Good Times Restaurants Inc. annual report, FY2016

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Good Times Restaurants Inc. — FY2016 Form 10-K

Reporting period: Fiscal year ended September 27, 2016. Although the request identifies “2016 Q4,” this filing is an annual report, not a standalone quarterly report. Fiscal 2016 had two fewer operating days than fiscal 2015, and the comparison is affected by the May 2015 Bad Daddy’s International acquisition.

Business context

The company operates Good Times Burgers & Frozen Custard, a quick-service drive-through concept concentrated in Colorado, and Bad Daddy’s Burger Bar, an upscale casual dining concept. At fiscal year-end it operated or co-developed 27 Good Times and 17 Bad Daddy’s restaurants, alongside franchise and license locations. Bad Daddy’s growth accelerated following the acquisition of its brand rights and North Carolina restaurant interests in May 2015.

Financial and operating results

  • Revenue: $64.439 million, up $20.382 million, or 46.3%, from $44.057 million. Good Times revenue was $29.217 million; Bad Daddy’s was $35.222 million. Most of the increase reflected the acquisition and new Bad Daddy’s openings.
  • Comparable sales: Good Times same-store sales rose 0.3%, comprising approximately 3.4% menu pricing growth and a 3.1% traffic decline. Bad Daddy’s same-store sales rose 3.3%. Good Times company-operated restaurants open for the full year averaged $1.088 million in sales, versus $1.091 million in 2015.
  • Profit and margins: Consolidated operating loss was $0.300 million, versus $0.239 million in 2015; net loss was $0.465 million, versus $0.300 million. Net loss attributable to Good Times common shareholders was $1.321 million, or $0.11 per share, versus $0.791 million, or $0.08 per share. The difference reflects $0.856 million of income attributable to non-controlling interests. Good Times segment operating income was $0.505 million; Bad Daddy’s segment operating loss was $0.805 million. Restaurant operating costs were $56.828 million, including $1.695 million of preopening costs.
  • Adjusted EBITDA: $3.368 million versus $2.503 million, a non-GAAP measure. The filing’s reconciliation starts with net loss attributable to common shareholders and adds specified items; it should not be treated as a substitute for GAAP results or cash flow.
  • Cash flow and investment: Operating cash flow was $5.398 million, up from $3.168 million. Investing cash outflow was $8.482 million, including $8.501 million of property and equipment purchases. Financing cash outflow was $4.395 million. Cash fell to $6.330 million from $13.809 million.
  • Liquidity and debt: Working capital was $2.671 million, down from $7.470 million. Debt and capital lease obligations totaled approximately $38,000 at year-end. The company repaid its prior facilities and entered a $9 million Cadence Bank revolving facility, undrawn at year-end, maturing September 2019. It is secured by substantially all company assets and includes leverage and fixed-charge-coverage covenants.
  • Other balance-sheet items: Total assets were $46.877 million; stockholders’ equity was $37.798 million. Accumulated deficit was $22.125 million. Future minimum operating lease commitments, net of sublease rentals, were $30.563 million.

Material changes versus the prior year

  • Revenue grew sharply, primarily because fiscal 2016 included a full year of Bad Daddy’s operations acquired in May 2015 and six Bad Daddy’s restaurants opened during fiscal 2016. The prior-year comparison included only part-year acquired operations.
  • Operating cash flow improved, but capital spending and debt repayments drove cash lower. Capital expenditure was concentrated in Bad Daddy’s development.
  • Payroll and employee-benefit costs rose to 34.7% of restaurant sales from 33.1%; management cited wage increases and a competitive Colorado labor market. Food and packaging costs improved to 31.8% from 33.9% of restaurant sales.
  • Fiscal 2016 included $57,000 of debt-extinguishment costs after repayment of the Bridge Funding facility. Fiscal 2015 included $648,000 of BDI acquisition costs.

Outlook, risks and contingencies

  • Management described the Good Times outlook for fiscal 2017 as cautiously optimistic, while the risk factors state the company expects a loss for that year. It planned one additional Good Times restaurant and continued remodeling and refresh work.
  • Management expected Bad Daddy’s openings to continue, but the filing gives differing fiscal 2017 targets: eight to ten in the MD&A and nine to eleven in the business highlights. One additional restaurant opened after year-end.
  • Key risks include sustained traffic weakness, wage and food-cost inflation, intense competition, successful execution and funding of restaurant expansion, site availability, hiring and retention, and consumer acceptance in new markets. The company has a history of losses and reported an accumulated deficit.
  • The company remains contingently liable for certain leases assigned or subleased to franchisees. It reported no known defaults, but future franchisee defaults could create costs. No material legal proceedings were reported.
  • Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The filing notes that a prior-year control issue involving the timing of liabilities for restaurant construction costs was addressed through a project-by-project accrual process.

Important facts for investors to verify

  • Reconcile the different fiscal 2017 Bad Daddy’s opening targets and assess the actual opening pace and unit economics.
  • Track Good Times traffic, pricing, and comparable sales separately; fiscal 2016’s positive comparable-sales figure included declining traffic offset by higher prices.
  • Review Bad Daddy’s restaurant-level profitability and cash requirements as the company expands, including preopening costs and capital spending.
  • Confirm liquidity, covenant headroom, and borrowing needs under the secured Cadence facility, particularly as operating leases and development commitments continue.
  • Assess the quality and comparability of reported Adjusted EBITDA alongside GAAP losses, cash flows, and the effect of non-controlling interests.