GTIM - Good Times Restaurants Inc.'s (GTIM) CEO Ryan Zink on Q3 2022 Results - Earnings Call Transcript

Good Times Restaurants Inc. (GTIM)

Q3 2022 Earnings Conference Call

August 11, 2022 5:00 PM ET

Company Participants

Ryan Zink – President and Chief Executive Officer

Matthew Karnes – Senior Vice President-Finance

Conference Call Participants

Brian Lonergan – UBS

Presentation

Operator

Ladies and gentlemen, welcome to the Good Times Restaurants Inc. Fiscal 2022 Third 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 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.

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 operations, general economic conditions, which could adversely affect the company’s results of operations and cash flows. These risks also include such factors as the disruption to our business from the novel coronavirus COVID-19 pandemic and the impact of the pandemic on our 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 restraints, 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 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 the fiscal year ended September 28, 2021, 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.

Ryan Zink

Thank you, Josh, and thank you all for joining us on the call today. As mentioned, you should have access to our earnings release and 10-Q filing. As we discussed last quarter, our results for this third fiscal quarter continue to reflect the inflationary pressures that are impacting the businesses nationwide. Our focus throughout this time period at both brands has been to pay wages, sufficient staff or restaurants, focus on the development of our people and maintain high levels of product quality, hospitality and well-maintained facilities to deliver an outstanding overall guest experience. The results have been the return of positive same-store sales at Good Times and a continuance of positive same-store sales at Bad Daddy’s, where we have been beating the Black Box Intelligence benchmark for casual dining.

Average weekly sales at Bad Daddy’s this quarter were $52,300 up from $50,400 the same quarter in 2021 and up from $49,100 in the same quarter of 2019. Similarly, average weekly sales at Good Times this quarter were $30,400 up from $29,800 in 2021 and up from $24,000 in 2019. This represents an all-time high for any quarter. We saw cost pressures across the restaurant P&L driven by high product costs, partially offset by a 6.8% year-over-year menu price increase at Bad Daddy’s and an 8.2% year-over-year menu price increase at Good Times.

In addition to significant product and wage cost increases, we’ve also experienced higher other restaurant operating costs due primarily to our investment in technology to expand digital orders. We continue to experience high levels of orders coming through third-party delivery aggregators at Bad Daddy’s, and we have seen increased volume of delivery orders at Good Times as we have more aggressively pursued that channel of the business.

Protein costs, namely beef and bacon, have shown some price stability from last quarter, and we’ve seen improvement in the pricing of chicken wings. But chicken breast, which is our main shipping product of both concepts continues to remain at stubbornly high levels. When we look at competitors specific to Bad Daddy’s, specifically boutique burger concepts with chef-inspired menus, we believe we have taken less price increase in our markets compared to those competitors. Whereas pre-pandemic, we were generally the highest priced among these chef-driven craft burger concepts. We’re now just above the median among that same group.

As mentioned last quarter, this has been a strategic decision, and we believe that this has paid off in stronger multiyear sales performance with seasonally adjusted same-store AUVs near all-time highs, and as I mentioned last quarter, over 20% of our restaurants at Bad Daddy’s with a full year of operating history, exceeding $3 million volumes and two restaurants continuing to exceed $4 million annual volumes on a last 12-month basis.

We continue to thoughtfully develop a pipeline for unit growth at Bad Daddy’s with our expectation that any new unit development will be focused in the Carolinas and Alabama. We have one lease in the final phase of negotiation that we expect to open in fiscal 2023 and other potential sites at various stages of negotiation. New restaurants will be based on a combination of pipeline development, cash flow generated by the business and other investment decisions affecting the use of cash.

Our image remodel prototype at Good Times, the restaurant in the Denver Metro area continues to progress, and we’ve approved two more units for remodels given the long lead time to get these remodels through the planning and building permitting processes with the local municipalities in the Greater Denver area. We hope to have this first remodel project complete early in the 2023 calendar year and the other two during the second or third quarter of 2023.

