Fogo de Chao Is Looking Tasty (2022)

A quick housekeeping note first. I recently moved from Cincinnati to Austin, TX which explains my blackout period of blogging. I was busy moving and getting settled in, but I’m finally back to a normal life. Blog posts will be more frequent now. If you happen to live in Austin, shoot me an email! Would love to meet some local investors.

Onto more important stuff. Fogo de Chao (FOGO, $10.52) is a Brazilian steakhouse with 31 locations in the US and 10 in Brazil (plus 1 junior venture in Mexico). I bet some of you are already turned off just because Fogo is a restaurant. I was too. Restaurant concepts come and go and they’re dependent on consumer tastes which can quickly change. Lots of good restaurants open, have a few years of success, and then slowly die as the initial luster wears off and people move on to the hot new concept down the street. I don’t think I’ve ever invested in a public restaurant group before, so hopefully the fact that I like Fogo so much says something (probably that I’m about to learn why restaurants are best avoided).

Fogo has a unique combination of national brand awareness while being under penetrated in their potential markets. This stems from them having locations all around the US dating back to 1997. Thus, most people have heard of Fogo even if locations are currently only in major metropolitan areas. A long runway for growth is the first thing that attracted me to Fogo. The second is their service style that gives them industry best operating margins. Finally, they have near industry best average unit volumes ($8+ million) and very positive Yelp reviews across their entire store base. All this means Fogo must be killing it right?

Fogo de Chao Is Looking Tasty (1)

Wrong. FOGO has been a falling knife since May. There are several headwinds facing Fogo (and the restaurant industry in general) over the near term, but looking out 3, 5, or 10 years down the line, it’s hard to justify today’s stock price. I’ll get into all that stuff soon.

Business overview

Brazilian steakhouses are unique because the gauchos function as both cook and server. Each gaucho is in charge of cooking a different meat. When a skewer of that meat is finished cooking, the gaucho walks around the restaurant presenting it to diners and cutting off a piece if they wish. In addition, the soup, salads, and appetizers are all self-serve (basically a buffet). This results in operating margins from13-17% the past couple years vs most full service restaurants in the 7-8% range(RUTH reached 12% in 2015). Another benefit of this concept is the flexibility in their meat offerings. Meat makes up over 50% of their food and beverage costs and protein pricing is largely a commodity that is out of their control. Luckily, they sell around 15 cuts of meat so they can adjust their offerings in line with what protein is facingmore or less inflation. This has resulted in impressive food costs decreases in the face of protein inflation the past few years.

(Video) Trying 27 Of The Most Popular Menu Items At Fogo de Chão

One risk of growing restaurant chains is proving success in different markets. There are many concepts that only seem to work in one city or region and then fail when expanding elsewhere. Thankfully, the 31 Fogo locations are spread all over the US in every major region. They have a national presence in big cities and are now filling in the gaps. Their future locations will be smaller footprints to account for smaller metropolitan areas. Whether Fogo thrives in smaller cities is one of the risks, but a couple factors give me optimism. First, Ruth’s Chris (RUTH) has 128 locations in the US and they are still expanding. Their average check of $79—compared to Fogo’s at $59—gives me confidence that Fogo’s lower priced offering has a long runway for growth. Second, Fogo’s only direct national competitor, Texas de Brazil, has a few locations in smaller metropolitan areas that have been open for years. However, Texas de Brazil is a private company so it’s hard to know how successful those units are.

At a store level, Fogo has implemented several new things to push revenue. This includes a focus on large group and event sales (great for getting a big group to try Fogo, higher average check as well), pushing alcohol more (their alcohol mix is 46% below peers), opening for lunch every day (lower average check, but hopefully increases guest count), and offering seafood for an upcharge. I don’t expect any of these things to make a huge difference in the long run—more of just the constant changes restaurants have to implement to keep comp salesgrowing.

