Why Is Fat Brands Crashing?

Fat Brands (NASDAQ:FAT) is an intriguing recovery stock as the business owns many popular restaurant chains, including Johnny Rockets and Fatburger. But since hitting a peak of $15.99 on June 28, shares of this food stock have crumbled. Last week, the stock closed at just $8.84 – down more than 44% from its 52-week high.

There hasn't been a big selloff since then but more of a persistent decline in price. A big reason could be due to the company's significant debt, which is going to be more problematic as interest rates rise and it becomes more costly to pay. At $146 million, the company's long-term debt is nearly four times the $44 million it reported on its books a year earlier.

The company has been busy acquiring companies to grow its business and not only is that costly, but it can lead to greater needs for cash down the road. In September, it announced plans to acquire Twin Peaks for $300 million, which operates sports-themed restaurants and has over 80 locations across the country. And that's after completing its $442.5 million acquisition of Global Franchise Group, which has a portfolio of over 1,400 restaurants spanning 16 countries.

Fat Brands would be a promising buy if not for its mounting debt levels. Interest expenses over the trailing 12 months have totaled $11 million. That's troublesome given that its gross profit was only $18 million and the company reported a negative operating profit.

There is significant potential for Fat Brands but there also challenges ahead. Given all the changes going on with Fat Brands and some sizeable risks to consider, investors are better off waiting to see how it performs as the dust settles from these transactions before buying the stock as it could still go lower.