Good Times Restaurants investment thesis

Good Times Restaurants – $GTIM

Good Times Restaurants investment thesis in a nutshell

Good Times Restaurants ($GTIM) is a microcap in the restaurant industry. It owns and operates 63 (+9 franchises) stores in several states (Colorado and North Carolina are the main ones) and generated positive FCF even in the last two years ($5MM and $10MM). Its Enterprise Value is $22MM and it is on net cash position ($10MM)
 
Good Times Restaurants owns two concepts – the original Good Times Drive Thru and Bad Daddy’s Burger Bar (fully-acquired in 2015)
  • Good Times Burgers & Frozen Custard is a regional chain of quick-service restaurants located primarily in Colorado. There are 23 company-owned Good Times restaurants and 8 franchised ones
  • Bad Daddy’s Burger Bar is a full-service and more upscale restaurant concept (Chef driven menu of gourmet signature burgers plus a full bar featuring a selection of local craft microbrew beers in a high-energy atmosphere). And it is where the company is focusing all its growth plans. So far, there are 40 owned venues plus a franchise.
There was an internal restructuring process in 2019 that concluded with a new CEO and the board of directors reduced to 5 people (two of whom impulsed the process) and the support of principal shareholders. Since then, the company has been focused on margins instead of growth. In three years, it eliminated its $10MM net debt and it has $10MM net cash as of today.
 
Good Times Restaurants has an active buyback program in place where they have already bought around 5% of the company shares.
 
They have experienced management, full alignment with main investors, the board has 25% of the company and the CEO & vice presidents’ incentives are fully aligned with shareholders
 
Despite continued cash generation and a healthy balance sheet position, the company is trading 4x EV/EBITDA due to the negative investment sentiment around consumer discretionary plus the fact that it is an illiquid company with no analyst coverage.

Good Times Restaurants history

Good Times Restaurants was founded in 1987. In 2013, they purchased 48% of Bad Daddy Bar Burger and they acquired the remaining 52% in 2015. They focused on the expansion of its Bad Daddy’s brand, growing the number of restaurants from 2 in 2014 to 37 in 2019. However, margins were declining and the business was not profitable.
Two of the directors (Stetson and Jobson) resigned as board members on a disagreement over the profitability on January 2018. Two months later, Delta Partners and REIT Redux LP (principal shareholders of $GTIM) supported reducing from 7 to 5 the number of directors and electing Stetson and Jobson as directors again. Boyd Hoback (CEO) was sacked in October 2019 and Stetson and Jobson put Zink Ryan as CEO (the current one).

Then, they stopped the high-growth strategy of the 2013-2019 period, which brought huge unit expansion but losses almost every year, and focused on margins. Good Times Restaurants reassessed its strategy and looked to improve its financial position.

In August 2021, $GTIM launched a tender offer for $6.5MM at $4.6 per share, targeting 1.413MM shares. However, only 333,241 accepted the price (2.6% market cap), so the company spent $1.5MM. With the remaining proceedings of the tender offer and taking advantage of the share price, Good Times Restaurants announced a $5MM share repurchase program at the beginning of 2022 (around $1.5MM executed so far and 400k shares )

Now, and despite the pandemic, the balance sheet is the healthiest in history and margins have improved considerably. After the storm, they are focusing on growth again.

Date: 29th Jan 2023

Capital Structure

1Common Shares$32.5MM
2Preferred Shares0
3Net cash$10MM

 

Main Shareholders

Jobson: 19.5%

Delta Partners: 11.7%

Wellington Management : 7.10%

Robert Stetson: 4.73%

Ryan Zink: 2%

Jennifer Stetson: 1.95%

 

Earning Metrics

$GTIM financials

Stock Information

11.95MMnº shares
23k3mth avg vol
1.5Beta
$2.02 – $4.71  52 Week Range

 

Good Times Restaurants Business Model

As explained before, Good Time Restaurants works with two complementary brands each following a different business model. 
 