Competition

Fogo is the only Brazilian steakhouse in town at six of their locations. There are very few cities where they compete with more than two brands (and I mean directly compete, obviously they compete with traditional steakhouses and all restaurants to a certain extent). In the 11 cities they have one direct competitor, Fogo has a higher Yelp rating in seven of those cities. In the 14 cities with two or more Brazilian steakhouses, Fogo has the highest rating in six of those cities and the lowest rating in one (they’re in the middle of the pack for the other seven).

The only other national Brazilian steakhouse is Texas de Brazil. Fogo and Texas de Brazil overlap in nine cities, all nine of which Fogo has higher ratings in (by a good margin). Over Fogo’s 31 US stores, they have an average 2016 YTD Yelp rating of 4.2 with only three locations under 4.0. In addition, their Yelp scores have remained pretty consistent since 2012 which is a good sign (2012 is as far back as Yelp shows).

Management/ownership

Larry Johnson has been CEO since 2007 after serving as Fogo’s lead counsel at Bakers & McKenzie (one of the largest law firms in the world) for many years. His base salary is $700k plus bonus, which is based on EBITDA, revenue, operational excellence, and employee retention. He currently owns 79k shares worth over $900k, plus he has beneficial ownership of another 323k shares (through options) that could be worth another $3.7 million. I wish Johnson’s ownership was higher, but I feel better that the private equity firm Thomas H Lee (THL) Partners owns 80% of Fogo.

(Video) The Truth About Brazilian Steakhouse Chain Fogo De Chao

In the majority of cases, I avoid any public company that has a majority owner. It’s too easy for them to take advantage of small shareholders for their own benefit. An individual or a founding family that owns over 50% can overpay themselves and not care about share price. On the other hand, a PE firm as the majority owner is better because they’re focused on getting a return on their investment just like I am. The two THL representatives on the board earn $0 for serving. THL will also need to get out of their investment at some point so a sale of the company in a few years wouldn’t surprise me.

Bear case

While there are quite a few headwinds and macro headlines negatively affecting Fogo, I have yet to hear a bear case for why this won’t remain a good company in five or ten years. If Fogo keeps selling food and can replicate their success in more cities, the stock is going to be a fine investment. If anyone is short FOGO or has seen a legitimate bear case, I’d love to seeit. Right now I feel like I’m missing something which scares me. Below,I’m going to go through all the negative headlines against FOGO that I’ve heard and give my thoughts on each.

Audit revealed “material weaknesses in internal control over financial reporting.” No one wants to see that in the 10-K of one of their investments. In Fogo’s case I’m not too concerned. Theyhad incorrectly put some expenses in operating cash flow that were supposed to go into investing cash flow instead. In my opinion, the wrong way they were accounting for those expenses was actually more conservative than the GAAP method, which makes me think it wasn’t anything nefarious. Hopefully it was just an example of going public and adjusting to being held to a higher accounting standard.

Fogo is a gimmick and old locations will do worse as the uniqueness wears off. It’s hard to disprove this, but older locations are some of the best reviewed on Yelp, including their first US location in Addison, TX that did $10 million in sales in 2011 (14 years after opening). Also, 62% of their clients visit more than once a year.

Millennials don’t like chain restaurants. All things being equal, I definitely prefer independents over large chains, but last week my girlfriend and I ate at Fogo and we were very impressed with the food. Going in, I expected my impression to be “It was good, but I’d rather spend $60 on one perfectly cooked steak as opposed to ten that aren’t as good.” Boy was I wrong. We only had one cut of meat that wasn’t great (the seasoning was off or something), but everything else was delicious. I liked it more than I thought I would. Also, it’s an expensive restaurant so it’s always going to trend towards an older crowd anyway as they generally have more discretionary funds.

Minimum wage increases. This sucks in the short-term, but it affects all their competitors and the cost eventually gets passed through to the consumer.

