Good Times Restaurants Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended September 26, 2017 (52 weeks); comparison is fiscal 2016, ended September 27, 2016. This is an annual filing, not a standalone fourth-quarter report. The company operates Good Times Burgers & Frozen Custard and Bad Daddy’s Burger Bar.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total net revenue | $79.080 million | $64.439 million |
| Restaurant sales | $78.395 million | $63.716 million |
| Operating loss | $1.422 million | $0.300 million |
| Net loss | $1.605 million | $0.465 million |
| Net loss attributable to common shareholders | $2.255 million | $1.321 million |
| Operating cash flow | $4.983 million | $5.398 million |
| Capital expenditures | $14.513 million | $8.501 million |
| Cash at year-end | $4.337 million | $6.330 million |
Revenue rose 22.7%, driven mainly by Bad Daddy’s openings and a full year of operations from prior-year openings. The filing reports diluted loss per share of $0.18, versus $0.11. The difference between net loss and loss attributable to common shareholders reflects the filing’s presentation of income attributable to non-controlling interests.
Restaurant operating costs were $71.502 million, or approximately 91% of restaurant sales. Segment operating results were mixed: Good Times reported $24,000 of operating income in the brand-level discussion, down from $505,000; Bad Daddy’s reported a $1.446 million operating loss, compared with a $805,000 loss. A separate segment note reports different segment operating figures; investors should verify the reconciliation in the full financial statements.
At year-end, working capital was negative $850,000. Long-term debt and capital lease obligations totaled $5.356 million, including $5.3 million drawn on the Cadence Bank facility. The facility’s borrowing limit was increased from $9 million to $12 million and its maturity extended to December 31, 2020; the company reported covenant compliance. Operating cash flow was positive, but investing activities used $12.628 million, primarily reflecting restaurant development. Adjusted EBITDA was $3.777 million, a non-GAAP measure that excludes, among other items, preopening costs and stock-based compensation.
Changes versus prior year
- Good Times restaurant sales increased to $30.689 million; comparable sales rose 2.1%, following 0.3% growth in FY2016.
- Bad Daddy’s restaurant sales increased to $47.706 million, principally from six FY2017 openings and a full year from earlier openings. Comparable sales rose 1.6%, or 2.2% excluding the Cherry Creek restaurant affected by nearby construction.
- Company-wide payroll and employee benefit costs increased to $28.274 million and rose to 36.1% of restaurant sales from 34.7%. Good Times average wages increased approximately 8.7%.
- Preopening costs increased to $2.588 million from $1.695 million. The company recorded a $219,000 non-cash impairment charge for one Good Times restaurant.
- Cash declined by $1.993 million. The company invested $14.513 million in property and equipment, partly offset by $1.927 million of sale-leaseback proceeds.
Outlook, risks and other notable items
- Management described the Good Times outlook as cautiously optimistic, planned price increases of approximately 2.5%–3.5% there and 2%–3% at Bad Daddy’s, and expected to open nine Bad Daddy’s restaurants in FY2018, including two opened shortly after year-end. The company explicitly expected a loss for FY2018.
- Management expected Good Times operating cash flow to fund planned refresh and remodel work. It stated that cash and credit-facility borrowings were expected to cover FY2018 working capital, debt service and recurring capital needs. Construction commitments outstanding at year-end were $558,000.
- Key operating risks include continued losses, restaurant-opening and expansion costs, labor availability and wage increases, commodity prices and supply, intense competition, customer response to price increases, and the ability of new locations to reach expected sales. Management cited an approximately 9% increase in its weighted commodity cost index during FY2017; beef remained exposed to market-price fluctuations.
- The company reported $41.230 million of future minimum operating lease commitments net of sublease rentals. It also remains contingently liable for certain assigned or subleased leases if franchisees default; it reported no known defaults.
- After year-end, the Brighton, Colorado Good Times property was sold in a sale-leaseback transaction for approximately $1.390 million net proceeds. The Cadence facility is secured by a first-priority lien on substantially all company assets.
- Delta Partners and REIT Redux nominated seven director candidates for the 2018 annual meeting. The filing also notes concentrated shareholder ownership and potential disruption from activist activity.
- Hein & Associates resigned following its combination with Moss Adams, which became the company’s auditor. The filing notes no disagreement or reportable event relating to the change, except a previously disclosed material weakness for FY2015. Management concluded FY2017 disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal controls.
Investor verification points
- Reconcile the differing Bad Daddy’s and Good Times segment operating-income figures presented in the MD&A and segment note, and confirm the loss attribution and per-share calculations.
- Assess the cash requirements and returns expected from the FY2018 restaurant-opening plan, remodel program and related capital expenditures.
- Review covenant headroom, variable-rate borrowing terms, lease commitments and the company’s reliance on continued facility availability.
- Evaluate whether planned menu price increases can offset food and labor inflation without weakening traffic or comparable sales.
- Monitor the Brighton sale-leaseback terms, any contingent lease exposures, and developments in the board-nomination contest.