Good Times Restaurants Inc. (GTIM) Q3 2021 Earnings Call Transcript

Good afternoon, ladies and gentlemen. Welcome to the Good Times Restaurants Inc. Fiscal 2021 Third Quarter Earnings Call. By now, everyone should have access to the company's earnings release and 10-Q filing, which are available in the Investors section of the company's website. As a reminder, a part of today's discussion will include forward-looking statements within the meaning of federal securities laws. 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. 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, including risks related to the COVID-19 pandemic. 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. And now, I would like to turn the call over to Ryan. Please go ahead, sir.

Thank you, Paul. And thank you all for joining us on the call today. We are pleased with the performance of both brands this quarter. The solid financial performance we reported doesn't fully do justice to the incredible efforts of our restaurant teams executing each of our concepts daily. As restrictions on dining rooms have eased, we have been met with other challenges stemming from a tight labor market in the overall economy that have affected both of our concepts. This tight labor market has resulted in elevated wage rates at both brands, as we strive to compete for talent and create an environment where our restaurant level compensation is rewarding and meaningful for our managers and team members. At our Good Times brand, we primarily focused on wages as a method of attracting hourly team members with a 10% increase in the average wage compared to the prior year. Whereas at Bad Daddies, we've implemented a multi-pronged approach including limited-time retention bonuses, an hourly employee holiday bonus program, as well as our increased wages to fairly reward employees in both tipped and non-tipped roles. Our back-of-house wage rate is up approximately 8% versus the prior year. And we expect this tight labor market to continue for some time. Yet despite the challenges in the external environment, we continue to focus on speed, accuracy, and consistent execution at our Good Times drive-thru restaurants. We believe that this has helped us to retain near prior year volumes, rolling over the closure of indoor dining in Colorado last year. We firmly believe that speed is a competitive advantage for us that's created repeat customers and long-term loyalty that we expect to stay with us. Our ongoing strategy is to further improve upon speed, consistently executing in a way that builds a solid reputation and strong association with customers between speed of service and Good Times. We've managed operating hours similarly to the prior year, in spite of staffing challenges, and we look to strategically increase those operating hours when there's greater capacity in the labor markets. Our hours of operations continue to be reduced compared to 2019 levels at Good Times. At Bad Daddies, we are operating with a menu that we believe is appropriately sized for our concept. Our menu is modestly smaller than it was pre-pandemic; however, compared to many competitors who significantly reduced their menus, our menu rationalization has been targeted around our assessment of customer demand. We don't expect to expand our menu from where it currently is. And in doing so, we're looking to set a long-term change in menu strategy compared to prior years. Innovation and taste and flavor will continue to play a part in the ongoing evolution of our menu. However, our greater focus is on executing our current, more compact menu exceptionally well. We continue to believe in a high level of hospitality and service at Bad Daddies and see that as a differentiator and as such focus throughout the quarter on elevating Front of House staffing. And we've seen that translate into sequentially improving comparable sales through the present. As with Good Times, we continue to operate with reduced operating hours compared to 2019. At both brands, we have developed mobile applications to enable native device-based mobile ordering, and at Good Times, we expect to be launching online ordering for the first time early in the first fiscal quarter of 2022. We continue to monitor technologies and are experimenting with alternative service models at Bad Daddies in a way to provide greater flexibility in the guest experience based on their preferences, improving the efficiency of serving our guests while at the same time not compromising the level of service and hospitality that we believe separates us from the sea of sameness in casual dining. Separately today, we issued a press release announcing that we expect to launch a tender offer to purchase up to 1,413,000 shares of our outstanding common stock at a price of $4.60 per share, for an approximate total amount of $6.5 million. This tender offer is expected to commence on August 13, 2021, or soon thereafter and remain open for 20 business days. The company expects to fund share purchases from its existing cash and cash equivalents. While we believe this tender offer to be an effective means to return capital to our shareholders, we also believe it allows those shareholders who do not participate in the tender offer to share in a higher portion of our future potential. Let's review this quarter's results. At Bad Daddies, restaurant sales during the quarter were $24.4 million, compared to $14.9 million during last year's third quarter. The increase in sales was attributable to increases in traffic as the combined on- and off-premise sales exceeded pre-pandemic levels and as we rolled over restrictions in dining capacity that were imposed during the third quarter of last year. Same-store sales increased 61% during the quarter compared to last year, and 0.7% compared to 2019 with 37 Bad Daddies in the comp base at the end of the quarter. Cost of sales at Bad Daddies were 29.7% for the quarter, a 120 basis point increase from last year's quarter, the result of a lower mix of