(Video) FOGO DE CHÃO [BRAZILIAN STEAKHOUSE] ALL U CAN EAT- PORTIMÃO - PORTUGAL 2021 - 4K

Brazil is in the shitter. Brazil is going through a horrible recession that seems to have maybe hit a bottom earlier this year as some signs are pointing to a recovery. This directly affects Fogo through their ten Brazil restaurants (16% of 2015 revenue), but also through currency exchangewhich has hurt them the past three years. The forex aspect has finally stabilized the past couple months. The effect of these Brazilian locations will slowly decline over time as management plans to open five US stores per year for the foreseeable future and only one in Brazil every 1-2 years.

Zika. Zika certainly isn’t helping the Brazilian economy and it’s starting to affect the Gulf Coast states as well. Fewer people are traveling to Florida (and Brazil for that matter) as Zika is spreading up the state. Fogo has two Florida locations which have been hurt by the decreased tourism. As much as Zika sucks for pregnant (or trying to be pregnant) women, I don’t see it having a long-term negative effect on tourism or people willing to go out and socialize. For the vast majority of people that contract Zika they maybe get sick for a few days, are completely fine two weeks later, never realize they even had it, and are now immune to it. As more of the Brazilian population becomes immune, it will become less of a problem. Stateside, the CDC seems to be doing a much better job controlling the virus in Florida than what happened in Brazil.

Texas locations are hurting from the oil collapse. Fogo has five locations in Texas that are starting to see varying effects from the oil collapse. The longer oil prices stay low, the more those local economies that depend on it will be affected. If “lower for longer” oil prices remain, this could be the new normal in Texas.

Consumer spending has recently pulled back in the US. This may be a sign of a coming recession or just normal variance, I don’t know. I guess we’re coming due for a recession after a long recovery, but nothing makes me think it’ll be anything like 2008-2009. A recession would probably hurt Fogo worse than most full-service restaurants though, thanks to their price point. The more expensive the restaurant, the more discretionary it is. Ruth’s Chris operating margins in 2008 and 2009 were less than half of what they were in 2014 and 2015. In addition, their comp sales were down double digits in both 2008 and 2009. Fogo management has said their comp sales were down single digits during the collapse. Worst case scenario is probably Brazil’s recovery taking a long time while the US enters into a recession of their own.

Valuation

I want to start with a kind of back-of-envelope valuation. Let’s assume at yearend 2014 that Fogo decided to stop opening restaurants. In 2015, all pre-opening costs and growth-related capex never happened. Next, let’s normalize the one-time (mostly IPO-related) expenses and their occasional restaurant refreshes to get new, steady-state results for 2015 (numbers below in millions).

Fogo de Chao Is Looking Tasty (2)

(Video) What You Should And Shouldn't Be Eating At Brazilian Steakhouses

Now, D&A is a little high in that example and 2015 was an above average year for the restaurant industry, so we can be conservative and take that $1.24 down to $1.00 and call that normalized, no growth earnings. That means FOGO is currently selling for just over 10x a steady-state level. To me, this seems cheap for a restaurant that’s been around for 37 years (19 in the US), has never closed a store, has industry-best margins, and is still getting very good reviews across their entire store base. If it’s fairly valued (or cheap in my opinion) on a steady-state basis, the next question becomes: what about the new units?

We’re not in some fantasy no growth land—quite the opposite actually, management’s goal is to open five new US stores per year. If steady-state is fairly valued and new stores are value accretive, then FOGO must be undervalued. And if you think 10x on no growth earnings is already cheap AND future stores are value accretive, then FOGO is very undervalued.

Management’s goals for the new, smaller units are $7 million in sales when fully ramped up (vs $8 million at current stores), a 27% contribution margin (vs 31% at current stores), and a $4.5 million build outcost. Using these numbers, and assuming new units shut downafter ten years, results in a 17.4% IRR (as shown below).

Fogo de Chao Is Looking Tasty (3)

But, as we all know, CEOs are optimists. I think toning down their estimates is prudent. In the below table, I use $6.5 million for fully ramped sales, 25% peak contribution margins, and a $5 million build out cost. As you can see below, these numbers result in a 10.6% IRR for new units, thus still creating value. And if these stores are cash flowing $1 million per year, they won’t be shut down after ten years so these IRR estimates are still too low.

