Good Times Restaurants Inc. quarterly report, Q2 FY2018

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Good Times Restaurants Inc. — Q2 FY2018 Form 10-Q

Reporting period: Fiscal quarter ended March 27, 2018; year-to-date figures cover the first two fiscal quarters. Unless stated otherwise, amounts are in U.S. dollars.

Business context and reporting period

The company operates and franchises Good Times Burgers & Frozen Custard quick-service restaurants and operates and franchises/licenses Bad Daddy’s Burger Bar full-service restaurants. At quarter-end it reported 37 Good Times and 27 Bad Daddy’s locations. Growth priorities include expanding Bad Daddy’s, developing Good Times locations, refreshing existing restaurants, and improving same-store sales.

Financial performance

  • Revenue: Q2 net revenue rose 28.9% to $23.5 million from $18.2 million; first-half revenue rose 33.0% to $46.3 million from $34.8 million. Bad Daddy’s expansion was the primary growth driver.
  • Comparable sales: Q2 Good Times same-store sales increased 7.1%; Bad Daddy’s increased 0.2% (0.7% excluding the Cherry Creek location affected by nearby construction). First-half increases were 6.5% and 0.4%, respectively (0.9% for Bad Daddy’s excluding Cherry Creek).
  • Profitability: Q2 operating loss improved to $41,000 from $528,000; consolidated net loss was $132,000 versus $564,000. Net loss attributable to common shareholders was $431,000, or $0.03 per share, versus $711,000, or $0.06 per share. For the first half, operating loss was $368,000 versus $1.0 million, consolidated net loss was $542,000 versus $1.1 million, and common-shareholder loss was $1.0 million, or $0.08 per share, versus $1.3 million, or $0.11 per share.
  • Adjusted EBITDA: The company-reported non-GAAP measure was $1.17 million in Q2 versus $619,000, and $2.04 million year to date versus $1.08 million. The filing cautions that this measure excludes significant costs and may not be comparable across companies.
  • Costs and margins: Q2 food and packaging costs were 30.5% of restaurant sales versus 31.1%; payroll and benefits were 37.0% versus 36.9%; occupancy was 7.7% versus 7.9%; and other restaurant operating costs were 9.2% versus 8.7%. Good Times food costs were pressured by bacon and all-natural beef prices; labor costs reflected wage and minimum-wage increases.
  • Cash flow and investment: First-half operating cash flow was $2.99 million versus $2.19 million. Investing cash outflow was $2.77 million, including $4.17 million of property and equipment purchases and $1.40 million of sale-leaseback proceeds. Financing cash outflow was $689,000. Cash declined by $462,000 to $3.88 million.
  • Debt and liquidity: Long-term debt and capital lease obligations totaled approximately $5.15 million, including $5.10 million outstanding under the Cadence facility. The facility limit is $12 million and its weighted-average borrowing rate was 5.6683%; it matures December 31, 2020 and is secured by substantially all company assets. Working capital was negative $1.60 million. The company reported compliance with its covenants, including a $2.5 million minimum-liquidity requirement.
  • Balance sheet: Total assets were $55.3 million and stockholders’ equity was $36.5 million at March 27, 2018. The company had $1.80 million of outstanding construction commitments for Bad Daddy’s restaurants.

Material changes versus the prior comparable period

  • Revenue growth primarily reflected Bad Daddy’s restaurants opened in fiscal 2017 and the first half of fiscal 2018; three Bad Daddy’s locations opened in the first two quarters of FY2018.
  • Despite higher absolute restaurant costs from the larger store base, operating and net losses narrowed. Q2 general and administrative costs increased to $1.90 million from $1.75 million, but fell as a share of revenue to 8.1% from 9.6%.
  • First-half capital spending was lower than the prior year ($4.17 million versus $6.70 million), while first-half financing cash flow shifted from a $1.28 million inflow to a $689,000 outflow, including debt principal payments and distributions to non-controlling interests.
  • Two Good Times locations were closed or scheduled to close: one in January 2018 and another after quarter-end in April. A $72,000 non-cash impairment charge was recorded in Q2 for the latter property.

Outlook, risks, contingencies, and unusual items

  • Management expected available cash, operating cash flow, and access to the Cadence facility to be sufficient for FY2018 working capital, debt service, and recurring capital needs. It anticipated continued Bad Daddy’s development and Good Times remodels; no numerical earnings or revenue guidance was provided.
  • Management expected food and packaging costs to remain consistent with the current-quarter share of sales for the remainder of FY2018, considering anticipated menu-price increases. It expected Good Times advertising to remain approximately 4.5% of restaurant sales and said G&A should decline as a percentage of revenue as the restaurant base grows.
  • Risks cited include competitive discounting, possible same-store-sales declines, food and labor inflation, staffing availability, consumer taste changes, and access to affordable capital. Restaurant sales are seasonal and can be affected by winter weather in Colorado.
  • The company remains contingently liable on leases for restaurants previously sold to franchisees; no defaults were known or reported. It also disclosed a $72,000 impairment and rent-related charges associated with closed locations.
  • The filing states the April 22 closure was in Aurora in one note and in Denver elsewhere. The location description is inconsistent and merits confirmation.
  • Adoption of the new lease accounting standard was expected to significantly increase reported long-term assets and liabilities because of the company’s substantial lease portfolio. Management reported effective disclosure controls and no material change in internal control over financial reporting.

Most important facts for investors to verify

  1. Confirm the location and lease/sublease details for the restaurant closed after quarter-end; the filing gives conflicting city descriptions.
  2. Track whether same-store sales growth, particularly the modest Bad Daddy’s increase, continues as new units mature.
  3. Monitor restaurant-level labor and food costs, working-capital deficit, cash balance, and remaining availability under the secured credit facility.
  4. Assess the returns and funding needs of Bad Daddy’s expansion against construction commitments and planned capital expenditures.
  5. Review lease obligations and the potential effect of the upcoming lease-accounting standard on reported assets and liabilities.