Good Times Restaurants Inc. (GTIM) Q4 2022 Earnings Call Transcript

Good afternoon, ladies and gentlemen. Welcome to the Good Times Restaurants Inc. Fiscal 2022 Fourth Quarter Earnings Call. By now, everyone should have access to the company's earnings release, which is 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 law. 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. Such risks and uncertainties include, among other things, the market price of the company's stock prevailing from time to time, the nature of other investment opportunities presented to the company, the company's financial performance and its cash flows from the operations, general economic conditions, which could adversely affect the company's results of operations and cash flows. These risks also include such factors as a disruption to our business from the COVID-19 pandemic and the impact of the pandemic on results of operations, financial condition and prospects, which may vary depending on the duration and extent of the pandemic and the impact of federal, state and local governmental actions and customer behavior in response to the pandemic; the impact and duration of staffing constraints at our restaurants; the uncertain nature of current restaurant development plans and the ability to implement those plans and integrate new restaurants; delays in developing and opening new restaurants because of weather, local permitting and other reasons; increased competition; cost increases or shortages in raw food products; supply chain and inflationary factors due to the unknown impacts of the war in Ukraine; and other matters discussed under the Risk Factors section of Good Times' annual report on Form 10-K for fiscal year ended September 27, 2022, filed with the SEC and other filings with the SEC. 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, Emma, and thank you all for joining us on the call today. You should have access to our earnings release and our annual 10-K filing. We are pleased to report growth in same-store sales at both of our brands this year while managing ongoing labor and product shortages, rising costs, and unpredictable consumer behavior in a highly inflationary environment. This year marks a record sales achievement for Bad Daddy's for the third consecutive year and growth in same-store sales at Good Times. While we are not satisfied with the company's profitability this year, we prioritize product quality and customer satisfaction over short-term profit increases. Our focus has been on organic growth and boosting customer traffic in our existing restaurants, with our investments reflecting this aim. Last November, we implemented new online ordering experiences at both brands, including a revamped web interface at Bad Daddy's, the introduction of online ordering at Good Times, and mobile apps for both brands. Sales through these platforms have seen consistent growth. Digital sales, which include orders from our delivery partners, surpassed 10% for the Good Times concept in the fourth quarter. At Good Times, we rely heavily on orders from delivery partners, and our 2023 goal is to drive more traffic to our own platforms and increase direct digital orders. Shortly after the fiscal year ended, we finished installing digital menu boards and modern lane timers at all company-operated Good Times restaurants. By the end of the fiscal second quarter, we expect nearly all of our Colorado-franchised locations to have the new menu boards installed, which are crucial for modernizing the Good Times brand. We recently started using a new signage package at Good Times, and we aim to complete at least one-third of the system this year. Back in late 2019, we streamlined the menu at Good Times while still offering a variety of products to enhance our kitchen efficiency and order accuracy. We continue to feature seasonal and monthly burgers while maintaining a focused menu. Our menu optimization is aimed at improving labor efficiency to counter rising labor costs while ensuring better product delivery to our customers by providing fresher and hotter burgers and fries at a quicker pace than competitors. We are pleased with the sales growth at Bad Daddy's, along with customer retention and traffic counts, reporting 3.7% same-store sales growth with a 5.7% average price increase during the quarter. The estimated 2% traffic decline is much better than the casual dining benchmark from Black Box Intelligence. At Bad Daddy's, digital sales account for about 23% of our total sales, and off-premises sales make up approximately 27% of our restaurant sales. Sales through third-party delivery services have remained consistent even as more customers return to dine in. Third-party delivery sales represent around 15% of our orders. We provide delivery through our own online ordering and app platform, and similar to our approach at Good Times, we are looking for ways to encourage traffic from aggregators to direct ordering. We are dedicated to high levels of customer service, with our primary focus on delivering exceptional burgers with unmatched customization. During the early stage of the pandemic and beyond, we simplified our menu at Bad Daddy's. Since then, we have reintroduced seasonal chef specials to drive additional visits and promote higher-margin products while keeping our kitchens efficient and productive. Looking ahead to 2023 and 2024, we plan to expand Bad Daddy's, with one lease already signed in Greater Huntsville, Alabama, set to open in the fourth fiscal quarter of 2023, and additional sites being explored in Birmingham and Raleigh, as well as other markets. This year has seen compressed restaurant margins, which we anticipate will continue into the first quarter or first half of fiscal 2023 due to an 8% minimum wage increase in our Colorado restaurants. While wage rate inflation has been significant, our operators have managed productivity effectively to limit labor cost increases. We faced challenges with cost of sales, especially with high chicken breast prices in the last quarter, which have only recently begun to decrease but remain high. Beef and bacon prices were also elevated in the fourth quarter but have shown some moderation as we enter the first fiscal quarter of 2023. Overall, rising delivery costs, particularly at Good Times, along with increased repair and maintenance costs across both brands, have contributed to margin compression. Moving traffic to our direct purchasing platforms is one of several strategies we are implementing to mitigate the impact of costly delivery aggregator fees. The current inflationary climate has led other restaurant groups to reconsider or downscale their development plans. Over the past year, we have focused our capital investments where we expect the best asset returns and predictable cash flow, including acquiring previously franchised Bad Daddy's restaurants and investing in our existing locations. We have also continued our stock repurchase program, purchasing 316,000 shares during fiscal 2022, and we are maintaining this program in fiscal 2023. A saying that has circulated on LinkedIn suggests that while restaurant jobs have always been challenging, more people are starting to acknowledge this reality. This saying likely extends to the industry as a whole, which has always faced significant challenges. Restaurant companies and concepts often deviate from their core strategies and risk compromising what sets them apart. We are committed to staying the course and are confident in our positions within both market segments we operate. We will continue to enhance our brands by creating excellent experiences tailored to our customers, thoughtfully expanding our presence, and recognizing the hard work of our team members and leaders who contribute to building brand equity for Good Times and Bad Daddy's. I'll now hand the call over to Matthew to discuss this quarter's results.