Fogo de Chao Is Looking Tasty (4)

While that back-of-envelope method shows the stock is cheap, a more involved DCF can get a ball park of just how cheap. Going through my entire DCF is not possible in a blog post, but here are my high level assumptions:

(Video) 3 Tips For Your Next Fogo De Chao Visit!

  • -6% comp sales the next two years while operating margins compress by 40%.
  • After this two year economic slump, comp sales go to 4% for two years and then 2% thereafter.These assumptions lead to average unit volumes at the current established store base not returningto 2015 levels until 2021.
  • Operating margins rebound in step, but never return to 2013-15 levels.
  • They open five US stores per year and one Brazil store every other year through 2020. No stores open after 2020.
  • New stores never reach management’s expectations, only achieving the results in the second example above.
  • Zero value given to junior ventures (one of which is already up and running, another is soon to be). I didn’t even discuss these, but suffice to say they cost Fogo zero dollars and could add substantial value years down the line. All JVs are international.
  • Alloutstanding options vest and share count increases 2% per year.
  • 11% discount rate.
  • 12.5x terminal value on 2021 cash flow.

Those assumptions result in a per share value a little under $20. With that being said, I can put anything in a DCF to get any result I want. But if I can use numbers worse than they’ve accomplished in years past, assume future stores do worse than management expects, and the value it spits out is still far above today’s price, that gives me some confidence. Though I still prefer the valuation of “stock is cheap on a steady-state basis + new units add value = stock is really cheap.”

FAQs

What Does Fogo de Chao meaning? ›

The name Fogo de Chão is pronounced (fo-go dèe shoun). The name means campfire or fire on the ground.

How Does Fogo de Chao cook their meat? ›

Our gaucho chefs expertly grill each cut we serve over an 800 degree flame until it has reached the ideal temperature, taste, and texture. That temperature is over 7 times hotter than a summer day in Brazil.

Do you tip at Fogo de Chao? ›

Tip: Tipping is a common practice in Brazil, but the average tip tends to be around 10 percent (versus 15 – 20 percent in the United States). Of course, if you truly enjoyed your dining experience or find yourself at a higher-end restaurant, there's no harm in tipping well above the going rate.

How do you say Fogo de Chao? ›

World folk edition that's how Brazilians. Say it fugu de Xiang not forgot I shall not forget to show

Can you take leftovers from Fogo? ›

You can't take food out of the restaurant .

What is the best meat at Fogo de Chão? ›

The signature steak is the picanha (the prime part of the top sirloin) that is flavored with sea salt or garlic. This was one of our favorites along with the moist Costela (Beef Ribs) braised for 4 hours, Fraldinha (Bottom sirloin), the rib-eye, sausage, bacon-wrapped sirloin, filet mignon, and lamb chops.

Is Brazilian meat good quality? ›

The quality of Brazilian beef is "still not that great when you compare its tenderness and taste with beef produced in Ireland", according a Brazilian beef exporter. Dyego Pedott, a beef export trader with Brazil-based Unitrading Logistics, said the "only thing Brazilian beef can compete with Irish beef on is price".

What Does Fogo de Chao season their meat with? ›

Now included in our Full-Churrasco Experience for Fall 2022. A decadent bone-in cut, that includes both a New York Strip and Filet, is seasoned with rock salt, fire-roasted, and served tableside. Our signature steak, picanha represents the art and science of churrasco cooking.

What cheese is used in Fogo de Chao? ›

The best thing to order a la carte is the queijo assado—or grilled cheese. Queijo assado is made with coalho, a squeaky cheese that's salty and firm enough to hold up in flames, while still externally browning into a masterpiece.

How should I dress for Fogo? ›

We appreciate your interest in Fogo de Chao. To answer your question, we do not have a dress code. The dress attire at all of our locations is generally business casual. Part of what makes us a great option for so many people is that we do not have a rigid dress code.

