Good Times Restaurants Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended June 27, 2017; the first three fiscal quarters covered 39 weeks from September 28, 2016. The company operates Good Times drive-through restaurants and Bad Daddy’s Burger Bar full-service restaurants. The prior-year year-to-date comparison covered nine calendar months and had one more operating day.
Financial performance
| Metric | Quarter ended June 27, 2017 | Prior-year quarter | Year to date 2017 | Prior-year year to date |
|---|---|---|---|---|
| Net revenue | $21.702 million | $18.066 million | $56.496 million | $47.222 million |
| Operating income (loss) | $15,000 | $848,000 | $(986,000) | $(514,000) |
| Net income (loss) | $(35,000) | $823,000 | $(1.092) million | $(605,000) |
| Loss attributable to common shareholders | $(247,000) | Net income of $547,000 | $(1.591) million | $(1.250) million |
| Operating cash flow | Not presented separately | Not presented separately | $2.875 million | $3.607 million |
Revenue rose 20.1% in the quarter and 19.6% year to date, largely from Bad Daddy’s restaurant openings. Quarter operating margin was approximately 0.1%, versus 4.7% a year earlier; year-to-date operating margin was approximately negative 1.7%, versus negative 1.1%. Adjusted EBITDA, a non-GAAP measure, was $1.396 million for the quarter versus $1.432 million, and $2.476 million year to date versus $2.317 million.
- Quarter same-store sales: Good Times company restaurants +3.7%; Good Times franchise restaurants −4.3%; Bad Daddy’s +0.1% (or +1.0% excluding its Cherry Creek restaurant, affected by nearby construction).
- Year-to-date same-store sales: Good Times company restaurants −1.2%; Good Times franchise restaurants −4.6%; Bad Daddy’s +1.7% (or +2.4% excluding Cherry Creek).
- Quarter food and packaging costs were 31.7% of restaurant sales, up from 31.1%; payroll and benefits were 35.1%, up from 33.9%. Year-to-date, those costs were 31.4% and 36.1%, respectively, versus 31.8% and 34.8%.
- Cash and cash equivalents were $4.084 million at June 27, 2017, down from $6.330 million at September 27, 2016. Working capital exceeded current liabilities by $58,000.
- Long-term debt and capital lease obligations totaled approximately $4.161 million, including $4.1 million borrowed under the $9 million Cadence facility. The facility’s effective interest rate was 5.08%; it matures September 8, 2019 and is secured by substantially all company assets. The company reported covenant compliance.
- Year-to-date capital spending was $11.178 million; investing cash flow was $(9.296) million and financing cash flow was $4.175 million.
Material changes and unusual items
Eight Bad Daddy’s restaurants opened since December 2015 contributed substantially to revenue growth and also increased restaurant expenses, depreciation and preopening costs. One company-owned Good Times restaurant opened in March 2017. Quarter preopening costs increased to $819,000 from $127,000; year-to-date costs were $1.737 million versus $1.428 million. Higher Colorado labor costs and mandated minimum-wage increases pressured payroll expense; management reported average wages up approximately 8% year over year. Management also cited higher beef and bacon costs in the latest quarter.
Property and equipment purchases were funded in part by $1.927 million of sale-leaseback proceeds. The company classified $1.221 million of assets as held for sale, primarily land and a building purchased for a Good Times restaurant in Brighton, Colorado, which it intended to sell in a sale-leaseback during fiscal fourth quarter 2017. No goodwill, trademark or restaurant long-lived-asset impairment was recorded.
Outlook, risks and contingencies
Management’s strategy is disciplined Bad Daddy’s development, Good Times remodeling and expansion, and improving same-store sales. It stated that cash generated by restaurants and available Cadence borrowing should be sufficient for fiscal 2017 working capital, debt obligations and recurring capital expenditures. It expected beef and bacon costs to rise in fiscal fourth quarter. No quantified earnings or revenue guidance was provided.
Risks include restaurant competition and discounting, weaker same-store sales, food and labor inflation, staffing availability, and access to capital. The company remains contingently liable for certain leases transferred to franchisees; it had no known defaults at the reporting date. It also had $689,000 of construction commitments outstanding. Management said legal proceedings were not expected to have a material impact and reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether same-store sales and restaurant-level profitability improve, especially at Good Times franchise locations and the Cherry Creek Bad Daddy’s.
- Whether food inflation, wage increases, and new-store preopening expenses continue to compress margins.
- Cash requirements for expansion and remodeling, and the company’s remaining borrowing capacity and covenant headroom.
- Completion and economics of the planned Brighton sale-leaseback and the resulting ongoing lease obligations.
- Potential exposure from contingent franchisee leases and the effect of lease-accounting changes, which management expected to materially increase reported assets and liabilities.