Good Times Restaurants Inc. — Q1 FY2019 Form 10-Q
Reporting period: Fiscal quarter ended December 25, 2018; comparisons are with the quarter ended December 26, 2017. The company operates and franchises Bad Daddy’s Burger Bar and Good Times Burgers & Frozen Custard.
Financial performance and liquidity
| Metric | Q1 FY2019 | Prior-year quarter |
|---|---|---|
| Total revenue | $25.370 million | $22.848 million |
| Operating loss | $581,000 | $327,000 |
| Consolidated net loss | $742,000 | $410,000 |
| Net loss attributable to common shareholders | $1.051 million; $0.08 per share | $583,000; $0.05 per share |
| Operating cash flow | $(386,000) | $269,000 |
| Capital expenditures | $2.918 million | $1.947 million |
| Cash and cash equivalents, quarter-end | $2.447 million | $3.299 million at prior-year quarter-end |
Revenue increased 11.0%, reflecting Bad Daddy’s growth, partly offset by weaker Good Times sales. Restaurant operating costs were $23.285 million, or about 91.8% of revenue; the resulting operating loss was about 2.3% of revenue, versus 1.4% in the prior-year quarter. Food and packaging costs improved to 29.9% of restaurant sales from 31.9%, while payroll and benefits rose to 38.0% from 36.6% and occupancy costs to 7.8% from 7.3%.
At December 25, 2018, working capital was negative $1.222 million. Long-term debt was approximately $10.226 million, including $10.2 million outstanding under the Cadence facility. The facility limit had been increased to $17 million and maturity extended to December 31, 2021; the weighted-average borrowing rate was 5.8893%. The company reported covenant compliance, including a $2 million minimum-liquidity requirement. The facility is secured by a first-priority lien on substantially all company assets.
Management reported Adjusted EBITDA of $767,000, compared with $877,000 in the prior-year quarter. This is a non-GAAP measure; its reconciliation uses the loss attributable to common shareholders rather than consolidated net loss.
Material changes and operating developments
- Bad Daddy’s revenue rose $3.265 million to $18.341 million; same-store sales increased 0.2%. Growth was primarily attributed to new restaurants, including nine opened in fiscal 2018 and one in the quarter.
- Good Times revenue fell $743,000 to $7.029 million; same-store sales declined 5.2%. Two restaurant closures in 2018 and weaker comparable sales contributed to the decrease.
- The company operated, co-developed or held joint-venture interests in 58 restaurants, versus 52 a year earlier; franchise/license locations totaled 11, versus 12.
- Interest expense increased $77,000 year over year to $160,000. Cash declined $1.030 million during the quarter as operating cash use and capital investment exceeded financing inflows.
- The company adopted the new revenue-recognition standard. Advertising-fund contributions and related expenses are now presented gross; the filing says this presentation change did not affect the balance sheet.
Outlook, risks and unusual items
Management’s stated strategy is disciplined Bad Daddy’s expansion, improving Good Times profitability and operating efficiency, and pursuing consistently positive same-store sales. It expects sufficient capital for fiscal 2019 working-capital needs, debt service and recurring capital expenditures, citing cash generation and access to the Cadence facility. Planned spending includes new Bad Daddy’s restaurants and Good Times reimaging and remodeling. No numerical revenue or earnings guidance is provided.
Management cited competitive discounting, same-store sales, food and labor inflation, staffing availability and access to capital as risks. Wage pressure was particularly evident at Bad Daddy’s; restaurant sales are also seasonally affected by winter weather in Colorado. The company expects adoption of lease accounting in fiscal 2020 to significantly increase reported long-term assets and liabilities because of its lease portfolio.
The company remains contingently liable on certain leases assigned or subleased to franchisees; it reported no known defaults. Management considered ordinary-course claims and litigation immaterial. After quarter-end, on February 6, 2019, the company agreed to acquire the remaining membership interests in three Bad Daddy’s joint-venture entities for approximately $3.0 million, subject to working-capital adjustments. The entities operate three restaurants in the Raleigh, North Carolina area.
Key facts for investors to verify
- Whether Good Times’ same-store sales decline and Bad Daddy’s near-flat comparable sales improve in subsequent quarters.
- Whether labor, occupancy and other operating-cost increases continue to pressure restaurant-level economics.
- Liquidity headroom, borrowing availability and covenant compliance amid negative working capital, capital spending and the planned acquisition.
- Completion cost and expected operating impact of acquiring the three Bad Daddy’s joint ventures.
- The Adjusted EBITDA reconciliation and its use of common-shareholder loss and a depreciation-and-amortization figure that differs from amounts elsewhere in the filing.