Good Times Restaurants, Inc. — Q3 FY2014 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2014. The company operates and franchises Good Times quick-service restaurants and is developing Bad Daddy’s Burger Bar. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended June 30, 2014 | Nine months ended June 30, 2014 |
|---|---|---|
| Net revenue | $7.572 million, up 16.7% year over year | $19.724 million, up 20.6% |
| Income (loss) from operations | $316,000, versus $234,000 | $(152,000), versus $(387,000) |
| Net income (loss) | $272,000, versus $208,000 | $(312,000), versus $(459,000) |
| Net income (loss) attributable to common shareholders | $162,000, versus $111,000 | $(600,000), versus $(614,000) |
| Operating cash flow | Not separately presented for the quarter | $458,000, versus $173,000 |
Good Times same-store sales increased 12.5% in the quarter and 15.6% year to date. Restaurant operating costs were 85.8% of restaurant sales in the quarter, compared with 87.2%; for the nine months, they were 89.8%, compared with 92.6%. These figures include Bad Daddy’s preopening costs; excluding those costs, management reported 85.2% and 87.7%, respectively, for the current periods.
At June 30, cash and cash equivalents were $8.188 million, working capital was a $6.810 million excess, and total assets were $14.109 million. Reported current maturities of debt and capital leases were $47,000, with $8,000 of long-term debt and $51,000 of long-term capital lease obligations. Capital expenditures were $2.304 million for the nine months. The company reported no restaurant impairment charges.
Material changes and significant developments
- Good Times revenue growth reflected strong comparable sales as well as restaurants acquired from franchisees in 2013; the company also closed a company-owned location in September 2013. The restaurant count was 36 at June 30, 2014, versus 39 a year earlier.
- The first Bad Daddy’s restaurant opened in Denver in February 2014. A second opened in late July, after the reporting date. Bad Daddy’s generated $596,000 of revenue and an $822,000 operating loss for the nine months; $449,000 of preopening costs were recorded.
- Good Times segment operating income was $670,000 for the nine months, versus a $358,000 loss a year earlier. Bad Daddy’s segment operating loss was $822,000.
- Warrant exercises generated $4.734 million in gross proceeds and $4.559 million in net cash proceeds after related expenses; 1,833,250 common shares were issued. Common shares outstanding increased from 4,926,214 at September 30, 2013 to 7,476,830 at June 30, 2014. The preferred-stock conversion in March also eliminated future preferred dividends and potential redemption obligations.
- In July 2014, a subsidiary entered into a development credit facility for up to $2.1 million, guaranteed by the parent. Approximately $196,000 had been borrowed by July 30. Facility proceeds may fund a point-of-sale system and development of three Good Times restaurants.
Outlook, commentary, and risks
Management described its fiscal 2014 Good Times outlook as “cautiously optimistic,” citing positive sales trends while noting that comparisons were against higher prior-year sales beginning in April. It said food costs had risen since February, particularly for beef, bacon, and dairy; the company had taken 2.4% in weighted-average menu price increases in fiscal 2014 and might take further moderate increases. Management cautioned that pricing may not fully offset higher costs. It expected food and packaging costs as a percentage of sales to be slightly lower for fiscal 2014 than fiscal 2013, based on pricing, sales mix, and recipe changes.
Bad Daddy’s opening-period results included promotional discounting, elevated labor costs, and training and regional management expenses. Management expected some labor-cost leverage as sales increased and the additional location opened. Other risks cited include intense price competition, changes in consumer preferences, food and labor cost inflation, staffing availability, capital availability, and seasonal sales weakness in December through March.
The company remains contingently liable for leases assigned or subleased to franchisees; it reported no known defaults or prior losses, but a franchisee default could materially affect results. The new development loan includes financial-ratio covenants and collateral assignments. Management stated that disclosure controls were effective and that it expected sufficient capital for working capital, debt obligations, and recurring capital expenditures.
Key facts for investors to verify
- Whether Good Times’ comparable-sales momentum continues as prior-year comparisons strengthen, and how much growth comes from same-store sales versus acquired locations.
- Bad Daddy’s sales ramp, unit-level profitability, opening costs, and capital needs as additional restaurants open.
- The effect of beef, bacon, dairy, labor, and other cost inflation, including whether menu pricing can offset it without weakening customer traffic.
- Use of the July credit facility, amounts drawn, covenant compliance, and repayment obligations.
- Potential dilution and selling pressure: share count rose materially, and certain large shareholders requested registration of shares for possible resale; the filing said no specific sale plan had been communicated.
- Exposure to contingent franchisee lease liabilities and any future defaults.