6 things to know about Fogo de Chao ahead of its IPO

Brazilian steakhouse chain Fogo de Chao is expected to price its initial public offering late Thursday, making it the fourth restaurant group to go public on a U.S. exchange this year, according to Dealogic.

Fogo de Chao—the name means“Fire pit” in Portuguese–is planning to sell 4.1 million shares at $16 to $18 a pop, to raise about $70 million at the midpoint of the range. The stock will list on the Nasdaq under the ticker symbol “FOGO”.

The company is owned by private-equity firm Thomas H. Lee Partners L.P, which will continue to hold an 80% stake after the transaction. As a full-service restaurant, it competes with other Brazlian-sytle steakhouses, as well as local and national upscale steakhouses such as Ruth’s Chris, Del Frisco’s and the Capital Grille.

The deal comes just days after chicken-wings chain Wingstop Inc.
 raised $127 million in its IPO. In May, chicken-and-biscuits chain Bojangles
 raised $169 million in its IPO and in January, burger chain Shake Shack Inc.
raised $121 million.

All three are still trading comfortably above their IPO issue prices.

Here are six things to know about Fogo de Chao before its IPO:

It has an operating model that boosts profit

In its prospectus, Fogo de Chao says it has a unique advantage in its operating model, which helps it rein in labor and food costs. The company operates as a churrascaria, offering fire-roasted, high-quality meats that are prepared and served Brazilian style by gaucho chefs, skilled workers who are trained in the Southern Brazilian cooking tradition.

That dual role reduces back-of-the-house costs, while the use of a self-service table of salads and side dishes mean minimal staffing and kitchen preparation at the front of the house. Butchering is done in house, and the wide range of proteins on offer—beef, lamb, pork, chicken and seafood—give the company flexibility in sourcing meat.

The company’s average per-person spend in fiscal 2014 was $59, which the prospectus says is three quarters that of the traditional high-end steakhouse category.

Brazilian-style cuts include e picanha, (a part of the sirloin), alcatra (cut from the top sirloin), new beef ancho (the prime part of the rib eye), fraldinha (bottom sirloin), linguica (robust pork sausages) and costela (beef ribs).

It is profitable and it has a growth plan

Fogo de Chao opened its first restaurant in Porto Alegre, Brazil in 1979, expanded to São Paulo in 1986 and to the U.S. in 1997. Today, the company has 37 outlets in total, 26 in the U.S., 10 in Brazil and one in Mexico.

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The company had revenue of $262 million in 2014, up from $219 the year earlier. But its restaurant contribution margin of 32.5% is among the highest in the full-service dining sector, according to the prospectus (Restaurant contribution is defined as revenue less restaurant operating costs, while restaurant contribution margin is restaurant contribution as a percentage of revenue.) The company had a net profit of $4.7 million in the first quarter, after profit of $17.6 million for all of fiscal 2014.

Fogo de Chao believes it has long-term potential for more than 100 sites in large and mid sized markets, as well as urban and suburban locations. It plans to open five to six new restaurants in 2015. Internationally, it is mulling opportunities in Asia, Australia, Canada, Europe, the Middle East and South America, through a mix of company-owned restaurants and joint ventures

It has no plans to pay a dividend any time soon

Investors hoping for a juicy dividend will be disappointed. Fogo de Chao is planning to retain all earnings “for the foreseeable future” and use it to pay down debt. That means, investors will have to rely on share price appreciation, which may be hampered by the small size of the float.

It enjoyed a World Cup boost that won’t be repeated

Fogo de Chao estimates that the FIFA World Cup in Brazil last year boosted revenue by $5 million, as about half the matches were played in cities where it has restaurants. Putting further pressure on comparisons this year, the company said the mass protests in Brazil in March and April hurt traffic, weighing on same-restaurant sales numbers for the second quarter.

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It is exposed to the uncertain immigration climate

Because of the special skills of its gaucho chefs, Fogo de Chao needs to bring Brazilian workers to the U.S. and relies on L-1B “specialized knowledge” visas, which permit an employee to work for up to five years, as well as L-1A “intracompany manager” visas, which allow an employee to work for up to seven years. The Department of Homeland Security’s Bureau of Citizenship & Immigration Services changed the rules on L-1B visas in 2007, and in 2009, stopped approving them for Fogo de Chao workers and attempted to rescind already-issued visas, said the prospectus.

The company took legal action, which is not yet fully resolved.

“ We will continue to explore all available legal means to bring employees from Brazil to work in our restaurants in the U.S.,” said the prospectus.

It may not meet all U.S. governance and disclosure requirements

Fogo de Chao is a “controlled company” under Nasdaq rules because it is majority-owned by Thomas H. Lee, which means it will qualify for exemptions from certain corporate governance requirements. It’s also an emerging growth company under the U.S. JOBS Act, which means it is exempt from certain disclosure requirements.

View more information: https://www.marketwatch.com/story/6-things-to-know-about-fogo-de-chao-ahead-of-its-ipo-2015-06-16

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