Do servers at Fogo de Chao make good money? ›

Average Fogo de Chao Server yearly pay in the United States is approximately $34,927, which is 26% above the national average.

Is it rude to tip the chef? ›

When you know how much you are going to pay your chef, you can use that as a basis for your tip. Generally, 10% of the total cost is a good start. Then, you can increase the amount to 15% or even double the tip if the chef works with a server, so they can share the gratuity.

How much is Fogo de Chão per person? ›

Fogo de Chao Menu With Prices (Updated: October 2022)
FoodPrice
Full Churrasco Experience$38.95
Mango Chilean Sea Bass A La Carte$27.95
Weekend Brazilian Branch
Full Churrasco Experience$40.95
17 more rows

What Does Fogo mean in Italian? ›

fogo (plural fogos) Alternative form of hogo (“strong unpleasant smell”) quotations ▼

What do you wear to a Brazilian steakhouse? ›

The Brazilian Steakhouse requires shirts, pants and shoes. Jeans are quite acceptable with polo shirt, particularly in the summer time.

How many Michelin stars does Fogo de Chao have? ›

Worth 5 Stars or three forks by Michelin! GREAT GREAT GREAT and recommended to all meat lovers. Best meat we ever eat and a great salad bar. The service is excellent and the location and atmosphere are superb.

Can you eat at Fogo Island Inn without staying there? ›

Our Dining Room does not serve outside guests during breakfast and seating capacity for other meals is extremely limited. Inquiries for Dining Room reservations from outside guests may be directed to 709-658-3444. Reservations for outside dining and lounge guests may not be possible during busy periods. Helpful?

What to do with unwanted leftovers? ›

What to do with leftover food
  1. Don't throw them out. Whether you're eating at home or out at a restaurant, don't let leftover edible food go to waste in the trash or compost bin. ...
  2. Make them tomorrow's lunch. Saving leftovers is a quick way to pack a low-effort lunch. ...
  3. Reinvent them. ...
  4. Freeze them. ...
  5. Swap them. ...
  6. Prevent them.

What's better Fogo de Chao or China? ›

Fogo is better. I've been to both and I've only returned to fogo... many times. Fogo's meats are a little better, their picaña is juicer and softer, their rib eye is exceptional and the gauchos come around with more beef options as opposed to sausages and chicken or pork.

Does Fogo de Chao have real Wagyu? ›

Fogo de Chao

This internationally renowned steakhouse offers domestically raised A4 Wagyu, in an ancho ribeye cut and a New York strip, both aged for 21 days. It's still decadent, still delicious, and always available as an add-on to the Full Churrasco Experience, which makes Fogo famous in our book.

What is the best cut of churrasco? ›

Skirt steak.

There are different variations of this recipe depending on where you're from however the common denominator is that skirt steak is the best cut of meat for churrasco.

Why does Brazilian beef taste different? ›

The “Nelore” factor. Why is Brazilian beef the way it is? It's because Brazilian producers are for the most part stuck with the Nelore cattle breed. In fact, more than 85% of Brazil's cattle are based on Nelore genetics.

What is the highest quality meat in the world? ›

Wagyu beef originates from Japan and is considered by many the best beef on the planet. With the name meaning “Japanese Cow” (wa = Japanese, gyu = cow), it can be found in four different types of Japanese cattle.

What makes churrasco special? ›

Churrasco Cooking Style

They developed a style of roasting beef on skewers over the embers of a fire, which brought out the natural flavor of the meat and made it more succulent. Churrasco was often a multi-family affair. The gaúchos would prepare skewers of meat for a large gathering of their friends and family.

Does Fogo de Chão have sauce? ›

Choose from several delicious sauces to complement your fire-roasted meats, like homemade hot sauce, Chimichurri, horseradish sauce, and mintchurri.