sales through our third-party delivery services which have a higher selling price, elevated commodity prices, and increased packaging costs. During the quarter, average menu prices were approximately 3% higher than the prior year, with most of those price increases concentrated in Colorado. We recently took another 2% price increase, this increase more concentrated in the balance of the system. Bad Daddies' labor costs increased by approximately 220 basis points compared to the prior year quarter to 34.3% for the quarter. This year-over-year increase is primarily due to increased Front of House staffing levels, where the company fully opened dining rooms compared against dining room closures and limited capacity in the same quarter last year. Costs related to the hourly employee holiday pay and incentive compensation programs aimed at improving retention, as well as higher average wages paid to hourly employees contributed to this increase. Our back-of-house wage at Bad Daddies is approximately 8% versus last year. As a reminder, the cost of restaurant managers in training for existing restaurants is now included as part of restaurant labor costs, and last year's amounts have been reclassified to the current year presentation. Overall, restaurant level operating profit, which is the non-GAAP measure for Bad Daddies, was approximately $4.3 million for the quarter, or 17.8% of sales, compared to $2.3 million, or 15.4% last year. This is due to the leveraging of fixed costs on higher sales, as well as reduced delivery fees as a percent of total restaurant sales, partially offset by increased cost of sales and labor. Restaurant sales at Good Times were $9.3 million, approximately the same as the prior year, driven by a 2.9% same-store sales increase during the quarter offset by a reduced number of operating weeks resulting from the previously reported closure of one Good Times that occurred in the first quarter of the year. Same-store sales at Good Times compared to 2019 are 14.3%. Food and packaging costs for Good Times were 29.4% for the quarter, a decrease of 70 basis points compared to last year's quarter. Modest increase in input costs during the quarter were offset by higher menu pricing. Average menu price during the quarter was up approximately 4.5% versus 2020. Total labor cost for Good Times increased to 31.0% from 28.1% for the quarter last year. This increase is due to wage increases compared to the prior year, the result of comparing against salaries and wages that had been reduced during the pandemic, as well as general increases in market wages due to labor shortages. Good Times' restaurant level operating profits decreased by $0.3 million for the quarter to $2.2 million. As a percent of sales, restaurant operating profit decreased to 23.6%, due primarily to higher wage costs and rolling over some rent forgiveness that certain landlords had granted us in the prior year. General and administrative expenses were $2.5 million during the quarter, or 7.4% as a percent of total revenues. This represents an increase of $0.8 million versus the prior year quarter. G&A expenses increased versus the prior year due to increased legal and professional fees, increased costs associated with multi-unit and senior management incentive compensation, higher manager training costs, and elevated systems and technology costs. Our net income to common shareholders for the quarter was $13.6 million, or $1.04 per fully diluted share, versus net income to common shareholders of $0.2 million last year, or $0.02 per share in the third quarter last year. The current year amount includes an approximate $11.8 million gain from the forgiveness of PPP loans. For the year-to-date period, our net income to common shareholders was $16.8 million, or $1.21 per fully diluted share, versus a loss of $15.4 million or $1.23 per share for the prior year-to-date period. Adjusted EBITDA for the quarter was $3.1 million, compared to $2.4 million for the third quarter of 2020. For the year-to-date period, our adjusted EBITDA was $7.2 million versus $4.7 million for the same period in fiscal 2020. Note that adjusted EBITDA is a non-GAAP measure. Also note that the same period of fiscal 2021 had 40 operating weeks, versus 39 operating weeks in the current year period. We finished the quarter with $10.3 million in cash and no long-term debt. At the current time, we expect to primarily finance future development with cash flow generated by the business. We believe that even as we expect to open one more Bad Daddy's restaurant this year, we will continue to have a solid balance sheet. We opened our Bad Daddy's in Marietta, Georgia in early June, which is currently posting average weekly sales of approximately $45,000 per week. And our next restaurant in Montgomery, Alabama is scheduled to open during September. We expect to open approximately two new Bad Daddy's restaurants in fiscal 2022, with those likely to occur during the late second half of the year. We provided guidance of net income for the full fiscal 2021 year of between $16.5 million and $17.0 million and adjusted EBITDA between $9.5 million and $10.0 million. For fiscal 2022, in light of the pandemic, we've not provided complete financial support, but we commented that we believe our current annualized run rate net income attributable to common shareholders is approximately $4.0 million to $4.5 million. Again, we're very pleased with this quarter's results, which sets us up well for the final quarter of the year. With that, Paul, we'll open the call for questions.

Our first question today will come from Roger Lipton with Lipton Financial Services. Please go ahead.

Hi, Ryan. Just interested in the comparisons of your operating numbers from 2019, in terms of, if you have them near your fingertips. If not, we could give them another time, but our mission in the cost of goods and labor in this most recent quarter versus the same quarter in 2019; just to get an idea of how the businesses changed over a couple of years.

