U.S. Markets close in 3 hrs 48 mins

Edited Transcript of GTIM earnings conference call or presentation 13-Dec-18 10:00pm GMT

Q4 2018 Good Times Restaurants Inc Earnings Call

GOLDEN Jan 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Good Times Restaurants Inc earnings conference call or presentation Thursday, December 13, 2018 at 10:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Boyd E. Hoback

Good Times Restaurants Inc. - President, CEO & Director

* Ryan M. Zink

Good Times Restaurants Inc. - CFO

================================================================================

Conference Call Participants

================================================================================

* Jeremy Scott Hamblin

Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen. Welcome to the Good Times Restaurants Inc. Fiscal 2018 Fourth Quarter and Year-End Earnings Call. By now everyone should have access to the company's fourth quarter earnings release. If not, it can be found at 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 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.

And now, I'd like to turn the call over to Boyd Hoback. Please go ahead, sir.

--------------------------------------------------------------------------------

Boyd E. Hoback, Good Times Restaurants Inc. - President, CEO & Director [2]

--------------------------------------------------------------------------------

Thank you, Brian, and thanks, again, everybody for joining us this afternoon. Here with me today is Ryan Zink, our Chief Financial Officer. I'll again cover a quick summary of our fourth quarter and our current developments and Ryan will provide more details on the specific financial results for the quarter and the year as well as providing some more updates on our guidance for fiscal 2019.

We had a strong finish to our fiscal year, with continued increases in comp sales at both brands, with Good Times comp sales up 0.5% for the fourth quarter and up 4.2% for the year; and Bad Daddy's was up 0.7% for the quarter and up 0.8% for the year. Now, that's adjusted for the impact of Hurricane Florence in the fourth quarter.

Bad Daddy's store level operating profit margin, a non-GAAP measure, improved by 120 basis points during the year from 15.8% last year to 17% for the full fiscal 2018. Our adjusted EBITDA was slightly ahead of the high-end of our fiscal year guidance at $5,758,000. That's an increase of approximately 52% over our adjusted EBITDA for fiscal 2017. And Ryan will provide more highlights of our financial performance and details around some of our revised guidance for fiscal 2019.

At the very end of the quarter, we opened one store in Greenville, South Carolina and won our third store in the Atlanta market, which gave us a total of 9 new stores for the fiscal year. And then subsequent to the end of the fiscal year, we opened our fourth store in the Greater Atlanta market and are opening our fourth store in the Raleigh market on January 2, right after the holidays. We will have a several-month gap until the summer when we will open the balance of our 5 to 6 planned stores for fiscal 2019, and those will be in Nashville; Huntsville, Alabama; and Charleston, South Carolina. That's a slight reduction from our initial plan and that's due to a couple of things, the elimination of a couple of planned stores in the pipeline and giving us time for a little further refinement of our site selection strategy. And I'll go on to the other factors impacting the revised guidance. We will have opened 8 new stores in approximately 6 months so that gap between January and early summer will allow us to build further bench strength in our ops team and work on improving our operating margins on stabilized sales volumes. In addition, for the first time, we're investing in technology to better understand our customer profile and segmentation of our most frequent customer, and we're using that then to develop a more predictive site model for new store development and to identify the most opportune trade areas and overall markets for expansion. That model has just been completed and we're working with an additional third-party real estate resource to finalize our fiscal '20 and '21 market trade areas and then the individual sites and the pipeline for those sites.

We had a little slower start to the 3 most recent openings than what we'd experienced in the other openings in fiscal 2018. And while all 3 of these stores are profitable and we believe they will grow into our targeted sales, they have not had as strong a start as the rest of our class of 2018 stores. They are good fit demographically. They're in upper-income, highly dense areas. So we're working on understanding the other variables that impact our initial sales volume.

In the past, we've had several stores that have taken more time to build to our targeted sales volume and the targeted 40% store level cash-on-cash return, but it's impactful to our near-term guidance, as we had anticipated higher honeymoon sales from these 3 stores. Also impacting our guidance for the year is the negative impact of weather during our first quarter, both on Good Times sales and Colorado and on -- and more recently on Bad Daddy's sales in North Carolina. We lost approximately 10 store days to the recent snow storm in North Carolina, where we had stores shutdown. And Colorado has experienced around 5x more precipitation this year from last year and below-average temperatures compared to above-average temperatures last year. So that's just all very impactful to Good Times comp sales as we lose our walk-up and patio business during those times. Bad Daddy's, in Colorado, comp sales have not been nearly as impacted as Good Times and continue to run positive.

