Good Times Restaurants Inc. (NASDAQ:GTIM) Q4 2016 Results Earnings Conference Call February 9, 2017 5:00 PM ET
Boyd Hoback - President and Chief Executive Officer
James Zielke - Chief Financial Officer
Mark Smith - Feltl and Company
David Burdick - Dougherty & Co.
Good afternoon, ladies and gentlemen. Welcome to the Good Times Restaurants, Inc. fiscal 2017 first quarter earnings call. All participants will be in listen-only mode. [Operator Instructions] By now, everyone should have access to the company's first quarter earnings release. If not, it can be found at www.goodtimesburgers.com in the Investors section.
As a reminder, a part of today's discussion will include forward-looking statements within the meaning of federal securities laws. These statements are commonly identified by words such as anticipate, continue, plan, expect, intend, should, will and other terms with similar meanings. These forward-looking statements are not guarantees of future performance and, therefore, you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect and, therefore, investors should not place undue reliance on them and the company undertakes no obligation to update these statements to reflect the events or circumstances that might arise after this call. The company refers you to their recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial conditions.
Lastly, during today's call, the company will discuss non-GAAP measures, which they believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP and reconciliation to comparable GAAP measures available in our earnings release.
Please note that this event is being recorded.
And I would now like to turn the call over to Mr. Boyd Hoback, President and CEO of Good Times. Please go ahead, sir. Please go ahead.
Thank you, Daniel. Thanks everyone for joining us this afternoon. I'm here again today with Jim Zielke, our Chief Financial Officer, and I’ll again cover a summary of our first quarter and current developments and then Jim will provide some more details on our financial results for the quarter as well as any additional color on our guidance for the remainder of the year.
Our total revenues increased 20% during the quarter to $16.5 million with comp sales increasing 2% at Bad Daddy’s and they were down a half a point at Good Times. The sale at Good Times were an improvement sequentially over the negative 2% reported two quarters ago and negative 1.2% reported last quarter and we’re better than the guidance given last quarter of a projected 1% to 2% decline. And the 2% increase of bad debt is in line with our guidance of a 1% to 2% increase this year.
Through the first six weeks of our second fiscal quarter, Good Times comp sales are down 1.6% and Bad Daddy’s comp sales are up 2.3%. Good Times sales are very heavily influenced by the weather and we were actually down 3.7% in the first four weeks of the quarter, but we’ve been up to 2.5% during the last two weeks, again, reflective of the Colorado weather.
For Good Times, we’re on track to have our new production line equipment and all our product improvements implemented in all the stores by the end of March and then we plan to roll a new television advertising campaign at the beginning of April, with the advertising for the whole fiscal year heavily weighted toward the last two quarters of the fiscal 2017 to support both the new product enhancements as well as new product and price point introductions. And most significantly, it will be the first time that we've ever offered a $3 and $5 price point on core menu items and we think that that really adds compelling price points to our overall menu between our fairly limited low-end menu items like our bambinos and most of our menu which is in premium sandwiches.
One of the test stores that has had the improvements to the core burgers in had also gone undergone a remodel last year, but it continues to run a very high positive double-digit same-store sales comp, so we don't know how much of that is from the remodel and how much of that is from the new product, but we’re optimistic and enthused by the feedback we've gotten so far.
The product enhancements are being staged in this month and next in all the stores and then the new product and price points will be introduced in March in all the stores. We also have one new Good Times under construction in Greeley, Colorado with a new prototype design and that will open in early March and it will also include a new broader kids’ menu that we’re testing.
Given our affinity amongst women and our all-natural positioning, we often hear that Good Times is the only quick service restaurant that parents will allow their kids to go to, so we think there's an opportunity there in testing a broader, more engaging junior menu that's really targeted at 6 to 12-year-olds, not towards young kids.
We took small price increases at both concepts in January, including a new menu we rolled out at Bad Daddy’s to help offset the increased state minimum wage in Colorado that got voted in and we saw continued improvement in our cost of sales from lower commodity costs, additional purchasing efficiencies that we’ve found and some menu engineering. And our average flow to restaurant operating profits on incremental sales is close to 50% for both concepts, as we see our sales grow.
We continue to refine our menu – both menus, focusing on meaningful innovation, our chef specials and high-quality unique items. We’re really working on optimizing labor efficiencies for the line and back of the house at both concepts.
