Good Times Restaurants Inc (GTIM) 2021 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and 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 the 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 meanings of the 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 may arise after this call. The company refers you to their recent SEC filings for a more detailed discussion of the risks that could impact their future operating results and financial conditions, which include the related -- 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, Cole, 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've 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 both strive to compete for talent and create an environment where our restaurant-level compensation is rewarding and meaningful for our managers and our team members.

At our Good Times brand, we primarily focused on wage as a method of attracting hourly team members with a 10% increase in the average wage compared to the prior year. Whereas at Bad Daddy's, we've implemented a multipronged approach, including limited time retention bonuses in our 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-through 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 believe firmly 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 the customer between speed of service and Good Times.

We've managed operating hours similar 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 Daddy's, we're 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 also believe in the high level of hospitality and service at Bad Daddy's and see that as a differentiator and, as such, focused throughout the quarter on elevating front-of-house staffing. And we have seen that translate into sequentially improving comparable sales through present. As with Good Times, we continue to operate with reduced operating hours compared to 2019.

At both brands, we're in development of mobile applications to enable native device-based mobile ordering. And at our Good Times brand, 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 Daddy's in a way that provide greater flexibility in the guest experience based upon 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 repurchases from its existing cash and cash equivalents. While we believe this tender offer -- we believe this tender offer to be an effective means to return capital to our shareholders while also allowing 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 Daddy's, restaurant sales during the quarter were $24.4 million compared with $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 Daddy's in the comp base at the end of the quarter. Cost of sales at Bad Daddy's were 29.7% for the quarter, a 120 basis point increase from last year's quarter that result in 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 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 Daddy's 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, accompanying 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 that are aimed at improving retention as well as higher average wages paid to hourly employees. Our back-of-house wage at Bad Daddy's is up 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 a non-GAAP measure, for Bad Daddy's 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 prior year, driven by 2.9% same-store sales increase during the quarter, offset by a reduced number of operating weeks resulting from the previously reported closure of 1 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 costs 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 have been reduced during the pandemic as well as general increases in market wages due to labor shortages.

Good Times restaurant-level operating profit 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 to 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 multiunit 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 1.4% 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, which includes -- 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 in fiscal 2021 -- or in fiscal 2020 was 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. And 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 2 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 of between $9.5 million and $10.0 million. For fiscal 2022, in light of the pandemic, we've not provided a complete financial forecast. 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, Cole, we'll open the call for questions.

(Operator Instructions) Our first question today will come from Roger Lipton with Lipton Financial Services.

Ryan, just interested in the comparisons of your -- some operating numbers from 2019 in terms of -- if you have them at your fingertips. If not, we could -- I can get them another time, but 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 business has 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 of hundred basis points of margin improvement on a quarter-to-quarter basis on a 2-year look back. I think what's more important kind of from a go-forward basis is that kind of 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 price, and we think that our menu price is competitive.

And actually, in the Bad Daddy's 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 menu price adjustments. I think the 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 more efficiently compared to 2019 and before.

Okay. Well, that would be the hope. So it sounds that way. One last question. What's the off-premise percentage at Bad Daddy's? How has that changed over the last couple of years?

So during -- obviously, when we were completely -- when our dining rooms were completely shut down during the third quarter last year, we went to 100% mix. As on-premise has 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 then we also offer delivery through our website, which is managed through third-parties, all of those combined, we're running high 20%, almost 30% mix in off-premise.

And how might -- roughly, what might that have been running a couple of years ago?

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

Our next question will come from [William James with Maher Investment].

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

Yes. I mean I think the way we look at that is our model calls for investment net of landlord contribution of approximately 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 at operating profits of high teens, 16%, 17%, on our target, we can generate restaurant level cash flow of approximately $400,000, so just shy of kind of 3x -- or 3-year payback, just shy of that.

Great. Do you think the idea 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 timed paybacks of Bad Daddy's?

Yes. I think our approach from a growth perspective is primarily focused on Bad Daddy's. As I mentioned, I think our intent is to finance Bad Daddy's 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.

Great. And Ryan, you guys have really brought a refreshing, pragmatic management to this company. It's just outstanding to see the EBITDA finally materialize and the restaurant margins at the operating level materialize, so a terrific job.

Thank you. I appreciate that.

(Operator Instructions) Our next question will come from Amar Sheth with Bellwood Partners.

I guess I had 2 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 offset by the normalization of demand?

So I think -- the best way to answer that, I think, 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 our fiscal year. And 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. And then my other question was, obviously, the normalization has occurred more recently and these things could take some time to develop, the new restaurant. But how do you foresee kind of longer term, maybe 3 to 5 years out, the ability to continue to grow?

Yes. I mean I think the best way to explain that because we haven't -- we're not really providing firm guidance either for next year on a 3- to 5-year basis. But I would say that I think our expectation is that the lion's share of the growth would come from the Bad Daddy's side of the portfolio. And there's a good chance that, that development primarily comes from a company-owned. However, I think there's also the possibility that we could explore a combination of company- and franchise-owned model in the future.

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, Cole. As we've entered the home stretch for our fiscal year, we continue to develop a culture at 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 their full 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 the convenience and better fast food platform to including all-natural beef and chicken; and at our Bad Daddy's brand through genuine hospitality, delicious scratch-made burgers and salad in an all-inclusive environment.

I could not be more proud to be a team member with the more than 200 restaurant and capability leaders we have and the 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 has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.