Good Times Restaurants Inc. — Q2 FY2017 Form 10-Q
Reporting period: Quarter ended March 28, 2017; year-to-date covers the first two fiscal quarters. Good Times operates and franchises Good Times Burgers & Frozen Custard and Bad Daddy’s Burger Bar. The company notes the first two fiscal quarters of 2017 had one fewer operating day than the comparable 2016 period.
Financial performance
| Metric | Q2 FY2017 | Q2 FY2016 | First two quarters FY2017 | First two quarters FY2016 |
|---|---|---|---|---|
| Net revenue | $18.239 million | $15.318 million | $34.794 million | $29.156 million |
| Operating loss | $0.528 million | $0.431 million | $1.001 million | $1.362 million |
| Net loss | $0.564 million | $0.467 million | $1.057 million | $1.428 million |
| Net loss attributable to common shareholders | $0.711 million | $0.673 million | $1.344 million | $1.797 million |
| Loss per share, basic and diluted | $0.06 | $0.05 | $0.11 | $0.15 |
| Operating cash flow | Not separately provided | Not separately provided | $2.187 million | $1.931 million |
| Capital expenditures | Not separately provided | Not separately provided | $6.697 million | $6.193 million |
Quarterly revenue rose 19.1%; first-two-quarter revenue rose 19.4%. Most growth came from Bad Daddy’s new restaurants. Quarterly operating margin was approximately negative 2.9% versus negative 2.8% a year earlier; year-to-date it improved to approximately negative 2.9% from negative 4.7%. Restaurant operating costs were $16.567 million for the quarter and $31.520 million year to date. Year-to-date food and packaging costs improved to 31.2% of restaurant sales from 32.3%, while payroll and benefits rose to 36.8% from 35.3%.
Q2 same-store sales increased 3.2% at Bad Daddy’s and 0.1% at company Good Times locations; year-to-date they increased 2.6% at Bad Daddy’s and declined 0.2% at company Good Times. Good Times franchise comps declined 4.2% year to date, and dual-branded franchise comps declined 11.0%.
Year-to-date adjusted EBITDA, a non-GAAP measure, was $1.077 million versus $0.884 million; Q2 was $0.619 million versus $0.639 million. Management cautions that this measure excludes significant items and is not a substitute for GAAP results.
Cash, debt and liquidity
Cash was $4.828 million at March 28, 2017, down $1.502 million from fiscal year-end. Working capital was negative $0.272 million. Operating cash flow of $2.187 million was below $6.697 million of capital expenditures; investing cash use was $4.970 million, partly offset by $1.722 million of sale-leaseback proceeds. Financing provided $1.281 million, including $1.4 million borrowed.
Outstanding debt and capital-lease obligations totaled approximately $1.468 million, including $1.4 million drawn on the $9 million Cadence facility. The facility matures September 2019, is secured by substantially all company assets, and carries variable-rate interest. The company reported compliance with its leverage and fixed-charge-coverage covenants. Management expects cash from operations and facility availability to fund fiscal 2017 working capital, debt service, and recurring capital needs. Construction commitments for Bad Daddy’s were $0.689 million.
Changes, outlook and risks
Bad Daddy’s revenue growth reflected six restaurants opened since December 2015; the company opened a Good Times restaurant in Greeley in March 2017 and a joint-venture Bad Daddy’s in North Carolina in January. At period-end, the company operated or franchised 38 Good Times and 20 Bad Daddy’s locations. Management’s strategy is disciplined Bad Daddy’s development, Good Times remodeling and expansion, and improving traffic and same-store sales. No specific revenue or earnings guidance was provided.
Management cited competitive labor conditions and mandated minimum-wage increases as drivers of higher payroll costs. It expects food and packaging costs to remain consistent with first-half percentages for the rest of FY2017, but warned that pressure on beef, bacon, or other commodities could raise costs. Other stated risks include restaurant competition and discounting, same-store-sales declines, consumer preference changes, labor availability and costs, and seasonal weather effects. The company remains contingently liable on certain leases assigned to franchisees; it knew of no defaults. A Brighton, Colorado property purchase for $1.2 million occurred April 28, 2017, with a sale-leaseback anticipated. The company expects the forthcoming lease-accounting standard to significantly increase long-term assets and liabilities. No goodwill or restaurant impairment was reported; management said disclosure controls were effective and identified no material risk-factor changes.
Investor verification points
- Assess whether Bad Daddy’s expansion can generate sustained restaurant-level returns as new units mature and capital spending remains high.
- Track Good Times franchise and dual-brand sales declines, and whether wage and commodity pressures continue to erode margins.
- Review cash needs, facility availability, variable-rate exposure, covenant headroom, and planned development and remodeling commitments.
- Evaluate lease obligations, including contingent franchisee leases and the expected balance-sheet impact of the new lease standard.
- Reconcile non-GAAP adjusted EBITDA to GAAP results and consider its exclusions when assessing operating performance.