Good Times Restaurants Inc. — Q2 FY2016 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2016; fiscal year ends September 30. The company operates and franchises Good Times Burgers & Frozen Custard and Bad Daddy’s Burger Bar. Comparisons are with the corresponding 2015 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $15.318 vs. $8.714; up 75.8% | $29.156 vs. $16.569; up 76.0% |
| Operating loss | $(0.431) vs. $(0.368) | $(1.362) vs. $(0.731) |
| Net loss | $(0.467) vs. $(0.361) | $(1.428) vs. $(0.722) |
| Net loss attributable to common shareholders | $(0.673) vs. $(0.435); loss per share $(0.05) in both periods | $(1.797) vs. $(0.845); loss per share $(0.15) vs. $(0.09) |
| Adjusted EBITDA, non-GAAP | $0.639 vs. $0.332 | $0.884 vs. $0.452 |
Revenue growth primarily reflected the May 2015 BDI acquisition and Bad Daddy’s expansion. For the quarter, Good Times same-store restaurant sales rose 0.5% and Bad Daddy’s rose 1.9%; for six months, they rose 2.6% and 4.0%, respectively. These figures include specified acquired Bad Daddy’s locations in comparable-sales calculations even though their prior-year revenue was not consolidated.
For the quarter, restaurant operating costs were $13.867 million, or about 90.5% of revenue; operating loss was about 2.8% of revenue. For six months, restaurant operating costs were $26.642 million, or about 91.4% of revenue; operating loss was about 4.7% of revenue. These measures include preopening costs and depreciation. Food and packaging costs as a share of restaurant sales improved year over year, while payroll costs rose as a share of restaurant sales, which management attributed in part to a competitive Colorado labor market and higher wages. Good Times benefited from menu-price increases and lower commodity costs, particularly beef.
Cash, liquidity and debt
- Cash was $9.040 million at March 31, 2016, down from $13.809 million at September 30, 2015. Working capital was $3.399 million, as reported by the company.
- Six-month operating cash flow was $1.931 million, versus $0.335 million in 2015. The 2016 result included a $1.979 million increase in deferred liabilities, related to tenant allowances, and an $0.807 million increase in accrued liabilities.
- Investing cash outflow was $6.180 million, mainly $6.193 million of property and equipment purchases; financing cash outflow was $0.520 million. Capital expenditures were concentrated on Bad Daddy’s development in Colorado.
- At March 31, reported current maturities of debt and capital leases were $2.609 million; long-term debt was $1.006 million and long-term capital lease obligations were $0.005 million. The company’s $2.414 million BDI acquisition note and accrued interest were paid on May 6, 2016, for $2.493 million in total. The United Capital loan balance was $1.147 million, at 6.69%, with scheduled monthly payments and financial covenants; the company reported covenant compliance at quarter-end.
Changes, outlook and risks
- The company had 37 Good Times and 17 Bad Daddy’s locations at March 31. It opened a Bad Daddy’s in Colorado after quarter-end. Expansion and the BDI acquisition substantially increased revenue, property and equipment, and operating costs.
- Management’s strategy is disciplined Bad Daddy’s development, additional joint-venture or franchise growth, Good Times remodeling and expansion, and improving same-store sales. Planned fiscal 2016 spending included recurring restaurant capital expenditures, new units, and Good Times reimaging. The company was seeking a senior debt facility it believed would support development, working capital, debt service, and recurring capital needs in fiscal 2016 and 2017; no facility terms or completed financing are provided in the filing.
- Management expected Good Times food and packaging costs to remain around the current-quarter percentage of sales for the balance of fiscal 2016, while noting that commodity pressure, including beef and bacon, could raise costs. Good Times advertising was expected to be slightly higher than fiscal 2015 as a percentage of sales, at approximately 4.4%.
- Key risks include restaurant competition and discounting, same-store sales performance, food and labor cost inflation, hiring, and the integration and expansion of BDI in unfamiliar geographic markets and a different dining segment. Weather can affect Colorado sales; a March blizzard closed all restaurants for one day. One Good Times franchise location closed after its lease expired.
- The company remained contingently liable on leases for restaurants previously sold to franchisees. It reported no known lease defaults, but future defaults could materially affect results. No restaurant, trademark, or goodwill impairment was identified for the periods described.
- The filing says disclosure controls were effective at March 31 after the company introduced project-by-project procedures to record development costs and liabilities for restaurants under construction. The prior annual report had identified a control weakness in recording those costs in the proper period.
Adjusted EBITDA is a non-GAAP measure and includes adjustments for items such as preopening costs and stock compensation; the filing cautions it should not be viewed in isolation or as a substitute for GAAP results.
Important facts for investors to verify
- How much revenue and operating performance growth is attributable to acquired or newly opened Bad Daddy’s locations versus comparable-store growth.
- Whether new-unit economics and restaurant-level margins improve as preopening costs and the development pace change.
- The availability and terms of the contemplated senior debt facility, and liquidity after the May 2016 BDI note repayment and ongoing capital expenditures.
- Whether operating cash flow remains adequate without relying on increases in tenant allowances, deferred liabilities, and accrued liabilities.
- Whether the updated development-cost controls remain effective, and whether any contingent franchisee lease obligations arise.