Good Times Restaurants Inc. — Q3 FY2019 Form 10-Q
Reporting period: Fiscal quarter ended June 25, 2019; year-to-date covers the first three fiscal quarters. Figures are unaudited and in U.S. dollars. The company operates Good Times Burgers & Frozen Custard and Bad Daddy’s Burger Bar.
Financial performance
| Metric | Quarter | Year to date |
|---|---|---|
| Total revenue | $29.46 million, up 12.2% year over year | $82.00 million, up 12.8% |
| Operating income | $1.08 million, versus $0.78 million | $0.51 million, versus $0.41 million |
| Net income (loss), consolidated | $0.87 million, versus $0.69 million | ($0.05) million, versus $0.14 million income |
| Net income (loss) attributable to common shareholders | $0.54 million; $0.04 per share | ($0.96) million; ($0.08) per share |
| Operating cash flow | Not separately reported for the quarter | $4.40 million, versus $4.63 million |
| Adjusted EBITDA (non-GAAP) | $2.08 million, versus $1.91 million | $3.97 million, versus $3.95 million |
Quarterly operating margin was approximately 3.7% of revenue, compared with 3.0% a year earlier. For the first three quarters, it was approximately 0.6%, compared with 0.6%. Quarter restaurant sales were $29.18 million; food and packaging costs were 29.2% of restaurant sales and payroll and benefits were 36.6%. Year-to-date restaurant operating costs rose to $73.21 million from $64.48 million.
Business trends and changes
- Bad Daddy’s drove growth: quarterly revenue rose to $21.18 million from $17.86 million, primarily reflecting new restaurants; same-store sales declined 0.7%. Year-to-date same-store sales increased 0.2%.
- Good Times quarterly revenue declined to $8.28 million from $8.40 million, while same-store sales rose 2.8%. Year-to-date revenue fell to $22.00 million from $23.72 million, and same-store sales declined 3.1%; management cited unusually cold, wet Colorado weather, restaurant closures, and a remodel.
- Labor costs increased as a share of restaurant sales year over year, reflecting competitive wages and statutory increases. Lower beef costs and menu pricing helped reduce food costs as a share of sales.
- The company reported 59 company-owned, co-developed, or joint-venture restaurants and 10 franchise/license locations at quarter-end. It repurchased the remaining interests in three Raleigh-area Bad Daddy’s joint ventures for approximately $3.0 million.
Cash, debt, and liquidity
- Cash was $2.62 million at June 25, 2019, down from $3.48 million at September 25, 2018. Working capital was negative $3.24 million.
- Long-term debt and capital lease obligations totaled $11.15 million, compared with $7.49 million at fiscal year-end. The Cadence facility allows borrowings up to $17 million and matures December 31, 2021; the reported weighted-average borrowing rate was 5.92%.
- Facility availability was reduced by $157,500 of letters of credit. The company reported compliance with its financial covenants, including a $2.0 million minimum-liquidity requirement.
- Year-to-date investing cash use was $7.70 million, including $4.72 million of capital expenditures and $3.01 million to purchase non-controlling interests. Financing provided $2.44 million; cash decreased $0.86 million.
Outlook, risks, and unusual items
- Management described disciplined Bad Daddy’s unit growth, positive same-store sales, and reinvestment of Good Times profits as strategic priorities. Two Bad Daddy’s openings were anticipated in August and September 2019; $1.49 million of construction commitments related to four locations under development.
- Management expected no further menu-price increases in the remainder of fiscal 2019 and forecast food and packaging costs as a percentage of sales to be roughly consistent with, or slightly above, the current quarter. It expected G&A to rise to support Bad Daddy’s growth but decline as a percentage of revenue.
- Risks include competition and discounting, same-store sales weakness, food and labor inflation, staffing availability, seasonal weather effects, and contingent lease obligations for restaurants previously sold to franchisees. Management was unaware of any franchisee lease defaults and considered ordinary-course legal claims immaterial.
- The company expects adoption of the new lease standard in September 2019 to significantly increase reported assets and liabilities. No goodwill impairment was recorded. A sublease for a previously closed Aurora location was entered into after quarter-end, subject to due diligence.
- Revenue-standard adoption changed presentation of advertising contributions: franchise advertising contributions are included in revenue and corresponding advertising costs are presented gross; management reported no material effect on the balance sheet.
Investor points to verify
- Whether Bad Daddy’s expansion can sustain sales and unit economics while same-store sales remain weak or modest.
- Whether Good Times’ year-to-date sales decline and labor/occupancy cost pressures improve.
- Available borrowing capacity, liquidity headroom, and continued compliance with Cadence facility covenants.
- The capital and balance-sheet effects of planned restaurant development and lease-standard adoption.
- Potential exposure from contingent franchisee leases and whether the post-quarter sublease becomes effective.