Good Times Restaurants Inc. (NASDAQ:GTIM) Q1 2020 Earnings Conference Call February 11, 2020 5:00 PM ET
Ryan Zink – Acting Chief Executive Officer, Chief Financial Officer and Treasurer
Conference Call Participants
Good afternoon, ladies and gentlemen. Welcome to the Good Times Restaurants Incorporated Fiscal 2020 First Quarter Earnings Conference Call. By now, everyone should have access to the company’s first quarter’s earnings release. If not, it can be found at www.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 would like to turn the call over to Ryan Zink. Please go ahead, sir.
Thank you, Shaun, and thanks everyone for joining us on the call today. I’ll begin with a high-level summary of the business and then review the financial performance for the quarter. We opened 2 new Bad Daddy’s Burger Bars during the fourth fiscal quarter in Greater Charleston, South Carolina and 1 in Columbia, South Carolina, bringing our total restaurants to 39, including our franchisee in South Carolina and our licensee at the Charlotte Airport.
We’re pleased with the performance of the new restaurants we opened at the end of fiscal 2019 and early fiscal 2020. And given the performance of these restaurants have added 1 unit to our development schedule for 2020 and expect that restaurant to open in the mid to late fourth fiscal quarter.
Comparable sales for Bad Daddy’s decreased 3.4% for the quarter, which when adjusted for holiday shifts was relatively consistent throughout the quarter. Our Good Times Restaurants posted 5.8% comparable sales growth for the quarter. We closed 1 Good Times Restaurants at the end of the quarter that has been subleased to an unrelated party.
As we indicated in our call in December, our high-level organizational focus is temporarily shifted from restaurant growth to stabilization of margins, with the intension of driving earnings growth by improving restaurant-level performance at our existing Bad Daddy’s and Good Times. During the quarter, we made some tough decisions and adjusted our multi-unit spans of control.
In the southeast, Bad Daddy’s specifically, at the beginning of the quarter we had spans of approximately 4 restaurants per district, but by the end of the quarter had approximately 7 per district. Additionally, we have a new operations leader, [Jim Abbott] [ph], overseeing the Bad Daddy’s concept. Jim has several years of experience with the brand with proven operating experience and delivering results.
We become somewhat comfortable with the status quo at Bad Daddy’s. And in visiting restaurants, I’ve heard many good brand consistent ideas from restaurant leaders. Several of these ideas have influenced our objectives and contributed to different test initiatives that we have in the works.
Labor will continue to be a challenge for us that we will need to find solutions for given the number of restaurants we have in Colorado. The city of Denver implemented a $12.85 minimum wage on January 1, above the statewide $12 an hour minimum wage. We have only 1 Bad Daddy’s within the jurisdiction of this legislation, but several Good Times are impacted.
Under the Colorado statewide minimum wage legislation, our current tipped wage for our front-of-house team-members at Bad Daddy’s, it’s more than 4 times the wage required to be paid in our Bad Daddy’s in the southeast part of the country. And that results in an approximate 700 basis point difference between the cost of labor for the standard model in our Colorado restaurants compared to our restaurants in the southeast.
One of Jim’s highest priorities is addressing these costs and he has developed plans to accomplish this. First, the establishment of a clear path to management for qualified hourly team members. This should result in us retaining high potential talent by promoting them into management, instead of losing them to competitors or non-competitor employers. But it also reduces hiring and training costs, and results in a higher likelihood of installing managers within the restaurants who have the knowledge, skills and values that we know leads to success in the role.
Second, we will establish clear department responsibility for each manager, which will not only include delineation between service bar and culinary, but also responsibility for such bolt-on roles like local store marketing, catering and in-restaurant training. The clear ownership of these responsibilities will empower and motivate managers to drive performance and results throughout the restaurant-level P&L.
Third, we are adjusting our manager staffing model to one based upon volume rather than mandating a fixed number of salaried managers in all stores irrespective of volume. This will create new roles for key hourly team members, which is part of our structured development plan for our hourly team members.
Our initiatives don’t merely stop with operations. To drive sales, we have other initiatives underway. As many other restaurants have noted, off-premise sales have been growing a larger share of the pie. Ours have too. But such growth has been significantly skewed towards the lesser profitable delivery sales through third-party aggregators. We see catering as an opportunity with legs in many of our restaurants. Some of whom have raised this as something their customers are already asking for.
We have nearly finalized the structure of this program, which is ready to be launched in test in a limited number of restaurants. Our goal is to roll this out company-wide at Bad Daddy’s during the third quarter.
We are expanding our marketing and advertising activities. We have made our first traditional radio buy in the Charlotte market as part of a broader local store and public relations activities to reestablish us as the local hometown burger bar in Charlotte. Such local store marketing initiatives, however, are company-wide, not isolated just to the Charlotte market.
Additionally, company-wide, we’re expanding our spend on digital and social marketing with technology partners to help us with such buys, targeting customers with similar demographics and spend profiles as our existing customers, as well as remarketing to our existing customers, beyond simply using our longstanding e-club.
At Good Times, we’re pleased with the strong sales during the quarter and have confidence that our focus on speed and accuracy will translate into greater customer loyalty, and ultimately, sustain sales and traffic growth. We’ll make some small equipment investments during the second quarter to help us finalize the execution of this initiative.
We’re also trying to increase the already existing awareness of our Colorado heritage, and the fact that as a company we are a Colorado native, as we continue to see foreign competition in our home territory. We have a following of loyal customers that we’re intent on maintaining and expanding through achieving class-leading speed, but while maintaining the consistency and high-quality of our products that we have become known for.