Bad Daddy’s Burger Bar is a full-service, casual dining small box “better burger” concept. They differentiate from the competition with 
  • “Chef-inspired burgers” which rotate periodically
  • Full bar with proprietary handcrafted cocktails and craft beers
  • Family friendly environment with iconic pop culture designs
The average sales per transaction of approximately $35. Fiscal 2022 average restaurant sales averaged $2.57 million per restaurant resulting in average sales per square foot of approximately $670. 
 
Despite being the acquired brand, BDBB is the core of the company. $GTIM growth plans are limited (at least by now) to grow its BDBB units. Its metrics are better than GTB&FC’s except for 2020, where GTB&FC took advantage of its drive-thru proposition to increase sales in the middle of the pandemic which helped the company considerably.
 
Good Times Burgers & Frozen Custard is a drive-thru, quick-service hamburger-focused restaurant concept with 23 venues in Colorado. Their focus is on service speed, averaging less than three-minute transaction times, as measured from the time the customer places their order until they leave the drive-thru lane. Its value proposition compared with its immediate peers is based on quality ingredients with a specific focus on all-natural beef and chicken products.  This type of quality drive-thru combined with its open-space restaurant concept was a terrible advantage during Covid, where this brand increased considerably its profits.
The average sales per person are approximately $14.17. This figure positioned them between McDonald’s -Burger King – Wendy’s and Five Guys- Habit Burger… In the last year, they have increased prices slower than it competitors, affecting the margins but diminishing the decline in the number of clients (compared to peers)
 
The CAGR on revenues during the last five years for the group has been more than 12%. Also, the limited Capex (mainly since the arrival of Mr Zink) has allowed $GTIM to have $10MM of net cash, quite a comfortable position.
 

Company strategy

Increase organic growth: After some years of slow or inexistent growth, $GTIM is focusing again on unit growth. They do that through its Bar Daddy’s Bar Restaurant brand exclusively. They target states where they have already restaurants opened as both brands have small market penetration. Consequently, they leverage local brand awareness. Specifically, BDBB targets urban and suburban upper-income demographic areas with median household incomes over $70,000. Locations are primarily end-cap locations in new and existing shopping centre developments using approximately 3,500 to 4,000 square feet.
They do not have explicit plans to develop additional Good Times restaurants, as they say that are focused on refining the economic model.
 
Same Store Sales: Organic sales in both brands (Same-store sales at Good Times have increased in ten of the past eleven years). In fact, they are betting hard on it as are doubling its advertisement expenses to promote its new gift program (large box retailers sells gift cards exchangeable at the company’s restaurants and third party get paid as commission) and in other channels. As commented before, $GTIM is increasing prices less than its competitors with the strategy of preserve clients. So Same Store Sales are being impacted by this strategic decision of looking for the long-term instead the short term. We believe that it is a bold strategy and monitor the SSS evolution to analyse the results in the medium term.
 
Increase efficiencies: Both brands operate with a common point-of-purchase system and a common back-office system has been implemented.
Also, in a bet to reduce the third party delivery costs as well as internal costs, they have launched their online ordering service and digital menu. Online orders already represent 27% of Bad Daddy’s sales and it is growing steady.
 
Franchise
We are not giving a lot of importance to the franchise part as $GTIM has been slowly diminishing the number of franchises over the years. Currently, they only have 1 franchise with BDBB and 8 with GTB&FC 
Franchisees will typically pay a royalty of 4-5% of net sales. Also, it has to contribute to the advertising fund and local advertising by 2% of net sales. The initial development and franchise fees are around $35,000 per restaurant. 

Economics

$GTIM has increased its revenues notably in the last 5 years, from $78.4MM to $137.25MM. As explained before, the unit growth stopped in 2019, remaining at 63 owned stores (plus 9 franchises). Although the number has remained at 63, we can observe Bad Daddy’s has experienced considerable growth in the number of stores. Also, Good Time Burgers brought stability during 2020, the year when the business model of BDBB was heavily impacted by Covid. The group saw a 20% increase in group revenues in 2022 compared to 2019, despite having the same number of stores.

