Good Times Restaurants Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and first two fiscal quarters ended March 26, 2019. The comparable periods ended March 27, 2018. Dollar amounts below are in millions unless noted.
Business context
The company operates and franchises Bad Daddy’s Burger Bar, a full-service casual dining concept, and Good Times Burgers & Frozen Custard, a drive-through concept. At quarter-end, it reported 35 Bad Daddy’s and 35 Good Times locations across company-operated, joint-venture, franchise and license arrangements. Management’s strategy is disciplined Bad Daddy’s development while improving Good Times profitability and operating efficiency.
Financial performance
| Metric | Fiscal Q2 2019 | Fiscal Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net revenue | $27.172 | $23.596 | $52.542 | $46.444 |
| Operating income (loss) | $0.018 | ($0.041) | ($0.563) | ($0.368) |
| Consolidated net loss | ($0.180) | ($0.132) | ($0.922) | ($0.542) |
| Net loss attributable to common shareholders | ($0.450) | ($0.431) | ($1.501) | ($1.014) |
| Loss per common share | ($0.04) | ($0.03) | ($0.12) | ($0.08) |
| Adjusted EBITDA | $1.147 | $1.167 | $1.894 | $2.044 |
Quarterly revenue increased 15.2%; first-half revenue increased 13.1%. Growth was driven by Bad Daddy’s, while Good Times revenue declined. Operating margin was approximately 0.1% in Q2 and negative 1.1% for the first half. The common-shareholder loss exceeds consolidated net loss because income attributable to non-controlling interests is deducted in arriving at the amount attributable to common shareholders.
Bad Daddy’s same-store sales rose 1.3% in Q2 and 0.8% for the first half. Good Times same-store sales fell 7.5% and 6.3%, respectively. Management said Colorado storms reduced operating days; excluding the estimated storm impact, Q2 same-store sales would have been up 1.8% at Bad Daddy’s and down 5.9% at Good Times.
Quarterly food and packaging costs improved to 29.3% of restaurant sales from 30.5%, but payroll costs increased to 37.9% from 37.0%; occupancy costs rose to 8.0% from 7.7%, and other restaurant operating costs to 10.5% from 9.2%. Management cited lower protein costs and menu pricing as favorable to food costs, but wage pressure, lower Good Times sales, delivery commissions and restaurant growth weighed on expenses.
Cash flow, debt and liquidity
- First-half operating cash flow was $2.487 million, down from $2.993 million. Investing used $6.502 million, including $3.793 million of property and equipment purchases and $2.724 million for non-controlling interests. Financing provided $3.937 million. Cash declined $0.078 million to $3.399 million.
- At March 26, 2019, current assets were $5.695 million and current liabilities $7.638 million, a working-capital deficit of $1.943 million. Management said cash generation and access to the credit facility should cover fiscal 2019 working capital, debt obligations and capital expenditures.
- Long-term debt and capital lease obligations totaled $12.300 million, compared with $7.489 million at September 25, 2018. The Cadence facility permits borrowings up to $17 million and matures December 31, 2021; the reported weighted-average borrowing rate was 5.9907%. Letters of credit totaled $0.158 million. The facility is secured by substantially all company assets.
- The company reported compliance with credit covenants, which include maximum leverage of 5.35:1, minimum fixed-charge coverage of 1.25:1 and minimum liquidity of $2 million. Construction commitments were $0.732 million.
Material changes, outlook and risks
- Bad Daddy’s growth included new restaurants opened in fiscal 2018 and the first half of 2019. In February, the company acquired the remaining interests in three Raleigh-area Bad Daddy’s joint ventures for approximately $3.0 million; $2.7 million was paid at closing and $0.3 million was accrued and paid after quarter-end. The transaction reduced non-controlling interests and increased debt and interest costs.
- Management plans continued Bad Daddy’s development and Good Times remodels and recurring capital spending. It expects food and packaging costs as a percentage of sales to be relatively consistent or slightly elevated compared with Q2 for the rest of fiscal 2019. It gave no specific revenue or earnings guidance.
- Management expects general and administrative costs to increase as infrastructure is built, but anticipates they may decline as a percentage of revenue over time with further restaurant growth. Good Times advertising costs are expected to remain around 5.4%–5.5% of segment revenue.
- Key risks include competition and discounting, same-store sales weakness, food and labor cost inflation, worker availability, weather-related sales volatility and access to affordable capital. The company remains contingently liable on leases assigned or subleased to franchisees; management reported no known defaults. Other ordinary-course claims and legal proceedings were not expected to have a material impact.
- The company expected to adopt the new lease accounting standard on September 25, 2019 and anticipated a significant increase in reported long-term assets and liabilities because of its lease portfolio. No impairment charges were recorded in the current first half; goodwill and trademarks were not impaired.
Important facts for investors to verify
- Whether the Good Times same-store sales decline stabilizes and Bad Daddy’s growth translates into sustained operating profitability.
- Whether wage, occupancy, delivery and other operating costs continue to pressure margins, particularly at Good Times.
- Debt availability, interest expense and ongoing compliance with the Cadence facility’s financial and minimum-liquidity covenants.
- Cash required for planned restaurant openings, remodels and other capital expenditures, alongside the working-capital deficit.
- Performance and integration of the three acquired Raleigh-area joint ventures, and any exposure from contingent franchisee lease obligations.
- The magnitude and presentation effects of lease-standard adoption; the filing does not provide a quantified estimate.