Let’s now review this quarter’s results. At Bad Daddy’s restaurant sales during the quarter were $22.8 million, an increase of 25% versus $18.3 million during last year’s first quarter. We had approximately 98 more store weeks this quarter versus the same quarter last year, approximately 37 weeks due to an additional operating week in the fiscal calendar and the remainder due to new restaurants.
Sales growth was partially offset by the 3.4% decline in same-store sales for the quarter. 25 Bad Daddy’s were included in the comp base during the entire quarter with 1 Bad Daddy’s joining the comp base during the quarter, 2 additional Bad Daddy’s will enter the comp base during our second quarter of fiscal 2020.
Cost of sales at Bad Daddy’s was 29.0% for the quarter, a 10 basis point increase from last year’s first quarter. We expect to run slightly higher cost of sales on a sequential basis in light of increases in commodities including fees for fiscal 2020. Bad Daddy’s labor cost increased by approximately 50 basis points compared to the prior year quarter to 38.8% for the quarter.
This year-over-year increase is due to increasing wage inflation for back-of-house employees, for the wage rate was up approximately 3.4% on a year-over-year basis, on top of the double-digit statutory front-of-house wage increases in Colorado. This was coupled with a higher level of management staffing across our restaurants in this quarter compared to the same quarter last year.
Overall, restaurant-level operating profit, a non-GAAP measure, for Bad Daddy’s was $3.1 million for the quarter, or 13.8% of sales, compared to $2.7 million or 14.7% last year. A net increase of $0.4 million compared to last year’s first quarter, but lower by 90 basis points, primarily due to increased labor costs, but also due to slight increases in cost of sales and occupancy costs as a percent of sales.
Restaurant sales at Good Times increased by approximately $0.9 million to $7.8 million, driven by the 5.8% positive comparable sales, and approximately $0.5 million due to the extra operating week. Food and packaging costs for Good Times were 31.0% for the quarter, a decrease of 170 basis points compared to last year’s fourth quarter.
As we discussed last quarter, Good Times has benefited from improved menu pricing, adjustments to our Custard lineup and improvements in product waste. Total labor costs for Good Times increased to 38.3% from 37.3% for the quarter last year. This is the result of the competitive labor market and elevated minimum wage in Colorado. The average wage rate during the quarter increased by approximately 9.5% versus the same quarter last year.
Good Times restaurant-level operating profit increased to $0.9 million for the quarter. As a percent of sales, the restaurant-level operating profit increased by 40 basis points versus last year to 11.3% due primarily to lower cost of sales, partially offset by the higher cost of labor and enhanced by leveraging higher average unit volumes.
General and administrative expenses were $2.2 million during the quarter or 7.2% as a percent of total revenues, an increase of approximately $0.2 million, but a decrease of approximately 60 basis points versus the same quarter last year. This quarter’s nominal G&A expenses increased due to the additional operating week as most of our G&A costs are function of operating weeks.
During the quarter, we had a greater number of multi-unit managers at both concepts than in the prior year, incurred some additional costs related to our Bad Daddy’s general managers’ conference, costs related to our employee healthcare plan and residual costs associated with the termination of our former CEO, which collectively amounted to approximately $0.2 million. But this was generally offset by reductions in other G&A costs.
Our net loss for the quarter was $0.8 million versus a net loss of $1.1 million in the first quarter last year. This narrower net loss is significantly driven by the increase in restaurant-level operating profit, a non-GAAP measure, offset by nominal increases in preopening and G&A costs, including the impact of the additional operating week during the quarter.
In our press release, we reported adjusted EBITDA of approximately $1.5 million for the quarter, up from approximately $0.8 million from the same quarter last year. We finished the year or the quarter rather with $3.3 million in cash and $14.4 million drawn against our credit line with Cadence Bank.
In the earnings release, we updated guidance for fiscal 2020. We maintained our revenue estimate of approximately $120 million to $123 million. The revenue estimate includes same-store sales assumptions for the full year of approximately 3.5% increase for Good Times. It assumes same-store sales for Bad Daddy’s initially decreasing at a rate of approximately 3.0%, but increasing to a trend of flat by the end of the year for Bad Daddy’s.
It includes the addition of 1 new unit during the mid to late fourth quarter of the year consistent with my earlier comments. Based upon our performance during this quarter, we’ve increased our full-year guidance to approximately $6.3 million to $6.5 million of adjusted EBITDA, and a net loss of between $0.3 million and $0.5 million.
As I mentioned at the conclusion of last quarter’s call, we have a new focus on operations excellence and fiscal discipline. This first quarter represents movement in that direction, but we clearly still have much progress to make. We roll over very favorable commodity costs at Bad Daddy’s from the prior year during the second quarter, which will impact year-over-year margin comparisons in that quarter.
We expect, however, to begin comparing favorably from the margin basis on a year-over-year basis beginning in the third quarter, as our initiatives begin to take hold and manifest themselves more prominently in our results.
With that, Shaun, we will open the call for questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] At this time, there are no questions in the question queue. And I would like to turn the call back over to Mr. Ryan Zink for any closing remarks.
Thanks, Shaun. We have a strong group of talented multi-unit leaders, restaurant leaders, restaurant team members as well as the leaders in supporting team members here in the home office, who work diligently making significant contributions that allow us to operate great restaurants and grow the business. I’d like to thank each and every one of those employees for their personal contribution to our brands and restaurants.
With that, we will close today’s call. Thank you all for joining us today.
Thank you. The conference has now concluded. Thank you for attending today’s presentation and you may now disconnect.