As mentioned during last quarter’s call, we’re refitting existing drive-thrus with new signage and digital menu boards, important merchandising assets that we haven’t updated in many years. We have eight digital menu boards now installed and operating, and currently expect to complete all locations by early of fiscal 2023. Additionally, we have new signage designed and in process for installation at eight restaurants that we expect to complete before the end of fiscal 2022 and expect to complete all of our signage replacements in fiscal 2023.

To improve our ability to accurately track speed and report consistently system-wide, we’re in the process of installing new lane timer systems in all of our Good Times restaurants, which will be completed before the end of the fiscal year and will provide a single source of timing data. We’re similarly thrilled with the results in the eight locations that are currently up and running and the ability for managers of these restaurants to view their real-time performance against their peers in the market has instilled a new spirit of friendly competition among them.

As previously announced, program of $5 million. As of June 28, 2022, the company has purchased approximately 169,000 shares of its common stock under the repurchase plan, leaving $4.4 million still available for use for repurchases under the plan. Though this quarter represents the continuation of a challenging year from a financial performance standpoint, we continue to believe that the strength of both of our brands as we manage both businesses for the long term.

We believe that the final quarter of this fiscal year will continue to show pressure on restaurant level margins with food and labor cost percentages that are higher than our long-term target. We’re committed to thoughtful well-planned adjustments to improve profitability and control costs and remain confident in the long-term potential of our brands despite the magnitude of the current inflationary environment we’re experiencing.

With that, I will pass it over to Matthew to review this quarter’s results.

Matthew Karnes

Thank you, Ryan. Total revenues increased 7.5% to $36.5 million for the quarter compared to the prior year quarter. Total restaurant sales for Bad Daddy’s restaurants increased $2.8 million to $27.1 million for the quarter. The increase in sales was due to higher demand for dine-in restaurant occasions as well as the continued strength in delivering online orders along with an additional 36 restaurant weeks associated with two new restaurants that opened in the third and fourth quarters of 2021 and the purchase of the Greenville, South Carolina, Bad Daddy’s restaurants.

Same-store sales increased 5.3% during the quarter with 38 Bad Daddy’s in the comp base at the end of the quarter. Cost of sales at Bad Daddy’s were 32.5% for the quarter, a 280 basis point increase from last year’s quarter, the result of significantly higher food and packaging costs as seen through inflationary and supply chain pressure.

Bad Daddy’s labor costs decreased by 10 basis points compared to the prior quarter to 34.2% for the quarter. The slight decrease as a percentage of sales reflects improved productivity, mostly offset by a significant increase in hourly wage rates. Among same-stores back-of-house hourly wage rates increased from $13.96 in the prior year quarter to $15.64 in the current year quarter, which is a 12% increase. Occupancy cost at Bad Daddy’s increased 10 basis points to 6.2%. The nominal increase is due to lease costs associated with newly opened restaurants toward the end of fiscal 2021 and lease costs associated with the restaurant acquired from a former franchisee and increased real property tax assessments. Other operating costs were 13.8% for the quarter, which is an increase of 180 basis points, primarily due to higher increased spending on restaurant technology and repair and maintenance expenses.

Overall, restaurant-level operating profit, a non-GAAP measure, for Bad Daddy’s was approximately $3.6 million for the quarter or 13.3% of sales compared to $4.3 million or 17.8% last year. The decline is primarily due to the increased cost of sales and other restaurant operating costs. Restaurant sales at Good Times were $9.1 million, a decrease of $0.2 million, driven by the closure of one restaurant at the end of March, mostly offset by the 1.6% same-store sales. Food and packaging costs for Good Times were 32.3% for the quarter. That’s an increase of 290 basis points compared to last year’s quarter, again, the result of significant inflationary pressures on food and packaging material. Total labor costs for Good Times increased to 33%, up from 31% for the quarter last year. That’s due primarily to higher wage rates to attract qualified employees in the Denver Metro area partially offset by increases in unit level productivity.