What is Brazilian style meat? ›

Picanha, Brazil's favorite cut of beef, has been a favorite in Brazil for years as an affordable yet flavorful cut of meat, especially when prepared in the traditional churrasco style. In the US, it is still relatively unknown outside of the Brazilian Steakhouse.

What is the most popular cheese in Brazil? ›

Queijo Minas Frescal

The most popular 100% Brazilian cheese is Minas Frescal. it is widely consumed in every region of the country, mostly for breakfast accompanied by bread or eggs or served in thin slices as the main dish.

Does Fogo de Chão have pineapple? ›

8 answers. MISINFORMATION ALERT: Fogo de Chão does serve Brazilian pineapple. It has hints of cinnamon and nutmeg and it is delicious. 10 months ago.

Who is Fogo de Chão owned by? ›

Rhône Capital

What Does Fogo mean in English? ›

So what's keeping all these people indoors and isolated? The answer may be similar to a phenomenon you've likely heard before: FOMO, which stands for "fear of missing out." Now, many people are experiencing FOGO, or "fear of going out."

What Does Fogo mean in Italian? ›

fogo (plural fogos) Alternative form of hogo (“strong unpleasant smell”) quotations ▼

What is the meaning of the word Chao? ›

bye (informal) ⧫ cheerio (Brit) (informal) ⧫ so long (informal) ⧫ see ya (informal)

What is Chao in English? ›

interjection. short for goodbye. bye → chao; chau; adiós.

What does Oxi mean in Brazil? ›

"Oxi", is an expression of amazement and at the same time indignation with what was said before and was not done by the person.

What is the meaning of churrasco? ›

Churrasco (Portuguese: [ʃuˈʁasku], Spanish: [tʃuˈrasko]) is the Portuguese and Spanish name for beef or grilled meat more generally. It is a prominent feature in the cuisine of Brazil, Uruguay, and Argentina.

What does cool mean in Brazil? ›

In brazilian portuguese the most common translation to “cool”would be: “bacana”, “maneiro”, “legal".

Do they say Chao in Italy? ›

Ciao (/tʃaʊ/ CHOW, Italian: [ˈtʃaːo] ( listen)) is an informal salutation in the Italian language that is used for both "hello" and "goodbye". Originally from the Venetian language, it has entered the vocabulary of English and of many other languages around the world.

What does Prego mean in Brazil? ›

interjection. /'preɡo/ (risposta / invito) please / you're welcome , after you , don't mention it. - “Grazie mille” – “prego” “Thank you so much” – “You're welcome”

What does Hot Dog mean in Italian? ›

perrito caliente, perrito caliente [masculine], hot dog [masculine]…

Is it rude to say ciao? ›

It isn't rude, but it is informal. So, it depends the circumstances and the participants of the conversation. It has loosened up quite a lot since I've been going to Italy (e.g., I hear “arrivederla” much less than 10 years ago), but there are relationships that are kept quite formal and those that are not.

Do they say Chao in Brazil? ›

By far the most common way to say “bye” in Portuguese is tchau. It's widely used in both Brazil and Portugal. Tchau comes the Italian word ciao, and is pronounced the same way.

Do Italians say ciao? ›

While ciao, pronounced "chow," is a casual Italian salutation that can mean both "hello" and "goodbye," most English speakers understand it as well.

Is Chao a Chinese word? ›

Chao is a surname in various cultures. It is the Pinyin spelling of two Chinese surnames (晁 and 巢), the Wade–Giles spelling of two others (趙 or the much rarer 兆, both spelled in Pinyin as Zhào), and a regional or other spelling of two additional Chinese surnames (曹 Cáo and 周 Zhōu).

Why do Vietnamese say Chao? ›

Greeting someone older than you

'Chao' is of course hello while 'a' is what Vietnamese say at the end of the sentence to show respect to those who are older; but it's optional.

Why do Spanish people say ciao? ›

The meaning of ciao in Spanish is "adios" or "hasta luego" (also meaning "see you later"). Because of the italian influence in the Spanish culture, you may find some Spanish say "ciao" when sending goodbyes to someone.

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