It is interesting to see that as there has been almost no Capex in the last two years and debt was almost 0 (now it is 0), the vast majority of EBITDA was transformed to FCF for the company.

It is also worth noting that the group’s AEBITDA margins have generally increased over the years, except for 2022 due to inflation. This highlights the group’s ability to control costs and maintain profitability, even in challenging circumstances.

Good Time Burgers

(The company provides some data in aggregate, so this table is made from Moram calculations). Capex in the image only consider pre-opening cost (not including the maintenance ones)

Management Team

Charles Jobson (Director – 19.15% ownership) has over thirty years of public and private markets investment experience. He is currently CEO of Thrive Acquisition, a special purpose acquisition company traded on the NASDAQ. He was the Founder and Portfolio Manager of Delta Partners L.P., a long-short hedge fund from 1999-2019, reaching a peak asset level of $2.9 billion. Before Delta Partners, Mr Jobson was an equity analyst, portfolio manager, and member of the investment committee at Baring Asset Management (managing a $3.5 billion U.S. equity portfolio). In 2019, he partnered with PAI Partners in taking Ecotone, formerly Wessanen, private in a $1 billion transaction. Ecotone is a leading European organic food company with brands such as Bjorg, Clipper Tea, and Whole Earth,…

Ryan Zink (CEO – 2% Ownership) serves as CEO since April 2020 (appointed in Sept-21) in these 7 months he was the Company’s Acting Chief Executive Officer, concurrently with his roles as the Company’s Chief Financial Officer and Treasurer, which roles he was initially appointed to in July 2017. Before Good Times he served for more than 15 years in other restaurant businesses and he started his career at KPMG.

Jennifer Stetson (Director -1.95% Ownership) is Asset Manager for US Restaurant Properties, a privately-owned landlord of chain restaurant properties and Asset Manager for SLKW Investments, a privately-owned company that invests in private and public businesses with a focus on finance, REITs and restaurants. Ms Stetson is the daughter-in-law of Mr Robert Stetson who is the managing member and is a beneficial owner of SLKW Investments, LLC and is a former director of the Company (the one who join forces with Jobston to change the course of the company).

Compensation

Four out of five directors get paid around $40000 per year (75% fixed – 25% stock awards) and the fifth (Mr Zink – CEO) does not receive any additional compensation for his service on the Board of Directors.

The Board of directors owns around 25% of the company (mainly Jobson, Stetson and Zink), which makes us think that the other two (Mr Bailey – director from 1996 and Mr Maceda 2018) with less than 1% ownership (mainly accumulation of stock awards) are not very aligned/active in the company…
The salary of Mr Zink is $325’000 plus option awards of around $200’000. Vice presidents of operations and finance (Mr Stack and Mr Karnes) around $170’000 plus $60’000.

The vesting of stock awards is conditioned, being an important part of them tied to the achievement of the Company’s common stock reaching a market price of $7.50 per share (as it happened with Mr Karnes who join the company in March 2022).

Debt

Good Time Restaurants has no debt at this moment. The company maintains a credit agreement with Cadence Bank to cover working capital and other commitments. They pay 0.25% for the unused balance, and a variable rate of 3.5% plus LIBOR for the balance used.

Financial covenants consist of a leverage ratio of 5.15:1, a minimum pre-distribution fixed charge coverage ratio of 1.25:1, a minimum post-distribution fixed charge coverage ratio of 1.10:1 and minimum liquidity of $2.0 million.

The interest expense for FY22 was $54000. We assume that 100% related to the unused part of the Cadence credit agreement.
Only for comparison, at the end of 2019, $GTIM had $10.1MM net debt and 3 years later (Covid included), Good Time Restaurants has almost $10MM net cash (Without taking into consideration leases any of the years (IFRS16). We believe that it shows the strong cash generation that $GTIM produces.

Also, the company plans to grow its business from operative cash flows and avoid debt for the moment. We cannot see that this is the best capital allocation. Maybe they want to be conservative because of the environment. However, we would see it as a disadvantage if this is not transitory and they continue this strategy in the future.