As I mentioned in last quarter's call, we moved off of our planned entry into Arizona with Bad Daddy’s due to the 40% increase in the minimum wage and other requirements that were voted in in November and we moved as quickly as we can to replace their plans for development for this year in other markets and we’re currently finalizing leases in Oklahoma, Nebraska and Atlanta. And we’ve slightly reduced our guidance on the total number of store weeks we anticipate based on adjusting for those four planned stores we had in Phoenix. And we are adding additional time to the projected turnover of new projects in our own calendars, so we can begin to beat projected development schedules knowing that the new developments are usually take longer than anticipated.
The Midwest markets of Oklahoma City, Tulsa, Wichita, Omaha, Lincoln, Kansas City and Iowa gives us a really strong development platform for over 25 stores. In the Southeast markets, finishing out North Carolina and then South Carolina, Georgia, Alabama and Tennessee provide opportunity for another 20 stores or more.
And all of those markets are federal minimum tip credit wage states except for a very slight premium in Oklahoma. So, we believe they've got also less competition for the Bad Daddy’s concept, certainly than Colorado. They allow us to maintain our backdoor product and distribution costs similar to what we have today in both North Carolina and Colorado. And most importantly, it gives us a large opportunity to grow to over 60 stores over the next few years in a fairly concentrated area.
Our current restaurant level and operating margins provide an approximate 40% cash on cash restaurant level return at $2.4 million in sales in those markets as opposed to requiring now closer to $2.6 million in Colorado for the same return, given Colorado's recent minimum wage legislation. And that’s despite Colorado stores running 50% higher bar mix and 5% lower bar cost than those in North Carolina.
That said, after the next two stores we’ve got under construction right now in Colorado open, we’ll have 12 stores open here and we anticipate we’ll only be opening a few more stores and only in trade areas where we believe we’ve got an outsized sales opportunity given the fairly dramatic change in difference in margin structure.
Our North Carolina stores continue to have slightly higher average unit store sales than our Colorado stores by about 10%. Part of that is due to the longer history and the year-over-year growth we've experienced in North Carolina and continue to see compared to stores in Colorado that only have been open less than a year. And the other part is due to continued learning on really where Bad Daddy’s will perform the best as we dial in our site selection.
The Fayetteville restaurant in North Carolina opened at our second-highest sales levels ever in January and that's really encouraging for us [indiscernible 0:09:24] smaller market development in North Carolina as we finish developing out Raleigh and Charlotte, but also further secondary and tertiary markets in each of the states that we've targeted for development. Fayetteville is relatively small market and it's opened up at a very, very high sales level.
We opened one new Bad Daddy’s restaurant in the first quarter of fiscal 2017 here in Denver and then opened the Fayetteville store in the second quarter. We’ve got two more under construction in Denver, one under construction in Raleigh, two in Charlotte that we’re waiting on turnover from the developer, but are in the permitting process, and then we’re finalizing leases, design and permits for the development of our first stores in Oklahoma, Nebraska and Atlanta. We plan to open a total of eight to nine stores in 2017, which is a slight change from our prior guidance, but we also anticipate that the stores we had originally planned for late fiscal 2017 that have been pushed to early 2018 will help accelerate our development for fiscal 2018.
We, again, anticipate that approximately two-thirds of this year's development will be in Colorado and North Carolina, with most of the growth in 2018 shifting into the new markets.
As we mentioned last quarter, we closed on our $9 million debt facility with Cadence Bank in September. We ended the quarter with $3.5 million in cash and we’ve now begun to draw on the debt facility here in the current quarter. We believe we've got sufficient capital to fund our growth for new Bad Daddy’s, the continued reinvestment in Good Times and other miscellaneous CapEx to the end of fiscal 2017. And we plan to increase our senior debt facility later this year to support some more accelerated growth in fiscal 2018, while maintaining what we believe will be a relatively conservative amount of leverage overall on our balance sheet.
Our goal continues to be to grow our adjusted EBITDA by over 40% each year over the next few years as we scale up Bad Daddy’s growth and reignite Good Times same-store sales growth. And we believe we can attain that rate of growth in new stores and in our adjusted EBITDA, with additional debt capital.
I’d like to turn it over now to Jim to review some of the details of our Good Times and Bad Daddy’s financial results.
Thanks, Boyd. As it relates to the Good Times brand, comp store sales, as Boyd mentioned, were down 0.5% for the quarter which again was slightly better than our guidance. We had about 2.2% year-over-year menu price increase in place, so traffic was down about 2.5% this quarter versus last year.
Food and packaging costs at Good Times improved 1.1% to 32.2% versus last year, which was also an improvement by 0.2% over the previous quarter. This decrease versus last year was primarily due to the 2.2 menu price increase I spoke of and also 44% decrease in baking costs and offset by about 2% higher beef cost in last year in the first quarter. Sequentially to the previous quarter, beef costs were about 0.4% and baking costs were down another 13% versus the fourth quarter of last fiscal year.