We've completed the implementation of our overall online ordering at all of our Bad Daddy's. We've implemented third-party delivery in all of Colorado and part of the Southeast. And we're seeing a nice increase in our total off-premise sales and we estimate that maybe 70% to 80% of the delivery sales are incremental. It's hard to know exactly, but that's what we're estimating them to be. And we're currently working on improving the profitability of those sales by implementing a separately priced delivery menu due to the commissions we have to pay on those sales.

We continue to take slightly higher pricing in Colorado than elsewhere at Bad Daddy's to offset our higher labor costs and that includes a planned increase for January 1 coming up after the holidays. And we're also working hard on additional labor efficiencies in both the front of the house, the back of the house and in how we utilize our management hours.

Our sales focus at Bad Daddy's is around continued innovation and quality improvements and particularly in partnering with local ingredient and brand partners in our rotating chef specials, our local beer pairings. We've got some new desserts in the pipeline to expand that category and we're testing an expanded Happy Hour Food and Drink menu to help build our off-peak day parts along with some other selective new-menu-item development and menu engineering as we continue to develop the concept.

We've got several of those in test and we plan to sequentially roll out those initiatives during our second and third fiscal quarters. We're also finalizing our digital platform partner for development of our Bad Daddy's app, our loyalty program and much more targeted guest communications based on people that have chosen to join the brand, how they use us and what their preferences are. That's really going to be our primary marketing focus during the latter half of fiscal 2019. And we've got several metrics in place that we'll be tracking to get as fast adoption as possible into that platform in the loyalty program.

At Good Times, we're continuing to work on increasing our throughput at peak times with faster speed of service, and we've also now got in test some new technology that may provide some additional labor efficiencies and some customer service innovation. Quality at Good Times. Quality and speed are really the primary influences of our overall customer satisfaction. We've been working hard on several quality initiatives over the last 18 months. Now we believe we can impact our sales positively through slight improvements in our speed of service, particularly during peak times. While our Q1 same-store sales dip is largely weather related, we're confident we can regain our string of comp sales increases through those initiatives and also through marketing a combination of our value price point of $5 combos along with premium product innovation we've got lined up for the balance of the year in burgers -- in the burgers and custard category. We'll provide more color on that in our Q1 earnings call.

While we're slowing our development slightly from our original guidance for fiscal 2019, we're really being careful to keep our balance sheet leverage relatively conservative while we position for accelerated growth in '20 and '21 and remain disciplined in our site selection. And we're also looking at pursuing the best way to sustain a high rate of development in Bad Daddy's over the longer term without the need for any external capital given Bad Daddy's superior unit level returns.

Ryan will now provide more detail on our financial results and guidance for fiscal 2019.

--------------------------------------------------------------------------------

Ryan M. Zink, Good Times Restaurants Inc. - CFO [3]

--------------------------------------------------------------------------------

Thanks, Boyd. At our Good Times brand for the quarter, restaurant sales decreased $466,000 from $8,378,000 to $7,912,000 in the current year, the result of 2 closed restaurants as well as lower year-over-year sales at our Greeley restaurant. That was partially offset by the 0.5% same-store sales increase. For the quarter, traffic is measured by check counts, decreased by 0.8% over comparable units. We have year-over-year menu price increase of about 4.3% and that translates into about 2% favorable mix shift. The traffic in mix shift is driven significantly by our lapping of the peak of our West Coast Double and Combo in the prior year.

For the full fiscal year, Good Times restaurant sales increased from $30,689,000 to $31,136,000, driven by positive comp sales during the year, partially offset by lost sales from the closure of 2 restaurants.

Food and packaging costs at Good Times were 32.8% for the quarter, a decrease of 0.6% versus last year's fourth quarter, driven by slightly lower commodity costs and higher menu pricing. For the full year, food and packaging costs at Good Times were 32.8%, an increase of 0.2% versus 32.6% for fiscal 2017. This was the result of slightly higher average year-over-year beef and bacon costs, primarily driven by the first 2 quarters of the year and then offset by the impact of the 4.3% average menu-price increase for the year.

Total labor costs at Good Times increased to 34.4% from 33.9% for the fourth quarter last year. This year-over-year increase was primarily due to the impact of a 9.6% increase in the average hourly wage, partially offset by the impact of our menu-price increases. The labor market in Colorado continues to be extremely tight and has continued to put upward pressure on wages. For full fiscal 2018, labor costs increased to 34.7% from 34.4% in fiscal 2017.