Thank you, Ryan. Total revenues rose 5% to $35.2 million for the quarter. Total restaurant sales increased by $1.7 million to $34.9 million for the quarter. Sales at Bad Daddy's restaurants grew by $1.5 million to $26 million for the quarter, driven by average menu price increases throughout the year, strong off-premise sales, and high demand for in-person dining. Same-store sales were up 3.7% during the quarter, with 38 Bad Daddy's in the comp base at quarter-end. Cost of sales at Bad Daddy's reached 32.8% for the quarter, representing a 170 basis point increase from the same quarter last year, largely due to higher food and packaging costs influenced by inflation and supply chain pressures. Labor costs at Bad Daddy's decreased by 110 basis points compared to the prior year quarter, bringing it to 33.2% for the quarter. This reduction as a percentage of sales was attributed to improved productivity and lower incentive compensation at the unit level, stemming from decreased restaurant-level profitability. Occupancy costs at Bad Daddy's decreased by 20 basis points to 6.4%, primarily due to leveraging higher sales. Other operating costs at Bad Daddy's were 14.7% for the quarter, an increase of 170 basis points, mainly driven by higher spending on repair and maintenance, restaurant technology costs, utilities, and restaurant supply costs. Overall, restaurant-level operating profit for Bad Daddy's was approximately $3.4 million for the quarter, amounting to 12.9% of sales compared to $3.7 million or 15% last year. This decline is largely due to increased costs associated with sales and other operating expenses. Sales at Good Times were $8.9 million, a rise of $0.2 million, resulting from 5.9% comp sales, which were partially offset by the closure of one restaurant earlier in fiscal 2022. Food and packaging costs for Good Times were 32.3% for the quarter, up 430 basis points from the previous year's quarter, due to significant inflationary pressures on food and packaging materials, mainly beef, bacon, and oil-based products, along with the effects of last year's unusually low costs for our all-natural beef. Total labor costs for Good Times decreased to 31.9% from 32.5% in the prior year quarter, largely due to improved unit-level productivity. Occupancy costs at Good Times were 7.8%, reflecting a slight increase of 10 basis points from the previous year due to increased property tax assessments. Other operating costs at Good Times were 12.7% for the quarter, representing an increase of 270 basis points, primarily because of additional delivery service charges linked to a higher mix of delivery sales and increased repair and maintenance costs during the quarter. Good Times' restaurant-level operating profit decreased by $0.5 million for the quarter to $1.4 million. As a percentage of sales, restaurant-level operating profit fell by 600 basis points from last year to 15.3% due to the higher costs previously discussed. Combined general and administrative expenses amounted to $2.8 million for the quarter, accounting for 8.1% of total revenue. This reflects an increase of $0.5 million compared to the previous year quarter, primarily driven by higher legal fees, training expenses, regional costs, and home office salaries, partially offset by lower underwriting losses related to the self-insured employee healthcare plan and costs linked to our tender offer in the fourth quarter of 2021. We recorded an impairment of long-lived assets of $1.4 million during the quarter for one Bad Daddy's restaurant in the Atlanta market. No impairment costs were noted in the prior year quarter. Our net loss attributable to common shareholders was $1.3 million or a loss of $0.10 per share, compared to income of $1.3 million or $0.10 per share in the fourth quarter of last year. For the full fiscal year, our net loss to common shareholders totaled $2.6 million or a loss of $0.21 per share, compared to income of $16.8 million or $1.32 per share in the previous year-to-date period. Adjusted EBITDA for the quarter was $0.8 million, down from $2.5 million in the fourth quarter of 2021. For the year-to-date period, adjusted EBITDA was $4.8 million compared to $9.6 million for the same period in fiscal 2021. We ended the quarter with $8.9 million in cash and no long-term debt. I am also pleased that we continue to see growth in same-store sales for both brands, and we are committed to investing in our restaurants, our employees, and our customers. I will now pass it back to Ryan.

