Good Times Restaurants Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2016; filed August 15, 2016. The company operates Good Times Burgers & Frozen Custard and Bad Daddy’s Burger Bar. Results are unaudited; dollar amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net revenue | $18.066 (2015: $12.937), up 39.6% | $47.222 (2015: $29.507), up 60.0% |
| Operating income (loss) | $0.848 (2015: $0.335); 4.7% margin versus 2.6% | $(0.514) (2015: $(0.396)); (1.1)% margin versus (1.3)% |
| Consolidated net income (loss) | $0.823 (2015: $0.294) | $(0.605) (2015: $(0.428)) |
| Net income (loss) attributable to common shareholders | $0.547, or $0.04 per diluted share (2015: $0.106, or $0.01) | $(1.250), or $(0.10) per basic share (2015: $(0.739), or $(0.07)) |
| Adjusted EBITDA, a non-GAAP measure | $1.432 (2015: $1.188) | $2.317 (2015: $1.641) |
Quarterly revenue growth primarily reflected Bad Daddy’s: Colorado restaurants contributed $3.041 million of the increase and acquired North Carolina restaurants $2.055 million. Good Times concept revenue increased $0.033 million. Nine-month growth also principally reflected Bad Daddy’s, including acquired North Carolina operations and newer Colorado units. Good Times same-store sales fell 2.0% in the quarter but rose 0.9% for nine months; Bad Daddy’s same-store sales rose 3.6% and 3.8%, respectively. Comparisons include acquired locations under the company’s stated same-store methodology.
- Costs and margins: In the quarter, food and packaging costs were 31.1% of restaurant sales versus 32.4% a year earlier; payroll and benefits were 33.9% versus 32.2%. For nine months, those costs were 31.8% versus 33.5% and 34.8% versus 32.8%, respectively. Management cited menu price increases and lower commodity costs as food-cost offsets, while a competitive Colorado labor market drove wage increases.
- Cash flow: Nine-month operating cash flow was $3.607 million (2015: $1.007 million). Investing used $6.886 million, mainly property and equipment purchases of $6.910 million; financing used $3.316 million. Cash declined $6.595 million to $7.214 million. Operating cash flow included a $1.989 million increase in deferred liabilities related to tenant allowances.
- Liquidity and debt: Working capital was positive by $3.909 million at June 30. Long-term debt and capital lease obligations totaled approximately $1.154 million, including $0.191 million current and $0.963 million long-term. The $2.414 million secured BDI acquisition note was repaid May 6, 2016. The company reported compliance with its United Capital loan covenants.
- Balance sheet: Total assets were $47.143 million, versus $48.228 million at September 30, 2015; stockholders’ equity was $37.435 million versus $38.257 million.
Material changes, outlook, and risks
- Quarterly operating income and common-shareholder earnings improved year over year, while the nine-month consolidated and common-shareholder losses widened. The prior-year periods included BDI acquisition costs; none were recorded in the current periods. Nine-month preopening costs rose to $1.428 million from $0.578 million, mainly for new Bad Daddy’s restaurants.
- Management said it was seeking a senior debt facility it believed would support development, working capital, debt obligations, and recurring capital expenditures in fiscal 2016 and 2017. Planned spending included new restaurants and Good Times remodels; no specific revenue or earnings guidance was provided.
- Management expected Good Times food and packaging costs to remain consistent with the current quarter as a percentage of sales through the rest of fiscal 2016, but warned that higher beef, bacon, or other commodity costs could raise that ratio. It anticipated Good Times advertising expense would be slightly higher as a percentage of sales than in fiscal 2015.
- Risks highlighted include competition and discounting, same-store sales declines, food and labor inflation, labor availability, and the challenges of integrating BDI and operating in unfamiliar markets and a new dining segment. Seasonal weather can weaken Colorado sales during winter months.
- The company remains contingently liable on certain leases assigned or subleased to franchisees; it reported no known defaults but warned a franchisee default could materially affect results. Routine legal proceedings were not expected to have a material impact. No goodwill or long-lived-asset impairment was recorded.
- Management reported disclosure controls effective at period-end after implementing a project-by-project process to record restaurant development costs and related liabilities in the proper period. The filing notes that this process uses estimates for costs incurred but not yet billed.
Important facts for investors to verify
- Whether the planned senior debt facility was secured and on what terms, and whether it adequately funds development and liquidity needs.
- Whether Bad Daddy’s openings and acquired operations can sustain sales and improve profitability after preopening, labor, and infrastructure costs.
- Whether Good Times same-store sales recover and whether wage and commodity pressures offset menu pricing.
- The sustainability of operating cash flow, including its reliance on increased deferred liabilities and tenant allowances, alongside the company’s planned capital expenditures.
- Potential exposure from contingent franchisee leases and the effectiveness of the revised development-cost accrual process.