serve in the Southeast. Unlike a lot of franchises, Pizza Inn actually has a loyal and dedicated fan base – many who have nostalgic memories about the restaurant and even consider it the best pizza in town (pretty crazy for a pizza buffet franchise).
Buffets (particularly pizza buffets) have seen a resurgence since COVID, with competitors like Pizza Ranch and CiCi’s seeing serious growth. But surprisingly enough, Pizza Inn doesn’t have too much serious competition on the pizza buffet side of things. The main pizza buffet concepts in the U.S. are Pizza Ranch, CiCi’s, and Mazzio’s.
Though it used to compete with Pizza Inn, Mazzio’s has relegated itself to Oklahoma these days (with over 80% of its locations there). Pizza Ranch is located primarily in the Midwest, and today doesn’t really have any crossover with Pizza Inn. But it is growing (at ~400 locations today), and expects to expand into Pizza Inn markets like Arkansas, Missouri, and Tennessee. CiCi’s is the only one of the three that is actually based in the Southeast. It has 298 locations, with the majority of them in Texas and Florida, though it has locations in almost every state that Pizza Inn does. But if you look closer, you can see that (absent a few larger cities), the two companies have almost no crossover in terms of location.
Pizza Inn has always focused on serving smaller towns, and will (I assume) continue with that strategy as it expands into markets where it previously had a presence. If it can do so without much competition and maintain the restaurant-level improvements that Mr Solano and team have put into place, I think Rave has a good chance of delivering great returns.
It’s obviously still very early in the story. Growth has just started to show up.. There’s no guarantee here. But, if the company can grow its Pizza Inn franchise (without too much competition) to 300 restaurants (the size of CiCi’s), I think investors could be looking at something like a 3.75x return (I estimate this could take 8 years or so). And given the fact that Rave can achieve this growth without reinvesting large amounts of capital in the business (the franchisees take on essentially all the capex requirements), there’s a good chance that all excess cash flow will continue to be used for buybacks, further increasing shareholders’ returns. And this is assigning no value to Pie Five – assume it’s worth nothing.
Overall, it’s still early for Rave, but you’re looking at a cheap (~10x EV/FCF) microcap turnaround play that’s got a lot of built up latent equity (with Pizza Inn), and is finally starting to see some real growth. The CEO and his team are experienced in restaurant turnarounds, and high-performing franchisors with a strong brand can grow pretty fast without the need for significant capital investments. Make no mistake though, this is a speculative bet on a microcap turnaround. There’s no guarantee that Rave can achieve the kind of growth it’s hoping for, though the risk-reward here is favorable. The company has no debt, a large cash balance, and is generating significant FCF.
If you enjoyed this, Inbox Alpha has a much deep dive into Rave Restaurant Group on their website, click here to check it out (its 21 pages long).
At the time of this publication, Inbox Alpha does not owns shares in Rave Restaurant Group RAVE 0.00%↑ but they are considering while I (YZ) don't.
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