Yes, so I don't have those numbers at my fingertips in terms of the margin numbers. However, what I would say is I believe on both concepts, we've exceeded at least a couple hundred basis points of margin improvement on a quarter-to-quarter basis on a two-year look back. I think what's more important kind of from a go-forward basis is that these metrics are more in line with what we expect for the future. Although certainly, there are cost pressures that other restaurant companies are experiencing as are we, I think we feel confident that we'll be able to manage cost of sales reasonably well with menu pricing, and we think that our menu pricing is competitive, and actually, in the Bad Daddies system, I think we feel like we've got a little bit of room for additional price; we've been purposefully, I wouldn't say slow, but controlled in many price adjustments. I think labor is the challenge, and that is kind of a function of rate driven by the lack of supply of talent in the market. But kind of to your point, I think what you've seen is meaningful improvement versus our financials prior to the pandemic. And we have learned a lot about how to manage our business more effectively and efficiently compared to 2019 and before.

Okay, well, that's the hope. So it sounds that way. One last question, what's the off-premise percentage at Bad Daddies, and how's that changed over the last couple of years?

So during, obviously when we were completely shut down during the third quarter last year, we went to 100% mix. As on-premises returned, our sales of off-premise have remained strong. And we still have in terms of all methods of off-premise, which currently include customer pickup, delivery through the aggregators, and we also offer delivery through our website, which is managed through third parties. All of those combined, we were running high 20% almost 30% mix in off-premise.

And how much roughly what might it have been running a couple of years ago?

We were running 12% to 14% off-premise in 2019.

And our next question will come from William James with Maher Investment. Please go ahead.

Hi, Ryan, just going forward with regard to Bad Daddies. The CapEx involved in opening up a new Bad Daddies divided by the run rate EBITDA at the restaurant level. Is the payback going to be running 3 to 3.5 times, do you think?

Yes, I mean, I think the way we look at that is our model calls for an investment net of landlord contribution of approximately $1.3 million. Currently, we've seen some increase in construction costs due to tightness in the market just like everything else. And operating profits of high teens, 16% to 17% on our target, we can generate restaurant level cash flow of approximately $400,000, so just shy of three times or a three-year payback, just shy of that.

Great. Do you think the idea of going forward would be to keep the balance sheet just clean and to just take all the excess cash flow and put them in these time paybacks of Bad Daddies?

Yes, I think our approach from a growth perspective is primarily focused on Bad Daddies. As I mentioned, I think our intent is to finance Bad Daddies development primarily through cash flow, not to incur a meaningful amount of debt, and to, as you say, keep a rather clean balance sheet. That's our aim as it pertains to development.

And Ryan, you guys have really brought a refreshing pragmatic management to this company; it is just outstanding to see the EBITDA finally materialize in the restaurant margins at the operating level materialize, just so terrific job.

Thank you. I appreciate that.

Our next question will come from an unidentified source. Please go ahead.

Hi, how are you? Thanks for taking my question. I guess I had two questions. One was, do you project that your restaurant-level margins are going to kind of maintain the current run rate with the increase in costs but also by the normalization of demand?

So I think the best way to answer that is long-term we do believe we'll be able to manage that. I think there may be some short-term volatility, in light of some of the extreme pressure that everybody is seeing in the market right now that we expect to continue, at least through the end of the fiscal year. I think there’s the potential for it to continue through the end of the calendar year. But I do believe that long term, we believe that we'll be able to achieve these margins. But again, I think short term, there will be some volatility.

Okay, thank you. And then my other question was, you know, obviously, the normalization has occurred more recently, and these things can take some time to develop in your restaurant. But how do you foresee kind of longer-term, maybe three to five years out, the ability to grow?

Yes, I mean, I think the best way to explain that because we're not really providing firm guidance either for next year or on a three to five-year basis. But I would say that I think our expectation is that the lion's share of growth would come from the Bad Daddy side of the portfolio. And there's a good chance that development primarily comes from a company-owned model. However, I think there's also the possibility that we could explore a combination of company and franchise-owned models in the future.

Okay, thank you.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Ryan for any closing remarks.

Thanks, Paul. As we've entered the homestretch for our fiscal year, we continue to develop a culture in both of our concepts that we believe will enable us to effectively compete in the labor market for high-quality, talented individuals that share our values. The staffing market in our industry is currently as challenging as it has ever been, and I could not be more proud of the restaurant general managers and therefore management teams at both of our brands. As we continue to execute, those brands continue to build an organization that creates loyal guests at Good Times through convenience and a better fast-food platform, including all-natural beef and chicken, and at our Bad Daddy's brand through genuine hospitality, delicious scratch-made burgers, and salads in an all-inclusive environment. I could not be more proud to be part of a team with more than 200 restaurant capability leaders; we have more than 2,000 total employees that each day come to work to create great experiences for our customers. With that, we will conclude today's call. I thank you all for joining us today.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.