Good Times Restaurants Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended June 26, 2018 (13 weeks), with year-to-date results for the first three fiscal quarters. Comparisons are with the quarter ended June 27, 2017 and the corresponding prior-year year-to-date period. Amounts are in U.S. dollars; financial statement figures are in thousands unless otherwise noted.
Business context and key financial metrics
The company operates Good Times Burgers & Frozen Custard, a quick-service drive-through brand, and Bad Daddy’s Burger Bar, a full-service casual dining brand. Management’s strategy is to develop Bad Daddy’s while improving Good Times profitability and selectively expanding that brand.
| Metric | Quarter | Year to date |
|---|---|---|
| Total revenue | $26.175 million, up 20.6% | $72.444 million, up 28.2% |
| Operating income (loss) | $781,000; prior year $15,000 | $413,000; prior year loss of $986,000 |
| Net income (loss), consolidated | $685,000; prior year loss of $35,000 | $143,000; prior year loss of $1.092 million |
| Net income (loss) attributable to common shareholders | $304,000; prior year loss of $247,000; diluted EPS $0.02 | Loss of $710,000; prior year loss of $1.591 million; EPS loss of $0.06 |
| Cash from operating activities | Not presented for the quarter | $4.627 million; prior year $2.875 million |
| Cash and cash equivalents | $3.186 million at June 26, 2018, versus $4.337 million at September 26, 2017 | |
| Debt and capital lease obligations | $5.143 million total, including $5.1 million outstanding under the Cadence facility |
Quarterly operating margin was approximately 3.0% of revenue, compared with approximately 0.1% a year earlier. Year-to-date operating margin was approximately 0.6%, versus a loss margin of approximately 1.7% in the prior-year period. The quarter’s consolidated net income included $381,000 attributable to non-controlling interests; year-to-date, that amount was $853,000.
Restaurant sales drove nearly all revenue: Bad Daddy’s quarterly revenue rose to $17.858 million from $13.068 million, while Good Times revenue declined to $8.317 million from $8.634 million. Same-store sales increased 0.5% at Bad Daddy’s and 3.8% at Good Times in the quarter. The year-to-date increases were 0.5% and 4.9%, respectively. Growth in Bad Daddy’s sales primarily reflected new locations.
Material changes and liquidity
- Operating results improved versus the prior year, with quarterly and year-to-date operating income positive. Bad Daddy’s segment operating income was $430,000 for the quarter versus a loss of $244,000 a year earlier; Good Times segment operating income was $423,000, nearly unchanged.
- Food and packaging costs declined as a share of restaurant sales in the quarter, to 30.1% from 31.4%. Payroll costs were 35.2% of restaurant sales, essentially flat year over year. Management cited wage pressure and a competitive labor market.
- Year-to-date investing cash outflow was $5.153 million, including $6.560 million of property and equipment purchases, partly offset by $1.397 million in sale-leaseback proceeds. Financing cash outflow was $625,000. Cash declined by $1.151 million from the fiscal-year beginning.
- Working capital was negative $2.824 million. The Cadence credit facility has a $12 million maximum, matures December 31, 2020, and carried a 6.0062% weighted-average rate at quarter-end. The company reported covenant compliance; minimum liquidity under the facility is $2.5 million. The facility is secured by a first-priority lien on substantially all company assets.
Outlook, risks, contingencies and unusual items
- Management said it expected existing cash, restaurant cash flow and access to the Cadence facility to be sufficient for fiscal 2018 working capital, debt obligations and recurring capital expenditures. It also expected food costs as a percentage of sales to be relatively stable or slightly elevated for the remainder of fiscal 2018. No specific revenue or earnings guidance was provided.
- Planned spending included new Bad Daddy’s restaurants and Good Times remodels and reimaging. Construction commitments outstanding were $1.379 million. Management reported 53 company-owned, co-developed or joint-venture restaurants and 12 franchised or licensed locations at quarter-end.
- The company closed two Good Times restaurants in Aurora during 2018. It recorded a $72,000 non-cash impairment charge for one closure; another closed location had a previously recorded impairment and was being marketed for sublease. A further closed restaurant was expected to be subleased at or above its contractual lease rate.
- The company remains contingently liable on certain leases for restaurants sold to franchisees. It reported no known lease defaults, but a franchisee default could require the company to pay lease costs. It also cited competition and discounting, same-store sales, food and labor cost inflation, staffing availability and access to capital as risks.
- The company expected adoption of the new lease accounting standard to significantly increase reported long-term assets and liabilities because of its many leases. A shareholder-approved option exchange concluded in July 2018; management expected no compensation expense from the exchange.
- Management reported no material change in previously disclosed risk factors, no material expected impact from routine legal proceedings, and effective disclosure controls. The filing reported no goodwill impairment.
Important facts for investors to verify
- Whether same-store sales and restaurant-level profitability can remain positive, particularly as Bad Daddy’s expansion adds locations and costs.
- Whether the company can fund planned construction and capital spending while managing its working capital deficit, declining cash balance and debt covenant liquidity minimum.
- How wage, commodity, occupancy and delivery-related costs affect margins, and whether menu pricing can offset those pressures.
- The status and potential exposure of contingent franchisee lease obligations, closed-restaurant subleases, and remaining development commitments.
- The differing consolidated and common-shareholder earnings figures: non-controlling interests reduced quarterly income available to common shareholders and contributed to the year-to-date common-shareholder loss.