Total labor cost at Good Times increased to 34.9% from 33.1% for the quarter last year. Most of this relates to the increase in average wage rate of approximately 6% for the quarter versus last year. This was due to the very competitive labor market we continue to experience here in Colorado, as we’ve mentioned in past calls. We expect similar wage pressures in the coming year, plus the State of Colorado recently passed the 12% increase in the minimum wage that began this last January 1, which alone will increase wages by approximately 50 basis points.
Restaurant-level operating profit at Good Times decreased $95,000 to $995,000 from the $1.09 million last year during the quarter. As a percent of sales, restaurant-level operating margin declined by 1.2% versus last year.
As it relates to the Bad Daddy’s brand, sales increased 42% versus last year from $6.7 million to $9.5 million this year. This was due to the five new units open since the end of last year's fiscal first quarter, resulting in 65 more store weeks this quarter than last year.
We achieved positive 2.0% comps for the quarter, which was at the high end of our guidance of 1% to 2% comps as 10 Bad Daddy’s restaurants were included in the comp base for the entire quarter.
Cost of sales at Bad Daddy’s improved 1.7% to 31.0% of sales for the quarter compared to 32.7% last year. The decrease in cost of sales over last year was primarily a result of the decrease in beef cost of about 21% in Colorado and 34% in North Carolina.
Bad Daddy’s labor cost increased to 37.8% from 36.8% last year. The increase versus last year is due to higher mix of stores in Colorado than last year, which has the higher tip employee minimum wage rate as compared to North Carolina. The minimum wage increase in Colorado mentioned earlier will have an even larger impact on Bad Daddy’s as the tipped employee wage increased 19% on January 1, resulting in about 150 basis point increase in hourly wages in the Colorado locations.
Overall, restaurant level profit for Bad Daddy’s was $1.4 million for the quarter or 14.9% of sales compared to $976,000 or 14.5% last year, an increase of $443,000 and an improvement of 0.4% as a percent of sales.
G&A expenses increased $1.645 million during the quarter from $1.606 million last year, but declined as a percent of total revenues from 11.6% last year to 9.9% this year. We anticipate that G&A expenses will continue to decline as a percentage of revenue in fiscal 2017 and in future years as we expand our base of restaurant even as we increase our G&A spending in key areas.
Our net loss for the quarter was $633,000 versus a loss of $1.124 million last year in the first quarter.
Our adjusted EBITDA increased by 93% for the quarter to $472,200 compared to $245,000 last year.
Our expectations for fiscal 2017 have been revised with total expected revenues of $78 million to $80 million, with revenue run rate at the end of fiscal 2017 of $92 million to $94 million. As Boyd mentioned, we had four stores in Phoenix ready to go and thought we could replace them with new stores in new markets without losing many store weeks. But now we’ve adjusted for the expected timing of these openings.
The revenue estimate includes same-store sales assumptions for the full year of plus 1% to plus 2% for both Good Times and Bad Daddy’s. We expect Good Times costs to remain relatively flat to slightly negative in Q2, a return to positive territory in the back half of the year, improving to plus 3% to plus 3.5% in Q3 and Q4, reflecting the impact of the initiatives Boyd mentioned earlier. We expect to open one new Good Times restaurant in the second quarter and six to seven Bad Daddy’s restaurants during the remainder of fiscal 2017 for a total of eight to nine for the year.
Total adjusted EBITDA is expected to be between $4 million to $4.5 million as compared to fiscal 2016’s adjusted EBITDA of $3.4 million. We expect approximately $7 million to $7.2 million in G&A expenses with approximately $800,000 of that in non-cash equity compensation expense.
We also expect preopening expenses of approximately $3 million an capital expenditures of approximately $12 million, including $2 million estimated for fiscal 2018 development incurred in fiscal 2017. As Boyd mentioned, we finished the quarter with $3.5 million in cash and begin drawing down on our $9 million debt facility during the quarter just ended which we believe will support our total CapEx needs related to new store development and the continued remodeling and improvements at Good Times through the end of fiscal 2017.
Now, I’d like to turn the call back over to Boyd.
Thanks, Jim. We’re very proud of the progress we’re making in a really challenging competitive environment, but we’re a bit frustrated about not yet being ahead of the curve on our new store development, but we’re getting that fixed with a really focused development in several of these new markets that I mentioned. We’re very excited about the opportunity to regain same-store sales growth at Good Times. We think we’ve got the most significant initiatives coming here that we've had in a couple years. We’re continuing to build great operating teams and we’re continuing to open Bad Daddy’s here in the right places and those are really the focus for the balance of this year.
