Good Times Restaurants Inc. Q3 FY2025 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Good Times Restaurants, Inc. Fiscal 2025 Third Quarter Earnings Call. I am Keri August, the company's Senior Vice President of Finance and Accounting. 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 laws. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements involve known and unknown risks, which may cause the company's actual results to differ materially from the results expressed or implied by the forward-looking statements. 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 disruption to our business from pandemics and other public health emergencies; the impact of staffing constraints at our restaurants; the impact of supply chain constraints and inflation; 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 or other reasons; increased competition; cost increases or ingredient shortages; general economic and operating conditions; risks associated with our share repurchase program; risks associated with the acquisition of additional restaurants, adequacy of cash flows and the cost and availability of capital or credit facility borrowings to provide liquidity; changes in federal, state or local laws and regulations affecting our restaurants, including wage and tip credit regulations; and other matters discussed under the Risk Factors section of Good Times' annual report on Form 10-K for the fiscal year ended September 24, 2024, and other reports filed with the SEC. During today's call, we will discuss non-GAAP measures, which we 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 our Chief Executive Officer, Ryan Zink.

Thank you, Keri, and thank you all for joining us today. Results during our third fiscal quarter were a mixed bag with notable sequential improvement in same-store sales at Bad Daddy's and a 10 basis point improvement in restaurant level operating profit. At Good Times, however, same-store sales performance and restaurant level profitability declined sequentially compared to the second quarter. As we announced in our earnings release, we've hired a new marketing leader for the company, Jason Murphy, who brings with him a strong pedigree in restaurant marketing. Jason will be responsible for leading all advertising and promotion strategy and execution at both brands, including menu, point-of-purchase materials and our online ordering experience, in addition to all channels of media and advertising. Welcome aboard, Jason, no pressure. Same-store sales at Good Times improved sequentially in July, though still down mid-single digits year-over-year. From a product and service execution standpoint, Craig Soto, our Director of Operations for Good Times, has made significant improvements to our operations in the past two months, including bringing us much closer to cook to order, rolling out the new burger builds we discussed on last month's call and making high-impact adjustments to schedule expectations so that our restaurant general managers are present during more of the high revenue shifts of the business. Craig successfully implemented our Fried Ice Cream limited time offer, which has been the most successful new product we've launched in several years as measured in units sold. While our competitors are highly focused on discounting, we continue to focus on our quality positioning. Having not taken price since January of 2024, we are now roughly in parity with pricing to our competitors outside of discounted menu offerings, against the historical backdrop of being generally priced at up to a 10% premium to those competitors. We increased pricing by approximately 1% in a subset of our stores on August 1 and are measuring traffic impact prior to increasing across the entire system. Intuitively, we believe that we have the ability to take price without significant traffic erosion beyond the trends we are already seeing. Historically, discounting has preserved sales but at the expense of restaurant level margins, and that history continues to guide our overall pricing and menu strategy. Additionally, as mentioned in our earnings release, we will be launching a new campaign centered around Colorado Native Burgers with refreshed digital assets, including web and mobile app, new digital advertising and an outdoor advertising campaign that will launch later this month. With respect to Bad Daddy's operations, I was again pleased with our controls during the quarter as we have continued to manage food and beverage costs well in spite of limited net incremental menu price year-over-year. Our $8 Bad Ass Margarita promotion has performed well throughout the summer with an increase in beverage incidents per guest. We continue to build additional sales, but are yet to a point where we're margin accretive on those incremental beverage unit sales. Similar to Good Times, we've not taken significant overall blended menu price and are sitting on less than 2% year-over-year food price, which has then mostly been offset by the discounted pricing of the Bad Ass Margarita. Both concepts are facing record high ground beef prices in the fourth fiscal quarter. And as with Good Times, we are considering incremental menu price to offset the input cost inflation. Sales at Bad Daddy's were choppy during July with the concept experiencing mid-single-digit negative comps during the first three weeks of the month before a recent modest improvement. Our upcoming fall product promotion features a return of a guest favorite, the Bratwurst Burger, and we're introducing a giant shareable Bavarian pretzel served with a house-made sauce trio of Jalapeño Cheddar, Sam Adams' Octoberfest Beer Cheese and Whole Grain Dijonnaise. Despite the headwinds, both brands continue to provide a differentiated product compared to those offered by our competitors in the market. Our restaurant operations at both concepts are delivering a better guest experience, both in product and service than at any time during the past several years, and I'm confident in the work that our operators are doing at both Bad Daddy's and Good Times. We anticipate that the additional professional marketing experience we have added to the team will result in strong communication of each brand's story to our guests and ultimately drive incremental sales and traffic for both concepts. I will now turn the call over to Keri for a review of our performance during the quarter and some perspective on the company's financial initiatives.