Restaurant-level operating profit, a non-GAAP measure, at Good Times decreased $153,000 from the same quarter last year to just under $1.2 million. And as a percent of sales decreased by 0.9%, the result of lower sales of the Greeley Restaurant, higher leverage wage costs and the impact ofa$48,000 noncash charge, which is related to the recognition of accretion expense associated with lease liability for one closed restaurant and that's consistent with GAAP accounting.

For the full year, restaurant-level operating profit was down $180,000 to $4,659,000.

At Bad Daddy's, sales increased 33% versus last year to $18,723,000 for the quarter. This was due to the 9 new units opened since the end of last year's fiscal third quarter, resulting in approximately 90 more restaurant operating weeks this quarter versus the same quarter last year. 17 Bad Daddy's restaurants were included in the comp base for the entire quarter. One additional restaurant will enter the comp base during the first quarter of fiscal 2019.

For the quarter, we were sitting on a weighted-average menu price increase of approximately 3.8%, having, again, as Boyd mentioned, taken greater price increases in Colorado compared to our non-Colorado restaurants.

For the full year, restaurant sales at Bad Daddy's have increased by $19.7 million to approximately $67.4 million for fiscal 2018.

Cost of sales at Bad Daddy's were 29.4% for the quarter, a decrease of 2.7% versus last year's fourth quarter. And for the full year, cost of sales declined from 31.2% to 29.7%, driven by a combination of higher menu pricing and a lower weighted average commodity cost, both during the quarter and much of the full year.

Bad Daddy's labor costs were down on a year-over-year basis to 36.6% for the quarter versus 37.2% in the year-ago quarter, down to 36.9% for the full year basis, which was a decrease of 30 basis points versus fiscal 2017.

These declines in labor costs represent a combination of leveraging increasing average unit volumes in our Colorado stores and development of restaurants outside of Colorado, the combination of which was able to slightly offset the wage inflationary impact of the tight labor market and unfavorable statutory minimum wage comparisons in the Colorado locations during the quarter and the full year periods.

Overall, restaurant-level profit, again, a non-GAAP measure, for Bad Daddy's was $3,136,000 for the quarter or 16.8% of sales compared to just over $2 million or 14.8% last year, a net increase of $1,055,000 over last year, the result of improved cost of sales offset partially by higher occupancy and other operating costs, the increase in the latter being driven substantially by third-party delivery fees.

For the full year, Bad Daddy's restaurant-level profit increased by $3.9 million to $11.5 million compared to fiscal 2017, and as a percent of sales improved to 17.0% versus 15.8% in the prior year, again, driven primarily by the improved cost of sales compared to the prior year.

General and administrative expenses increased to $2.0 million during the quarter from $1.8 million in the same quarter last year, but declined as a percent of total revenues to 7.4% for the quarter versus 7.9% in the same quarter last year.

During fiscal 2019, G&A expenses increased to $7.9 million or 7.9% from $7.0 million or 8.9% last year.

Our net loss attributable to common shareholders for the quarter was $324,000 or $0.03 a share, compared to a net loss of $664,000 or $0.05 a share in fiscal 2017's fourth quarter. The $340,000 narrowing of the net loss was primarily due to the contribution of new restaurants this year comparing against last year's asset impairment charge of $219,000 and then partially offset by increased G&A, advertising, interest expense and preopening costs associated with the 5 restaurants opened during the quarter.

Preopening expenses for the quarter were $1.1 million compared with $851,000 in the same quarter fiscal 2017. Our net loss for the year narrowed to just over $1 million or $0.08 a share, a $1.2 million improvement or $0.10 per share improvement versus fiscal 2017.

Our adjusted EBITDA for the fourth quarter increased 38.3% to $1.8 million. And for the full fiscal year in 2018, adjusted EBITDA was $5.8 million compared with $3.8 million for fiscal 2017.

For a reconciliation of restaurant-level profit and adjusted EBITDA to net loss, please refer to the press release issued earlier today.

In the earnings release, we updated our guidance for fiscal '19, primarily due to the performance of the 3 most recently opened restaurants, slightly reduced development planned for 2019 and also to reflect the impact of the unusually high precipitation and cold weather in October and November and comparing against the warmer and drier-than-average fall during the first quarter of fiscal 2018.