Again, appreciate your time with us today. And with that, operator, we’ll open the call for questions.
Thank you. [Operator Instructions] Our first question comes from Will Slabaugh with Stephens. Please go ahead.
Hey, thanks, guys. This is actually Drew on for Will. So, I’ve got two questions, if I may. First off, I just wanted to check on how pleased you’ll are with the most recent class of openings for Bad Daddy’s, specifically just from fiscal 2016 and how those are comparing, volumes and margin-wise, versus where you’ll anticipated going in?
Sure. So, the most recent one obviously being Fayetteville has opened up very, very strong. Jim, the average of our stores in 2016, most of which have not yet been open a year, but if we try and annualize them as best we can?
Yeah. Probably – again, you can extrapolate that just based on the restaurant weeks that we've reported in the earnings release. But it would be in the neighborhood of $2.3 million on an annualized basis. But, again, a couple of those units are clearly – we have some positive momentum over last year and then again, of course, some of them have had some honeymoon period last year. But that is kind of trying to filter all that out as well as the seasonality. So, that's what we’re looking at for fiscal 2017 for the class of 16.
Sure, thanks. And then just one more broader question in terms of general state of the industry as we head into the new year as it relates to discounting and any trends you’ll are noticing and what steps you’ll have taken to offset the discounting that we saw at the end of last year and how you’ll can continue to effectively compete with both brands?
Good question. We have not seen any abatement. And if anything, it continues at a pretty hot and heavy pace both in QSR and in full service casual theme. That's one of the reasons we’re really excited about our April rollout of the $3 and $5 price points, which we’re calling our West Coast Double and our West Coast Double Combo. And it’s a taste profile that’s very similar to the in-and-out product which we don't currently have in our menu, but it's a really great burger and it’s gone very well in tests. It is actually our third highest selling burger on the menu. But with an average check that’s approaching $7 and not really a value component at the low end, we think that mid-tier pricing is our best option to come out with a relevant price point without dumbing down the quality in anyway. In fact, it’s a very high quality product. So, on Good Times, that's really going to be our focus for the back half of the year.
On Bad Daddy’s, we continue to see discounting going on at the casual theme level. We’re still maintaining good solid growth on Bad Daddy’s. We are pretty aggressive on rotating in our chef specials and specific price points. We’ve gotten also a lot more aggressive and we've hired a local store marketing coordinator. We’re doing a lot of things at the local level that we weren’t doing last year in terms of connecting with the communities, selective promotions, we’re getting a little bit more promotional in our bar on particularly the slower nights of the week. But we really are not playing a price point game on Bad Daddy’s, which is positioned at the top end with a $17 check. And as long as we’re seeing continued growth in transactions in our same-store sales, we’re going to continue down that path.
Great. Thanks, guys. And congrats on the quarter.
Our next question comes from Mark Smith with Feltl and Company. Please go ahead.
First off, can you walk us through any changes in timing of those Bad Daddy’s opening through the rest of the year?
So, Mark, again, we’ve opened the two. We have a couple more or several more under construction. Two of them will open in Q3. And those two will open in between mid-April and mid-May, both of those. Those will be the only openings in Q3. So, then the other four to five would be Q4. So, we’re really not talking about a lot of store weeks from those final four to five openings of the year. I’d 25 store weeks combined between all those four to five final units of the year. So, we’re pretty locked in the five openings this year and then the last three being – last three or four being mid to late Q4.
Okay. And then, food costs came in better than we had expected. Sounds like you’re getting some savings on bacon, can you walk us through your thoughts on COGS through the rest of year?
Yeah, Mark. I think on the Good Times side, we’ll continue to run – Q2, the one we’re in right now, is our best quarter last year, cost of sales wise. So, we ran about, I think, 31.7 last year in Q2 and we just ran 32.2 this year. So hopefully flat to last year in Q2, which would be an improvement over what we just did in Q1 with some additional purchasing efficiencies that we’ve been able to take advantage of. In the balance of the year, again, I think we will run just a little bit ahead of last year on cost of sales for Good Times. And again, most of that probably given back and then some – a little bit on the labor line. So, Good Times margins probably will be a little bit lower than they were last year. Again, a lot of that depends on getting the 3% comp store sales at the back half of the year. On the Bad Daddy’s side, kind of really similar. We had nice cost of sales improvement versus last year and we will continue to see that, the balance of fiscal 2017 being better than last year with again the wage rates in Colorado causing labor probably to be a little bit higher than last year. But I would say Bad Daddy’s would be pretty flat margins, maybe a little bit improvement when you get to the end of the year over fiscal 2016 for the full year.