The average hourly wage rate at Good Times was $17.28 during the current year quarter compared to $15 – in the prior year quarter. That’s more than a 15% increase. Occupancy cost at Good Times were 7.7%, which is an increase of 20 basis points. Good Times Other operating costs were 11.1% for the quarter, an increase of 260 basis points due primarily to additional delivery service charges, accompanying a higher mix of delivery sales and higher repair and maintenance expenses during the quarter. The Good Times restaurant-level operating profit decreased by $0.8 million for the quarter to $1.4 million. As a percent of sales, restaurant-level operating profit decreased by 770 basis points versus last year to 15.9% due primarily to higher costs that we previously discussed. Combined general and administrative expenses were $2.4 million during the quarter or 6.5% as a percent of total revenues. This represents a decrease of $0.1 million versus the prior year quarter.

G&A expenses decreased versus the prior year due to decreased legal and professional services and was offset by increased costs in recruiting and training, travel and insurance cost. We recorded impairment of long-lived assets of $0.3 million during the quarter for the impairment of one Good Times restaurant. No impairment costs were recorded in the prior year quarter. Our net income to common shareholders for the quarter was $0.5 million or $0.04 per share versus income to common shareholders of $13.6 million or $1.07 per share in the third quarter last year. For the year-to-date period, our net loss to common shareholders was $1.4 million or a loss of $0.11 per share versus income of $15.5 million or $1.22 per share in the prior year-to-date period. Last year’s income included a gain of approximately $11.8 million on debt extinguishment. Adjusted EBITDA for the quarter was $1.7 million compared to $3.1 million for the third quarter of 2021. For the year-to-date period, our adjusted EBITDA was $4 million versus adjusted EBITDA of $7.2 million for the same period in fiscal 2021. We finished the quarter with $9.7 million in cash and zero debt.

And with that, I will hand it back to you, Ryan.

Ryan Zink

Thank you, Matthew, for the review of our financials for the quarter. And with that, Josh, we can open the call for questions, please.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brian Lonergan [UBS]. Your line is open.

Brian Lonergan

Hey guys. Yes, the quarter was impressive to me given the environment. I was just wondering if you guys could maybe provide some guidance on seasonality going forward, having a tough time kind of getting a beat on it given the pandemic over the past few years and the mix of Bad Daddy’s and the Good times.

Ryan Zink

Certainly. I mean I think it’s a really thoughtful question because our business, particularly at Good Times, but also Bad Daddy’s has followed a similar seasonal pattern. And that’s been somewhat changed over the past couple of years as the pandemic has affected customer behavior. I think what we’re seeing is a return to the level of seasonality that we had prior to the pandemic, where typically between December and February, in particular, but maybe also in November, sales tend to decline and that tends to be the lowest indexing period. And the summer months really beginning in March – the spring and summer months, I should say, beginning in March and extending through say, mid-August tend to be some of the higher indexing months. I would say that July, despite being in the middle of summer tends to index a little more softly than the other summer months.

Brian Lonergan

Okay. Yes, that’s extremely helpful. Just kind of a small follow-up on that. I’m wondering, do you think you’re going to get any kind of kick or benefit during Christmas going forward?

Ryan Zink

I think it’s – that also is a very interesting question, and I think it is one that we’re excited to and we’re anticipating highly. We do have a couple of more traditional mall restaurants, particularly at Bad Daddy’s. And I think that’s where we would see any pop, if you will. The short answer is we don’t know. We’re certainly hoping that’s the case. But I think that’s a question in light of how consumer behaviors changed. And is there going to be a return to some of the more normal patterns we see with holiday shopping. I know that’s a long-winded way to say I don’t really know. I’d say I think we’re hoping it is, but we’ll have to wait and see.

Brian Lonergan

Okay, I’ll appreciate the candidness. Thanks again.

Ryan Zink

You’re welcome. Thank you.

Operator

[Operator Instructions] There are no further questions at this time. I’d like to turn the call back to Ryan.

Ryan Zink

Thank you, Josh. Though our performance this year continues to be impacted by severe cost pressures and we expect those pressures to have similar impact at least through the end of the fiscal year, our focus, along with the focus of our operators and their teams is to concentrate on running great restaurants, delighting customers and providing our guests with memorable experiences through great suit at both of our unique concepts. As always, I want to express my sincere thanks and appreciation for the entire team of people who all work exceptionally hard to execute both of our brands.

With that, we’ll conclude today’s call. I thank you all for joining us today.

Operator

This concludes today’s conference call. You may.

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