Good Times Restaurants Inc. — Q1 FY2020 10-Q
Reporting period: Fiscal quarter ended December 31, 2019. The quarter contained 14 weeks, versus 13 weeks in the prior-year quarter ended December 25, 2018. Amounts below are in millions unless noted.
Business context and operating results
The company operates and franchises Bad Daddy’s Burger Bar (full-service casual dining) and Good Times Burgers & Frozen Custard (drive-through). At quarter-end it reported 39 Bad Daddy’s and 33 Good Times locations, including company-operated, joint-venture, franchise and licensed restaurants.
- Revenue was $30.814 million, up 21.5% from $25.365 million. Management attributed growth to new restaurants and the extra operating week; it estimated that week added about $2.015 million to Bad Daddy’s sales and $0.460 million to Good Times sales.
- Bad Daddy’s same-store sales declined 3.4%; Good Times same-store sales increased 5.8%. These figures include the extra week in the current quarter and are not directly week-matched.
- Operating loss improved to $0.372 million from $0.581 million. Consolidated net loss was $0.599 million versus $0.742 million. Net loss attributable to common shareholders was $0.811 million, or $0.06 per share, versus $1.051 million, or $0.08 per share; $0.212 million of current-quarter income was attributable to non-controlling interests.
- Adjusted EBITDA, a non-GAAP measure, was $1.514 million versus $0.767 million. The filing cautions that the measure excludes significant costs and may not be comparable with other companies’ measures.
Costs, margins and cash flow
- Food and packaging costs were 29.5% of restaurant sales versus 29.9%; payroll and benefits were 38.6% versus 38.0%; occupancy was 8.0% versus 7.8%; and other restaurant operating costs were 10.7% versus 10.6%.
- Preopening costs rose to $0.802 million from $0.627 million, all related to Bad Daddy’s. General and administrative expense increased to $2.213 million from $1.974 million. Management cited labor-market and wage pressure, including higher kitchen wages and statutory minimum-wage increases.
- Operating cash flow was positive $0.999 million, compared with negative $0.386 million. Investing cash flow was negative $1.683 million, including $1.613 million of property and equipment purchases. Financing cash flow was positive $1.231 million.
Liquidity, debt and balance-sheet changes
- Cash was $3.292 million at December 31, up from $2.745 million at September 24, 2019. The company reported a working-capital deficit of $7.753 million.
- Cadence Bank facility borrowings were $14.350 million against a commitment of up to $17 million; letters of credit totaled $0.158 million. The facility bears variable interest; the weighted-average rate was 5.275%. Quarterly $0.250 million principal installments begin March 31, 2020, and the balance matures December 31, 2021.
- The company was in compliance with facility covenants at quarter-end, including minimum liquidity of $2 million, minimum fixed-charge coverage of 1.25:1 and maximum leverage of 5.35:1. The facility is secured by a first-priority lien on substantially all company assets.
- Adoption of lease accounting on September 25, 2019 added operating lease right-of-use assets of $51.941 million and lease liabilities totaling $61.004 million at quarter-end. Management said adoption significantly affected the balance sheet but had an immaterial impact on operations, cash flows and overall liquidity. Comparative periods were not restated.
Outlook, risks and unusual items
- Management said it expected available credit and cash flow from existing restaurants to be sufficient for FY2020 working capital, debt service and recurring capital spending. Planned remaining-year capital expenditures primarily cover recurring needs; no construction-contract commitments for restaurants under development were outstanding at quarter-end.
- Management expected food and packaging costs as a percentage of sales to be relatively consistent or slightly higher for the rest of FY2020, citing elevated commodity prices. It expected G&A to remain stable or decline slightly and Good Times advertising expense to remain around 3.9% of segment revenue.
- Key risks cited include competition and discounting, same-store sales weakness, food and labor cost inflation, employee availability, and access to affordable capital. Sales are seasonal, with winter weather potentially affecting Colorado locations.
- The company remains contingently liable on leases for restaurants previously sold to franchisees; it reported no known defaults. Management considered potential losses from ordinary-course claims and litigation immaterial. The filing reported no material change in previously disclosed risk factors.
- During the quarter the company repurchased 43,110 shares from former CEO Boyd Hoback for $75,000 under a repurchase option agreement. The Cadence facility was amended in connection with his separation; the quarter included $41,000 of non-recurring severance cost in the Adjusted EBITDA reconciliation.
No formal quantitative revenue or earnings guidance was provided.
Important facts for investors to verify
- How the extra week and new-unit openings affect comparisons with the prior-year quarter, and the underlying trend in Bad Daddy’s same-store sales.
- Facility covenant headroom, remaining borrowing availability, required amortization and the December 2021 maturity/refinancing plan.
- Cash needs for Bad Daddy’s development and recurring capital spending given the working-capital deficit and lease commitments.
- Whether wage and commodity-cost pressures, winter seasonality and franchisee performance alter management’s stated FY2020 expectations.
- Potential exposure from contingent leases and the effect of the newly recognized operating lease liabilities on leverage and liquidity assessments.