Thank you, Matthew. Emma, at this time, we can open the call for questions.

Your first question comes from the line of Brian London.

I was curious if you could provide some general insights on the traffic trends for both brands. Over the years, I've observed many restaurants and noticed that while prices have gone up, traffic has been on the decline, a trend I noticed even before the pandemic. If detailed information is unavailable, any general impressions would still be appreciated.

Certainly, Brian. As I mentioned during my prepared remarks, in the fourth quarter, we experienced a traffic decline at Bad Daddy's of about 2%, while the pricing increased by approximately 5.7%. We didn't elaborate much on this in the prepared remarks, but our pricing strategy for Bad Daddy's remains unchanged. We've previously stated in our filings that we aim for modest price increases. Based on recent CPI data, particularly for food away from home, full-service dining saw an increase of 8.0% in November, while our price adjustments have been lower. Our approach is to prioritize customer satisfaction, which is reflected in our increased cost of sales for Bad Daddy's. Generally speaking, price increases in the fast food segment have been higher. However, the latest CPI figures showed these increases to be slightly less than in full-service dining. At the Good Times concept, we have increased prices a bit more, although we've noticed a slight traffic decline there, and we're allowing this data to guide our future decisions. The main challenge we're facing at Good Times and at 12 of our Colorado Bad Daddy's restaurants is the increased labor costs driven by the higher minimum wage, which will increase by 8% in January 2023 due to CPI adjustments. This is a significant consideration for us. I share your concerns, as I've observed that some restaurant companies have raised prices too quickly, which can be unsustainable for customers, and that is a critical factor in every pricing decision we make.

There are no further questions today. Ryan, I turn the call back to you.

Thanks again, Emma. Pressing on into 2023, we're excited about the future for each of our brands and for our company as a whole. With a strong balance sheet, relevant concepts as demonstrated by the strong sales and an amazing group of leaders at all levels of the team, we're poised to continue to create greater value for shareholders. My thanks and appreciation go out to the entire team who take care of their customers. That's whether those customers are visiting in the restaurants or their internal customers who are cared for by individuals here at our home office. With that, we will conclude today's call. I thank you all for joining us today, and I wish you all a safe and happy holiday season.

Thank you for attending today's conference call. You may now disconnect.