It’s not every day that a restaurant chain with only one location goes public. But that’s exactly what kid-friendly Century City restaurant Giggles N’ Hugs plans to do in the next week or two through a reverse merger.
What’s more, the company’s market cap is projected to be over $100 million once the deal goes through, based on current share prices of the Nevada shell company it’s merging with.
Experts say that valuation is artificially high because of low trading volume, but owner Joey Parsi believes he’s got a juggernaut on his hands. So much so he said that he turned down an offer this year from Sydney, Australia’s Westfield Group, the largest mall owner in the world, to open stores exclusively in its malls.
“We’re thinking bigger,” said Parsi, a former investment banker who founded the restaurant three years ago with his wife, Dorsa, and envisions more than 100 outlets across the United States. “There’s not a restaurant like this in the country.”
Indeed, the Westfield Century City mall restaurant, essentially an upscale take on Chuck E. Cheese’s, is riding a wave of buzz, thanks to celebrity clientele such as Halle Berry and Adam Sandler, and features in media outlets from daytime TV show “The Talk” to Bloomberg Businessweek.
By replacing junk food with organic cuisine, reducing the number of video games and focusing more on play areas, the restaurant has become a hit with affluent parents who might want to enjoy a glass of wine and a caprese panini while their kids run around.
The relatively upscale menu features items such as wild Alaskan salmon ($15.95) for parents, while the kids can order nuggets made from real chicken breasts, covered in flax seed and fried in canola oil ($8.44). Parents who want to go shopping can also drop their kids off in the play area, featuring a merry-go-round and face-painting stations, for a few hours for a fee. Private birthday parties can cost more than $2,500.
The success has fueled expansion plans. Parsi said the company is negotiating agreements with Westfield to open two more locations, in Canoga Park and Valencia, by early next year, but also would like to expand to malls operated by other companies.
In the next three to six months, he would like to issue a secondary offering to raise $12 million, in order to open an additional five after that.
Westfield spokeswoman Katy Dickey declined to comment on any negotiations with Giggles N’ Hugs, but did say the company wanted more of the restaurants in its malls.
“We are always looking to introduce new and innovative concepts at Westfield centers,” Dickey wrote in an e-mail. “Giggles N’ Hugs is a popular destination at Westfield Century City, rounding out the kids and family offer very well.”
Skepticism
Still, the concept has skeptics.
Jerry Prendergast, principal of Culver City restaurant consultancy Prendergast & Associates, said he has been approached by copycats wanting to open similar restaurants, but walked away because the numbers didn’t add up.
Such ventures are expensive per square foot, with higher costs for liability insurance and training staff to handle children. Unless revenue is through the roof, there’s no way to make rent in malls or more affluent areas, Prendergast said.
“I just don’t know how you make money off of it,” he said. “(Giggles N’ Hugs) is in a very unique space right now. But if you look at where Chuck E. Cheese goes, they don’t go to high-rent locations because you’re not generating a tremendous amount of revenue.”
Indeed, Parsi said that his restaurant makes $120,000 in revenue a month, about half of what Prendergast said restaurants need to generate to stay open in a mall. Yet Parsi claims profit margins of about 24 percent, higher than most publicly traded restaurant chains.
Part of the secret, according to Parsi, is that he’s not paying typical monthly rent. Because the restaurant adds a family-friendly atmosphere and brings in desirable customers to the mall, he said Westfield cut a deal where he pays one-fourth of the $8- to $9-a-square-foot cost most other tenants are paying. Westfield even covered some construction costs.
Assuming those figures are accurate, that allows the restaurant to keep monthly rental payments at roughly $13,000, which is close to the industry average of 10 percent of revenue.
Parsi also attributed profits to high margin sources of revenue such as $5 admission fees, birthday parties, and beer and wine sales.
Prendergast said the business is more viable with such low rents, but it’s still no slam-dunk.
“That makes more sense, but I still don’t know how you make it work,” he said.
High priced
Also raising eyebrows is the company’s projected $100 million valuation once it completes its reverse merger and becomes listed on Nasdaq’s OTC Bulletin Board.
That number appears inflated to Kevin Leung, a partner at Century City firm LKP Global Law LLP who specializes in financial transactions and reverse mergers.
He believes the price is artificially high because of the low volume of shares being traded – fewer than 1,000 a day over the last three months. If the secondary offering happens, the greater number of shares exchanging hands could more accurately reflect the value, which he thinks is significantly lower.
Los Angeles has a record of producing fast-growing publicly traded restaurant chains, including California Pizza Kitchen Inc. and Cheesecake Factory Inc.
But the industry is tough to succeed in and other restaurants with fast expansion plans have stumbled, including Jerry’s Famous Deli Inc., which had four restaurants when it went public in 1995. However, it now operates fewer than 10 restaurants, while its shares trade for less than $1 over the counter and it has a market cap of just $2.4 million.
But Parsi believes his company is ready to take off. The 41-year-old former investment banker and stock broker worked at several firms, including Lehman Brothers and Prudential Securities before starting a brokerage firm in Beverly Hills more than 10 years ago. He lost it all in the Internet bubble and had to shutter his business, before regrouping to work as a stock broker again.
Then, after a particularly nightmarish night out at a restaurant with his family in 2007 – one of the couple’s young children knocked over water at a nearby table – he and his wife conceived of Giggles N’ Hugs. He plopped down $700,000 of his money to start it, keeping his day job at a local office of StockCross Financial Services before finally quitting a year ago.
Already, Parsi is thinking about licensing his brand into apparel and other merchandise next year, citing as a model San Francisco’s Gymboree Corp., which began as a play center for kids, transitioned into an apparel company and was bought last year by Boston private-equity firm Bain Capital for $1.8 billion.
“In six months, the market cap could be $50 million, it could be $200 million, depending on how we execute,” he said. “The market isn’t based on what the company is today. People have been buying this thing based on the potential for us in the future.”