And then last, can you just walk through your average weekly sales at Bad Daddy’s as we see the comp up with those average weekly sales down a bit? Maybe walk us through how much of that is new restaurants opening at maybe lower volumes versus anything else happening that point that number down a bit?
Based on the previous group of questions, again, just comparing Q1 2016 to Q1 2017, and extrapolating that based on 2% comps and knowing that the rest of the average volume declined would be from – again from the new units being slightly lower, that kind of is what kind of gets you to around $2.3 million annualized volume and keep in mind that Q1, from a seasonality perspectives, anywhere from 7% to 10% less than the average quarter. That’s what we saw last year Q1 was right at 7% less than the average weekly sales for the year. We would anticipate that to be very similar this year. So, again, keep that in mind when you're looking at the weekly sales and trying to extrapolate that for the full year.
You called that weather a little bit on Good Times. Did you see as far as the Bad Daddy’s in Colorado the same impact here in this quarter?
Yeah. It’s a little less impactful to Bad Daddy’s than it is to Good Times. We had in the first quarter, it wasn’t snow, but it was a hurricane down in North Carolina that ended up delaying Fayetteville. But in Colorado, when we get really severe weather, yeah, it is impactful, but relatively inclement weather as long as people can drive around. Bad Daddy’s is not as impacted as heavily seasonally as Good Times is. Some of that is driven by the fact that Good Times, at a lot of our stores, the only seating is in our outdoor patios and that, obviously, goes away when the weather turns nasty. It’s going to be 75° here tomorrow. So, we’re going to have a big Good Times day.
Excellent, thank you.
[Operator Instructions] Our next question comes from Jeremy Hamblin with Dougherty & Co. Please go ahead.
Hi. This is actually David Burdick on for Jeremy. Thanks for taking my questions. Just wanted to touch on those new units for the year. Just was hoping to get a little more color on where you are in discussions on the remaining leases and when those need to be signed, so they are able to open by September?
Yeah. So, we’ve got – beyond the three that are actually under construction right now, we’ve got two leases that have been signed and signed for quite a while in Charlotte and that's really not driven by signing of the leases. We’re waiting – those are new lifestyle center developments and we’re just waiting on the turnover of those. So, that really dictates the timing of those. We're probably finalizing – we’re going to be ready to execute our first lease in Atlanta and in Oklahoma next week. And one of those is – shelves is already constructed, so there's no waiting on that development. The other one also is probably 80% of the way there. So, we’re confident that that’s going to be delivered on time and we’ve got plenty of time for our permitting and licensing to get those done. And then we’ve got one other one that will be in either Nebraska or Oklahoma as well and we’re past the tenth stage on that negotiating final lease. So, given that it's mid-February, we’re coming up on mid-February. We've got plenty of time to be able to get those open this year. The challenge has been – and those two Charlotte ones are good examples where we've had those leases signed for quite a long time. And the developer has now twice set back their delivery dates just because of their construction is behind. So, as I mentioned, moving into 2018, we’re just going to be factoring that in a lot more proactively on any new developments and not counting on the initial delivery date, but really planning something later than that. But those are where we are right now. We've got the three that are under construction. One of those is in Raleigh, which will be our third store in Raleigh, and the other two are in Denver, one of which is up in Northern Colorado and one is right here in core Denver [ph].
Okay, great. Thanks. And then, I know in the past, you’ve spoken about maybe some opportunities for some labor improvements. Just wondering, can you explain where you are – where you see those opportunities, where you are in implementing those opportunities and maybe what we should expect?
Sure. So, those really largely exist on the Bad Daddy’s side. Good Times, we run really efficiently on that side and really now it's a matter of offsetting the average wage increase through the minimum wage hikes. On the labor side, on Bad Daddy’s, we continue to make some progress there. And in addition to the cost of sales line where we’ve got some purchasing efficiencies that Mark was asking about, we've been working on simplifying some of the back of the house processes as well as our production line on the Bad Daddy’s. Some of that is through – will be a little bit offset on the cost of sales side as we change some of the products we’re bringing, but we’re anticipating some continued incremental improvement on the labor line. One of the biggest impacts on the labor line as well, we carve out a lot of our training. We still have some excess labor that we carry at the stores in terms of having full five and six-man management teams in most of the stores. As we get the market built out here in Colorado and get that fully rationalized, we will see a little bit more labor improvement at the store level from that as well.
Okay, great. Thanks, guys. And best of luck.
We have no further questions in the Q&A line. At this point, I would now like to conclude today's conference. Thank youfor joining the presentation. You may now disconnect.
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