Good Times Restaurants Inc. — Form 10-Q, Quarter Ended June 29, 2021
Business context and reporting period: Good Times operates and franchises Bad Daddy’s Burger Bar, a full-service concept, and Good Times Burgers & Frozen Custard, a quick-service concept. The quarter comprised 13 weeks; year-to-date results cover 39 weeks, compared with 40 weeks in the prior year. All amounts below are in U.S. dollars.
Financial performance and liquidity
- Quarter revenue: $33.946 million, up 39.4% year over year. Restaurant sales were $33.701 million and franchise revenue was $0.245 million. Bad Daddy’s revenue rose to $24.481 million from $14.928 million; Good Times revenue was $9.465 million, versus $9.429 million.
- Quarter profitability: Operating income was $2.446 million, compared with $0.843 million. Net income was $14.158 million; net income attributable to common shareholders was $13.634 million, or $1.07 basic and $1.04 diluted per share. Results include an $11.778 million gain from forgiveness of Paycheck Protection Program (PPP) loans.
- Year-to-date: Revenue increased 11.2% to $90.434 million. Operating income was $5.312 million, versus an operating loss of $14.062 million; net income attributable to common shareholders was $15.533 million, versus a loss of $15.438 million. Basic and diluted EPS were $1.22 and $1.21, respectively. The current-year result includes the PPP forgiveness gain; the prior-year result included $15.291 million of goodwill and long-lived-asset impairment charges.
- Operating costs and margins: For the quarter, food and packaging costs were 29.6% of restaurant sales versus 29.1%; payroll and benefits were 33.4% versus 30.6%; occupancy was 6.5% versus 8.6%; and other restaurant operating costs were 11.1% versus 11.7%. Management cited higher staffing and wages as factors in labor-cost pressure.
- Cash flow and capital spending: Year-to-date operating cash flow was $7.386 million, compared with $4.388 million. Investing cash outflow was $2.085 million, including $2.098 million of property and equipment purchases. Financing cash outflow was $6.454 million, including $5.5 million of debt repayments and distributions to non-controlling interests. Cash declined by $1.153 million from fiscal year-end to $10.301 million.
- Debt and liquidity: The balance sheet showed no outstanding long-term debt. The Cadence credit facility was undrawn; its commitment was scheduled to reduce to $8 million on July 1, 2021, and $157,500 of letters of credit reduced availability. The company reported $55.555 million of operating lease liabilities and a $1.215 million working-capital deficit. It said it expected sufficient capital for fiscal 2021 needs and was in compliance with facility covenants at quarter-end.
- Other measures: Management-reported adjusted EBITDA was $3.082 million for the quarter and $7.183 million year to date, versus $2.393 million and $4.733 million, respectively. These non-GAAP figures exclude specified items, including the PPP forgiveness gain; the filing cautions that the measure may not be comparable across companies.
Material changes versus prior comparable periods
- Quarter revenue and Bad Daddy’s comparable-store sales increased substantially against a prior-year quarter affected by dining-room closures and capacity restrictions. Bad Daddy’s same-store sales rose 61.4%; Good Times same-store sales rose 2.9%.
- Year-to-date same-store sales increased 16.4% at Bad Daddy’s and 22.5% at Good Times. Comparisons are affected by pandemic disruptions and the prior-year period’s additional week; management estimated that extra week contributed about $2.015 million of sales.
- PPP loans of approximately $11.645 million principal, plus accrued interest, were fully forgiven in June 2021. The resulting $11.778 million accounting gain materially increased reported net income.
- The company repaid $5.5 million of debt during the year-to-date period. Compared with the prior-year period, reported earnings also benefited from the absence of the prior-year impairment charges.
Outlook, risks, contingencies and unusual items
- Management said it opened one Bad Daddy’s restaurant in the quarter and expected to open one more in September 2021. Its stated strategy is targeted Bad Daddy’s growth while improving same-store sales and profitability at both concepts.
- The company expected general and administrative costs to remain above fiscal 2020 levels, citing insurance and health costs and investment in human-resources and financial-management systems. It also highlighted food-supply uncertainty, commodity inflation, labor shortages and wage pressure.
- All Bad Daddy’s restaurants were permitted to operate at full capacity at the filing date, but management warned that COVID-19, including the Delta variant, could again reduce dining-room traffic or lead to restrictions, supply disruption and lower cash flow.
- The company expected to commence a tender offer on or about August 13, 2021 to repurchase up to $6.5 million of shares at $4.60 per share. It stated that the offer would materially affect liquidity; commencement and final terms were not assured in this filing.
- In a lawsuit concerning failed negotiations to sell the Good Times drive-through division, plaintiffs sought leave to add claims and request $18 million in damages. The company opposed the motion and said it would defend the case; it warned that an adverse outcome could materially affect it. The filing does not provide a clear estimate of any related accrued loss.
- The company also remains contingently liable on certain leases assigned or subleased to franchisees; it reported no known defaults at the filing date. Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the tender offer commenced, its final terms and participation, and the resulting cash and covenant headroom.
- Subsequent developments in the lawsuit, including the court’s decision on the proposed amended claims and any potential financial exposure.
- Whether sales momentum persists when compared with less disrupted periods, and the effects of labor costs, food inflation and delivery commissions on restaurant-level profitability.
- Cash generation and liquidity after planned capital returns, lease payments and restaurant-development spending.
- The extent to which reported earnings reflect recurring operations rather than the one-time PPP forgiveness gain and prior-year impairment comparisons.