Our new guidance includes assumptions that the second fiscal quarter will also have snowfall in Colorado above the long-term averages and temperatures below long-term averages, consistent with what we've experienced this fall/winter season to date.

We opened 1 restaurant during November 2018, expect to open 1 more restaurant in early January 2019 and expect the remaining 3 to 4 restaurants we will open during the year to open during the fourth quarter of the year.

Our adjusted guidance reflects expected revenues for fiscal 2019 of $112 million to $114 million. We're estimating mid-single-digit negative comps at the Good Times brand during the first 2 quarters, again, primarily due to the impact of weather, but returning to positive comps during the last half of the year, with the expectation of comparable sales for the full year between negative 2% and negative 3%, again, for the Good Times brand. For Bad Daddy's, we expect comparable sales for the full year, still in the positive 1% to 2% range, although expect the first quarter to be approximately 1% negative, due in part to the approximately $50,000 same-store sales impact from store closures in North Carolina due to the winter storm that Boyd mentioned, and the impact from 2 restaurants in the Charlotte market that are trending at high single-digit negative comps due to do -- due a bit to cannibalization from 2 new stores in that market.

Our Colorado market continues to exhibit broad-based positive comparable sales, despite some unfavorable weather and is trending in line with our overall expectations.

One other note that may be important to analysts, the Greenville restaurant -- the Greenville, South Carolina, restaurant that opened in late fiscal 2018 ended up being a joint venture restaurant in which we own approximately 75% interest. Previously, we had expected that restaurant to be a fully company-owned unit.

The impact of these adjustments results in a new expectation of a net loss for the year of approximately $0.9 million, which includes $1.6 million of preopening expenses. This translates into a reduction of $1.5 million from our former EBITDA -- adjusted EBITDA guidance, both at the high-end and the low-end of our guidance. And our new expectation is between -- is a range of approximately $6.0 million to $6.5 million for fiscal 2019.

We expect capital expenditures for the year of approximately $7 million to $7.5 million and a year-end debt balance between $11 million and $11.5 million. We ended the year with $3.5 million in cash and equivalents and $7.5 million of long-term debt. Subsequent to the end of the year, we amended our cadence credit facility to provide a total commitment of $17 million as well as improvement in our pricing, which is generally based upon a premium to LIBOR. The amendment also extended the notes maturity date until December 2021. The expansion of this commitment should provide us adequate capital to continue our expected development during fiscal 2019 and beyond.

Now I'd like to turn the call back over to Boyd.

--------------------------------------------------------------------------------

Boyd E. Hoback, Good Times Restaurants Inc. - President, CEO & Director [4]

--------------------------------------------------------------------------------

In spite of our revised guidance, we certainly remain very enthusiastic about the Bad Daddy's brand and the opportunity for development and are looking forward to regaining our streak of comp sales increases at Good Times and we've been on a terrific run.

So we appreciate your time with us today. With that, operator, we'll open the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And it looks like today's first question will be from Jeremy Hamblin with Dougherty & Company.

--------------------------------------------------------------------------------

Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [2]

--------------------------------------------------------------------------------

I want to start with Bad Daddy's comp guidance for the year. I think what you said was Q1, you expect to be down 1% due to the lost days from the winter storm. Not totally a surprise, but the prior guidance for the fiscal year was for a plus 1% comp at Bad Daddy's and now it looks like the guidance is for plus 1% to plus 2% for the year. So what are you seeing? That's confusing when we're looking at the full year guidance, because it looks like you're actually raising the comp guidance for Bad Daddy's even though Q1 has got some weather factors that are having a negative impact.

--------------------------------------------------------------------------------

Boyd E. Hoback, Good Times Restaurants Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Yes, Jeremy, I actually think that's accurate. Absence of weather and even in Colorado, Bad Daddy's same-store sales are remaining pretty strong. I think we're a little bit more optimistic and particularly given that some of the pricing that we're going to be taking. When the sun is shining, we're popping up really nicely. And so we're I think comfortable with that 1% to 2% for the year.

--------------------------------------------------------------------------------

Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [4]

--------------------------------------------------------------------------------

Okay. And so then backing in to the full-year guidance, which is down $8.5 million at the midpoint, it's actually -- it's almost hard to reconcile the change because even if you factor in the Good Times portion of reduced guidance, that's still a small -- much smaller fraction of the overall change. Is this just these 2 or 3 new Bad Daddy's locations are really performing badly? I know...

