Good Times Restaurants, Inc. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended December 31, 2013; comparisons are with the three months ended December 31, 2012, unless noted. The unaudited results are not necessarily indicative of the full fiscal year.
Business context
Good Times operated or franchised 37 restaurants at quarter-end: 18 company-owned, 7 co-developed and 12 franchised, including three dual-brand locations. The company is developing Bad Daddy’s Burger Bar through BD of Colorado, LLC (BDFD), in which it holds a 48% interest. Its first Bad Daddy’s location opened in Denver on February 3, 2014, after quarter-end; another Colorado lease was signed, with an opening expected in July 2014.
Financial performance and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Total net revenues | $5.988 million | $4.817 million |
| Restaurant sales | $5.906 million | $4.722 million |
| Operating loss | $86,000 | $297,000 |
| Net loss | $159,000 | $330,000 |
| Net loss attributable to common shareholders | $253,000 | $370,000 |
| Basic loss per share | $0.05 | $0.14 |
| Cash provided by operating activities | $295,000 | Cash used: $26,000 |
Revenue increased 24.3%. Same-store sales rose 17.4% for company and franchised Good Times restaurants meeting the company’s comparison criteria; management said the new limited breakfast menu contributed approximately 9% of sales in the quarter. Restaurant operating costs were 90.0% of restaurant sales, compared with 95.5% a year earlier, including 2.5% of sales in Bad Daddy’s preopening costs. Food and packaging costs fell to 32.8% of restaurant sales from 33.9%; payroll and benefits fell to 33.6% from 36.8%; occupancy and other operating costs fell to 18.7% from 20.5%. General and administrative expense increased to $508,000 from $386,000.
Cash and cash equivalents were $5.206 million at December 31, down from $6.143 million at September 30, 2013. Working capital was $3.653 million. Total assets were $9.792 million and stockholders’ equity was $7.111 million. Current maturities of debt and capital leases were $45,000; long-term debt was $17,000 and long-term capital leases were $66,000. The company reported $1.139 million of net cash used in investing activities, primarily for the BDFD investment and capital spending, and $93,000 used in financing activities. Cash dividends of $30,000 were paid on preferred stock; its liquidation preference was $1.5 million.
Material changes and unusual items
- The operating loss narrowed by $211,000, principally as higher revenue more than offset increased operating expenses. Net loss also improved, despite a $72,000 equity-method loss from BDFD, related to initial franchise-program development costs.
- The company paid the remaining $375,000 installment on its $750,000 BDFD investment during the quarter. The investment’s carrying value was $576,000 at December 31.
- Quarterly preopening costs were $148,000, all related to initial Bad Daddy’s restaurants. Capital spending included development costs for the Cherry Creek Bad Daddy’s location and Good Times restaurant reimaging.
- Restaurant count declined from 39 at December 31, 2012 to 37 at December 31, 2013, reflecting franchisee closures and the company’s acquisition of two franchised restaurants during fiscal 2013. One company-owned restaurant had closed in September 2013.
- The quarter-end balance sheet reported 4,926,214 common shares outstanding. Through February 10, 2014, the company received $448,250 from exercises of A and B warrants; the cover page reported 5,105,114 common shares outstanding as of February 12.
Outlook, risks and contingencies
Management described its fiscal 2014 outlook as cautiously optimistic, citing recent positive sales trends, but cautioned that comparisons would become more challenging beginning in April. It expected food and packaging costs as a percentage of sales to be slightly lower for fiscal 2014, while anticipating pressure on beef, bacon and dairy costs. Moderate menu price increases were planned, but management cautioned they might not fully offset rising commodity and other operating costs. It believed available capital would cover fiscal 2014 working capital, debt obligations and recurring capital needs; additional restaurant development depends on sales, operating cash generation and access to capital.
Risks include intense competition and discounting, potential same-store sales declines, changing consumer tastes, rising food, labor and other costs, staffing availability, and access to affordable capital. Restaurant revenue is seasonal and can be affected by winter weather. The company remains contingently liable on leases assigned or subleased to franchisees; it reported no known defaults or prior losses, but a franchisee default could materially affect results. Management reported no restaurant or goodwill impairment at December 31, 2013, while noting that weaker-than-projected cash flows or a decision to close or exit a location could lead to impairment. Legal proceedings were described as incidental and not expected to have a material impact. Disclosure controls were concluded to be effective, with no significant control changes reported.
Important facts for investors to verify
- Confirm the durability and drivers of the 17.4% same-store sales increase, including the breakfast contribution and the effect of higher prior-year comparisons.
- Track Bad Daddy’s opening costs, unit performance, further development commitments and BDFD’s funding needs and operating losses.
- Assess whether menu pricing and mix can offset expected commodity and other cost pressures without harming traffic or average customer spending.
- Review contingent lease exposure and liquidity as the company undertakes restaurant development and remodeling.
- Reconcile investing cash flow: the cash flow statement reports $1.139 million used, while MD&A reports $1.137 million; property and equipment purchases are likewise reported as $768,000 and $766,000, respectively.
- Monitor warrant exercises, resulting share dilution and the preferred stock’s dividend and liquidation preference.