Thank you, Ryan. I'll now review this quarter's results. We'll start with Bad Daddy's results. Total restaurant sales decreased $0.8 million to $26.5 million for the quarter. The sales decrease is primarily due to the fourth fiscal quarter 2024 closure of one Bad Daddy's restaurant, reduced customer traffic and a negative mix shift attributable to the success of our Smash Patty burgers, partially offset by menu price increases. Our average menu price during the quarter was 3.8% higher than Q3 of 2024. Same-store sales decreased 1.4% for the quarter with 39 Bad Daddy's in the comp base at quarter end. Food and beverage costs were 30.6% for the quarter, a decrease of 60 basis points from last year's quarter. The decrease is primarily attributable to lower purchase prices, mainly for chicken wings and potatoes compared to our prior year quarter and the impact of a 3.8% increase in menu pricing, partially offset by increased ground beef costs. After a slight drop in the first two months of the quarter, beef prices again increased during the last month of the quarter and costs remained elevated over the prior year. Due to the continued tightening of beef supply, we anticipate ground beef costs will continue to increase throughout the remainder of fiscal year 2025. Labor costs increased by 50 basis points compared to the prior year quarter to 34.3%. This increase is primarily attributable to decreased labor productivity resulting from the deleveraging impact of lower sales. Occupancy costs were 6%, a decrease of 30 basis points from the prior year quarter, primarily due to decreases in noncash rent for the locations with impaired right-of-use lease assets. Other operating costs were 14.7% for the quarter, an increase of 30 basis points, primarily due to increased utilities, technology-related fees and menu printing, partially offset by decreased customer delivery fees. Overall, restaurant-level operating profit, a non-GAAP measure for Bad Daddy's, was approximately $3.8 million for the quarter or 14.4% of sales compared to $3.9 million or 14.3% last year due to solid cost controls throughout the quarter. Moving over to Good Times. Total restaurant sales for company-owned restaurants decreased approximately $0.1 million to $10.4 million for the quarter compared to the prior year third quarter. Same-store sales decreased 9% for the quarter with 27 Good Times restaurants in the comp base at quarter end. The average menu price for the quarter was approximately the same as the prior year quarter. Discounting activity continues in the QSR and in particular, burger QSR segment, but recent pricing surveys have indicated that our most direct competitors in Colorado have begun to increase prices on non-discounted items, providing some flexibility for limited price increases during the last quarter of the fiscal year. Food and packaging costs were 31.5% for the quarter, an increase of 100 basis points compared to last year's quarter. The increase is primarily attributable to higher purchase prices for ground beef and eggs compared to the prior year quarter without the benefit of any price increase, partially offset by savings in potato pricing. As is the case with Bad Daddy's, based upon current commodity forecast, we expect ground beef costs to continue to increase throughout the remainder of fiscal year 2025. The cost of eggs, which are a component of each of our breakfast entrees, eased during the quarter, but prices are still well above prior year. Macroeconomic and political forces continue to cloud visibility into the magnitude and direction of commodities further into the future. Total labor costs increased to 34.2%, a 150 basis point increase from the 32.7% we ran during last year's quarter, mostly due to higher average wage rates resulting from market forces and the CPI index minimum wage in Denver and the State of Colorado as well as decreased productivity resulting from the deleveraging impact of lower sales. This was partially offset by reduced restaurant-level incentive compensation. Occupancy costs were 8.6%, an increase of 40 basis points from the prior year quarter, driven by the deleveraging impact of the sales decline on fixed costs. Other operating costs were 14.6% for the quarter, an increase of 260 basis points, primarily due to increased technology-related fees, repair and maintenance and restaurant smallwares and supplies. Good Times restaurant-level operating profit decreased by $0.6 million for the quarter to $1.2 million. As a percent of sales, restaurant-level operating profit decreased by 530 basis points versus last year to 11.2% due to elevated costs throughout the P&L. Combined general and administrative expenses were $2.2 million during the quarter or 5.9% of total revenues, which decreased 120 basis points from the prior year quarter. We expect to run between 6% and 7% general and administrative costs on a full year basis for fiscal 2025. Our net income to common shareholders for the quarter was $1.5 million or income of $0.14 per share versus net income of $1.3 million, $0.12 per share in the third quarter last year. There was income tax benefit of approximately $0.4 million recorded during the current quarter versus an income tax benefit of $0.2 million in the prior year quarter. Adjusted EBITDA for the quarter was $2.2 million compared to $2.4 million for the third quarter of 2024. We finished the quarter with $3.1 million in cash and $2.3 million of long-term debt. We repurchased 21,968 shares during the quarter under our share repurchase program. Our share repurchase program continues to be active, but we expect significantly reduced purchases as our focus will remain on cash accumulation for the remainder of the fiscal year. We incurred $0.2 million of CapEx during the third fiscal quarter related to our restaurant remodel and signage projects. And now I will turn the call back to Ryan.

Thank you, Keri. Jim, we can open the call for questions at this time.

We'll take our first question today from the line of William James.

The CapEx for the quarter in the Q says it's $469,000. My question was, are we entering a phase where the EBITDA could roughly be running $2 million, $2.2 million a quarter and maybe maintenance CapEx at $0.5 million and then the investment CapEx is another discussion.