--------------------------------------------------------------------------------

Boyd E. Hoback, Good Times Restaurants Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

They're not -- yes, I'll tell you specifically. They're performing at around -- we got them forecasted now at about $2 million. So they are profitable. They're cash flowing. They're certainly not losing money, but we anticipate for them to get up to our target of $2.5 million to $2.6 million, but it's going to take a little bit more time. So that is impactful with 3 stores, $0.5 million each below and we had actually included some honeymoon periods, which we have been -- experienced almost in almost every store. Those 3 stores are very impactful. And I think the balance of it is the other class of 2018 stores, and we've annualized those and projected those for '19. That really hasn't changed in our modeling. It's primarily the impact of our Q1 in those 3 stores.

--------------------------------------------------------------------------------

Ryan M. Zink, Good Times Restaurants Inc. - CFO [6]

--------------------------------------------------------------------------------

Yes, I think I would add that some of the -- if you look at full fiscal '18 and you look at our guidance that we had originally provided for fiscal '19, I think we have seen a little bit of an extension of the honeymoons and we've seen some later declines in some of the fiscal 2018 stores as well that's kind of flowing through into this updated guidance, if that makes sense, Jeremy?

--------------------------------------------------------------------------------

Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [7]

--------------------------------------------------------------------------------

Okay. Okay. Well, let me move on to another item that, just wanted to see if I could get clarification. So understand the labor cost, but if I look at Occupancy and Other, that seems to be another category that's climbed quite a bit as a percent of total sales, although you're altering your real estate strategy to a lower-cost environment. Is that higher projection of whether you want to look at it as Occupancy and Other on a store week basis? It's clearly coming from not just Bad Daddy's, but Good Times as well. Is that more a factor of the third-party delivery and charges, which I assume flow through there? Any color that you can provide on that because it looks like for the year that was a category combined up 40 basis points for Good Times ended up 60 basis points for BD even though you had positive comps for both comp sets.

--------------------------------------------------------------------------------

Ryan M. Zink, Good Times Restaurants Inc. - CFO [8]

--------------------------------------------------------------------------------

Yes. So I think in terms of Bad Daddy's, specifically, just during the fourth quarter, we had approximately $75,000 of third-party delivery fees. And so there is a significant increase in both dollar terms and as a percentage basis in that Occupancy and Other that is driven specifically on Bad Daddy's by the third-party delivery fees. The other piece on the Good Times side to note, and I had mentioned this during the prepared remarks, is that under GAAP accounting, we have to recognize changes in the expected lease liability associated with our closed restaurants. And so what that means that, that was a $48,000 occupancy charge in the third -- I'm sorry, the fourth quarter of fiscal 2018 noncash charge. And what that represents is related to one of the closed restaurants that we've not subleased. We have approved 6 months of rent in accordance with kind of the GAAP guidance to -- which represents basically the additional amount before we expect to have that property subleased. So in terms of kind of a cash-base look at it, I would adjust your numbers for those -- for that $48,000 to better understand the true margin changes in occupancy and other sort of Good Times concept.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

(Operator Instructions) It looks like the next question will be from [Gerald Cantorina], Private Investor.

--------------------------------------------------------------------------------

Unidentified Shareholder, [10]

--------------------------------------------------------------------------------

Regarding delivery, how common is it to have pricing on delivery menus that differ from the in-restaurant prices?

--------------------------------------------------------------------------------

Boyd E. Hoback, Good Times Restaurants Inc. - President, CEO & Director [11]

--------------------------------------------------------------------------------

It's fairly common. And I think you're going to see a lot more of it. More and more concepts are moving to that due to the commission structure with the third-party delivery companies. And given the fact that the third-party delivery companies' the fee itself to the consumer is not that much, they pay a tip, but the fee typically is pretty low. You're seeing that and I think you're going to see the structure of the delivery business change a little bit, where the consumer is going to have to pick up a little bit more of the cost. Candidly, with the commission rate that ranges typically anywhere from 20% to 30% for the operator, the threshold for those all being incremental sales without any cannibalization, the profitability on those, I think, has to improve. And so you're going to see -- you are seeing more and more people come to market with a 10% to 15% premium price on their delivery menu.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

(Operator Instructions) With no other questions in the queue, I'd like to conclude today's question-and-answer session as well as today's conference. I want to thank everyone for attending today's presentation and Happy Holidays.

At this time, you may now disconnect.