Good Times Restaurants Inc. — Q1 FY2018 Form 10-Q
Reporting period: Fiscal quarter ended December 26, 2017 (13 weeks), compared with the quarter ended December 27, 2016. The company operates and franchises Good Times Burgers & Frozen Custard and operates and franchises/licenses Bad Daddy’s Burger Bar.
Financial performance
| Metric | Q1 FY2018 | Prior-year quarter |
|---|---|---|
| Total revenue | $22.760 million | $16.555 million |
| Operating loss | $327,000 | $473,000 |
| Net loss | $410,000 | $493,000 |
| Net loss attributable to common shareholders | $583,000; $0.05 per share | $633,000; $0.05 per share |
| Company-reported Adjusted EBITDA | $877,000 | $472,000 |
| Operating cash flow | $269,000 | Cash used: $352,000 |
| Capital expenditures | $1.947 million | $2.425 million |
Revenue increased 37.5%, led by Bad Daddy’s growth from new locations. Good Times brand revenue was $7.688 million versus $6.952 million; Bad Daddy’s was $15.072 million versus $9.603 million. Same-store restaurant sales rose 5.9% at Good Times and 0.7% at Bad Daddy’s, or 1.3% excluding the Cherry Creek location affected by nearby construction.
Restaurant operating costs were $20.661 million, about 90.8% of total revenue. Food and packaging costs were 31.9% of restaurant sales versus 31.5%; payroll and benefits were 36.6% in both periods. The company recorded $577,000 of preopening costs, versus $351,000. General and administrative costs fell as a share of revenue to 8.4% from 9.9%. Net interest expense rose by $63,000 year over year.
Liquidity, debt and balance sheet
- Cash was $3.299 million at December 26, 2017, down from $4.337 million at September 26, 2017. Working capital was negative $738,000.
- Long-term debt and capital lease obligations totaled approximately $4.852 million, including $4.8 million outstanding under the Cadence Bank facility. The $12 million facility matures December 31, 2020, bears variable interest, and had a weighted-average rate of 5.6456% at quarter-end.
- The facility is secured by substantially all company assets. The company reported compliance with its covenants, including a $2.5 million minimum-liquidity requirement.
- Operating cash flow improved year over year, while investing activities used $547,000 and financing activities used $760,000. Investing cash flows included $1.947 million of property and equipment purchases and $1.397 million of sale-leaseback proceeds.
- The company had $1.198 million of outstanding construction commitments for Bad Daddy’s restaurants, expected to be funded with cash or further facility borrowings.
Material changes, outlook and risks
- Bad Daddy’s revenue growth primarily reflected six restaurants opened in fiscal 2017 and two opened in Q1 FY2018. The company reported 52 company-owned/co-developed/joint-venture restaurants and 12 franchised or licensed locations at quarter-end.
- Management’s strategy is disciplined Bad Daddy’s development, Good Times remodeling and expansion, and improving same-store sales. No specific revenue or earnings guidance was provided.
- Management expected food and packaging costs as a percentage of sales to remain near the quarter’s level or decline slightly during the rest of FY2018, citing moderate recent commodity-cost declines and anticipated menu pricing. The weighted food-cost basket was about 6.5% more expensive year over year. Good Times employee wages rose about 8.6%, amid a competitive labor market and minimum-wage increases.
- Management expected Good Times advertising to remain about 4.5% of restaurant sales for the balance of FY2018. It noted that corporate costs may rise in dollars as infrastructure supports growth, while declining as a percentage of revenue as restaurants are added.
- On January 30, 2018, the company closed a Good Times restaurant in Aurora, Colorado. It had previously recorded a $219,000 non-cash impairment and was evaluating subleasing options against about 17 years of remaining lease obligations.
- Risks include restaurant competition and discounting, sales and traffic fluctuations, food and labor cost inflation, employee availability, seasonality, and contingent lease liabilities if franchisees default. The company reported no known defaults on those leases. It also identified a significant future balance-sheet effect from adoption of the new lease standard, given its many leases.
- The company reported no goodwill or restaurant-level long-lived asset impairment for the quarter. It recorded no income-tax provision or benefit, citing net operating losses and a full valuation allowance against related deferred tax assets.
Investor facts to verify
- Whether same-store sales and new-unit performance remain sufficient to support growth, particularly at Bad Daddy’s.
- Liquidity headroom relative to the $2.5 million covenant minimum, planned construction spending, and variable-rate debt obligations.
- Whether commodity, wage, and other restaurant cost pressures remain consistent with management’s expectations.
- The economics of the Aurora closure and any sublease recovery, as well as potential exposure to contingent franchisee lease liabilities.
- How the company-reported Adjusted EBITDA reconciliation compares with GAAP results and cash needs; it is a non-GAAP measure and excludes certain costs.