I think it's important to understand that we are currently in our higher indexing quarters. The $2.2 million for this quarter is one of the highest amounts we'll see throughout the year. We're not offering forward guidance on EBITDA, as we usually don’t do that. However, regarding CapEx, Keri mentioned that the specific restaurant remodel CapEx is about $200,000. Typically, we budget around 1% of sales for maintenance CapEx, and this is something we've shared in previous calls. If you look at the last 12 months of EBITDA, I would suggest using that as a framework for projecting free cash flow, which I believe is your goal here. To reiterate, we intend to allocate about 1% of sales for maintenance CapEx. We're being more cautious with our special project CapEx as we aim to accumulate additional cash. We still have an interest in share repurchases, especially given the current low stock price, but our primary focus is on building up our cash reserves. This will provide us with flexibility for debt repayment, potential share repurchases, or new store development. More specifically, we have some projects at both concepts that we're planning to invest in during fiscal 2026.

Okay. And would that be more investment CapEx that would just be at the existing store level? Or would that be like new builds?

I think we want to keep our options open for new units for either concept, rather than both. However, we also want to finish our remodels at Good Times. Additionally, we have some technology projects at Bad Daddy's, particularly the replacement of our old point-of-sale system, which we aim to complete during fiscal 2026.

Okay. So the internal investment CapEx hurdle rate or IRR for existing restaurants, would that be like north of 20%, do you think?

When you mention north of, are you referring to investment CapEx, and what is our hurdle rate for new unit CapEx? Is that what you mean?

I know like maintenance CapEx, you have to do it, but choosing to do an investment CapEx, what kind of rate of return would you be looking at for investment CapEx at the existing restaurant level, not a new build?

I believe that some of the special project capital expenditures are necessary. For example, with the new unit capital expenditures, we aim for a return rate of at least 20%. However, for certain special projects, such as replacing the point-of-sale system, there isn't a specific internal rate of return threshold since the legacy system must eventually be updated. This type of maintenance capital expenditures tends to be irregular, occurring every 5, 7, or 10 years, rather than annually. Regarding remodel capital expenditures, we feel confident that they are yielding a strong return on investment. Additionally, some of these expenditures, particularly for signage, are necessary, as the old signs need to be replaced.

And our next question from the phone lines today will come from Sanjay Raaga.

I think you mostly answered a couple of my questions from the previous question. But the Good Times concept, the kind of underperformance in the third quarter. Can you elaborate a bit on that? Are there specific issues you've identified? Or I mean, what kind of caused that underperformance?

There are several factors at play, and it’s challenging to determine the impact of each one. One of our competitors announced their earnings yesterday. While they don’t have many stores in Colorado, they do have numerous restaurants in California. They mentioned macroeconomic factors affecting their business that we also believe are impacting us, related to demographics and geography. We think there is some truth to that. Furthermore, major competitors like McDonald's, Wendy's, and Burger King are investing significantly in marketing and offering heavy discounts. Those brands are largely franchised, and from a franchisor's viewpoint, it's crucial to maintain sales. We run all but three of our locations, so profitability at the unit level is equally important for us. As a result, we've opted not to engage in heavy discounting but instead to focus on preserving margins as much as possible. We're exploring ways to deliver value, which includes pricing strategies and enhancing our brand communication and advertising, all without resorting to significant discounts that are difficult to sustain profitably given our food costs. I'm not sure if that fully addresses your question, but that’s the best way to explain our position.

Okay. Yes, that's good. Okay. And I believe you mentioned that you're focusing more on cash accumulation at this stage. Do you have a plan on sort of when you think you'd be able to accelerate the share repurchases given the current share price?

I think we will continue to buy shares very selectively. However, if we're going to accelerate the repurchase, it will likely be in fiscal 2026 and possibly into the second quarter of that year before we truly ramp up purchases under that program. However, this is subject to change based on overall macro factors and our internal forecasting as the current fiscal year and the first quarter of the next fiscal year progress.

Okay. In your response to the previous question, I didn't fully understand your point. You mentioned special projects for fiscal 2026 for both concepts. Could you elaborate on that a bit? I didn't quite grasp that part.

Yes. In terms of special projects, we have identified two key initiatives. First, we are nearing the completion of our remodel and signage project at Good Times, which has been in progress for three years. Last fiscal year, we upgraded the point-of-sale system at Good Times, but we still need to implement that at Bad Daddy's, which is part of our capital plan for 2026. Additionally, we continue to explore new unit opportunities for both brands. The financial performance of Good Times will significantly influence any potential development there. The real estate market appears to be opening up, with landlords more willing to negotiate on terms, including lower tenant improvements and rents, which has created new opportunities for Bad Daddy's development. We want to ensure we have the necessary capital available to pursue these projects as they arise.

And that is all the questions that we have in our queue today. Mr. Zink, I'm happy to turn it back to you, sir, for any additional or closing remarks.

Thanks again, Jim. Our continued vision for both brands is to provide elevated experiences through high-quality execution and value perception delivered not just by low price, but by quality and service and reflects our focus on a guest-first mindset. I sincerely want to thank all the members of our team, both leaders and their team members for their commitment to delivering memorable experiences for all of our guests. Thank you all for joining us today.

Ladies and gentlemen, this does conclude the Good Times Restaurants Fiscal Year 2025 Third Quarter Earnings Conference. We thank you all for your participation, and you may now disconnect your lines.