Good Times Restaurants, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2011; comparative periods ended June 30, 2010. The filing was signed August 12, 2011. Good Times operated and franchised 46 restaurants at quarter-end, down from 49 a year earlier.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total revenue | 2011: $5.413 million; 2010: $5.565 million | 2011: $15.201 million; 2010: $15.102 million |
| Operating income (loss) | 2011: $95,000; 2010: $(300,000) | 2011: $(560,000); 2010: $(1.548) million |
| Continuing-operations income (loss) | 2011: $40,000; 2010: $(507,000) | 2011: $(760,000); 2010: $(1.985) million |
| Net loss applicable to common shareholders | 2011: $(7,000); 2010: $(565,000) | 2011: $(811,000); 2010: $(2.403) million |
- Same-store sales at qualifying Good Times restaurants increased 6.1% in the quarter and 8.4% for the nine months. Management attributed some early-2011 sales strength to favorable weather.
- Restaurant operating costs were 92.8% of restaurant sales for the quarter and 96.3% for the nine months, compared with 93.9% and 98.7%, respectively, in 2010. Nine-month food and packaging costs rose to 35.9% of restaurant sales from 34.8%; payroll costs improved as a percentage of sales.
- Cash and cash equivalents were $969,000 at June 30, versus $429,000 at September 30, 2010. Working capital was negative $393,000.
- Nine-month operating cash flow was negative $550,000, compared with negative $708,000. Investing provided $976,000, mainly from $1.053 million of asset-sale proceeds. Financing provided $114,000, including $1.727 million from common-stock sales and $1.551 million of debt principal payments.
- Reported debt, net of discounts, totaled approximately $2.230 million: $198,000 current and $2.032 million long-term. Total liabilities were $4.594 million. The company said it was in compliance with its modified Wells Fargo loan covenants.
- Stockholders’ equity was $2.708 million, versus $1.694 million at September 30, 2010. Common shares outstanding were 2,726,214 at June 30; the filing reflects a one-for-three reverse split in December 2010.
Material changes and notable items
- Revenue was down 2.7% in the quarter but up 0.7% year to date. Restaurant sales benefited from same-store growth, while restaurant sales and franchise royalties were affected by restaurant sales, closures, and the end of a licensee’s Pepsi Center operations.
- Two company-owned Colorado Springs restaurants were sold in February and May 2011, generating total net proceeds of $268,000 and reported gains of $134,000. The nine-month operating result also benefited from lower advertising, general and administrative, depreciation, and interest costs.
- Small Island Investments completed a $2.1 million stock investment in December 2010, giving it approximately 51.4% ownership and control, including the right to designate four directors while it holds more than 50%. The transaction proceeds were used in part to repay loans, reduce payables and accrued liabilities, and fund working capital.
- Assets held for sale of $1.595 million relate to the developed Firestone, Colorado site. The company was evaluating a sale-leaseback; reclassifying the site as held and used could add approximately $90,000 of depreciation expense in fiscal fourth quarter.
Outlook, risks, and contingencies
- Management described its fiscal 2011 outlook as more optimistic given recent sales trends, but said the macroeconomic environment remained challenging. It planned limited additional menu price increases and expected continued pressure on beef, bacon, and dairy costs; price increases may not fully offset higher costs.
- The company did not provide a clear numerical earnings or revenue forecast. Its impairment analysis assumed fiscal 2011 sales growth of 3%–5% over fiscal 2010 and 2%–3% annual growth thereafter; these are assumptions used for the analysis, not formal guidance. No restaurant impairment was identified at June 30, but weaker-than-projected results or a decision to exit a location could lead to charges.
- Management expected no significant capital expenditures for the balance of fiscal 2011 beyond recurring restaurant needs and menu boards. New restaurant development would depend on sales, operating cash generation, and access to additional capital.
- The company remained contingently liable on leases associated with restaurants previously sold to franchisees, although it knew of no franchisee lease defaults. At the closed Commerce City location, aggregate lease obligations were $663,000, partly offset by $528,000 of sublease income; the recorded discounted liability was $100,000.
- Key risks cited include competition and discounting, sustained same-store sales declines, food and other cost inflation, labor availability, weather-related seasonality, and limited access to capital. The filing reported no subsequent events and said incidental legal proceedings were not expected to have a material impact.
Important facts for investors to verify
- Whether same-store sales gains persist after accounting for favorable weather and restaurant closures or sales.
- Whether menu pricing and operating-cost actions can offset ongoing commodity inflation without weakening traffic.
- Cash needs and financing access, given negative working capital and continuing operating cash outflows.
- Progress on the Firestone sale-leaseback and the potential depreciation impact if it is not completed.
- Compliance with Wells Fargo covenants as the required debt-coverage thresholds increase in fiscal 2012 and thereafter.
- Potential exposure from contingent leases and the effect of SII’s controlling ownership and related governance rights.