Buybacks

After the tender offer fiasco, which honestly we interpret as shareholder not selling that bargain price (tender offer price was $4.6, now $GTIM is trading at $2.7….) they launched a $5MM buyback program, they are buying around 70’000 shares/month which, at these share prices, is creating a lot of value for shareholders. However, we are also aware that the $5MM figure of the buyback program is higher than the amount spent on Capex each of the last 3 years.

We do not believe that it is because of a lack of growth opportunities, but we understand that the company is taking a conservative approach. Also, during the last two years, Mr Jobson has been steadily buying new shares in open-market transactions. He is known for making bids to bring companies private. That is why we believe that this option is over the table.

Another option is to interpret this strategy as a defensive movement to avoid receiving a hostile takeover at very low prices, but with the low volume and the 25% shareholders ownership, it seems improbable that a hostile takeover goes through. Obviously there is a risk that owners want to maintain the share price low to make a management takeover, but if someone wants to do that, it is weird that the company is buying back shares…

After reading the last five years of this company plus several reports prior to 2017, we think that it is a market inefficiency due to illiquidity and lack of coverage. (But this is only our thought, not investment advice).

Good Times Restaurants Valuation

We have worked on several ways to value $GTIM. The traditional DCF model, a valuation based on metrics of traded peers, and also, as we believe that because of its size and Jobson’s background and the size of the company, there is a considerable probability of being acquired, we also have considered the average multiple offered in transactions of similar peers.

We will provide full detail of the DCF model after the 1Q23 results next Thursday. We can advance that we have used a 14% WACC and a modest two stores increase per year ($1.75MM Capex each). Also, we consider higher than usual advertisement expenses and cost of Food & packaging, Payroll, restaurant occupancy and General & Admin to represent a percentage of sales higher than pre-covid but a little less than in 2022 (be back to 5-6% AEBITDA margins)

Considering the “M&A” valuation, we have analysed the M&A transaction in the last months. Some of them were MTY group has purchased BBQ Holdings and Wetzels, Denny acquired Keke’s breakfast,… Mainly, we focused on M&A where the acquired business had a similar structure to $GTIM regarding owned vs franchise stores. We could take 14x EBITDA as the average multiple of this type of transaction in 2022. (We are simplifying a lot as we are not considering capital structure,…). Also, we will refine this calculation once Kroll releases its annual Restaurant update (which should be around the corner)

We prefer the DCF because of EBITDA volatility due to Covid impairments & debt extinguishment (government program). Nevertheless, the AEBITDA22 we take for valuation is a quarter of EBITDA21 and considerably lower than pre-pandemic figures. Hence, we believe that this is a conservative valuation as EBITDA should be higher in the coming years.

Target price from each valuation method: $7.26(DCF), $6.15(M&A) $5.66 (traded peers) –> $6.35/share (linear average)

We will update it after the 1Q23 release this Thursday.

Risks

Illiquidity: the average volume of this micro-cap is around 30000 shares per day, which makes it pretty difficult to have a position for any fund. Even, for wealthy retailers, it could take several days/weeks to create a position on it. Furthermore, it trades on OTC markets, with the restrictions it implies. The bid ask is usually wide.
Competition: Microcap restaurants may face intense competition from both local and national restaurant chains, making it difficult to attract and retain customers.
Economic conditions: Restaurants are highly sensitive to economic conditions, and a downturn in the economy can lead to decreased consumer spending and decreased profitability.
Labour costs: The current Tight labour market makes $GTIM face rising labour costs, including minimum wage increases and the costs of benefits for employees.
Food costs: particularly for key proteins will hurt the profitability of the business. After a complicated 2022, price of main ingredients is softening. However, any fluctuations in food costs can have a significant impact on $ GTIM’s profitability

Conclusion about Good Times Restaurants

We find a company that has no debt, cash represents a third of its market cap. It is growing and repurchasing shares, directors own 25% of the company and no analysts are covering the stock. It is illiquid and it is in an industry which has suffered from pandemic and inflation. But we believe that it should be trading much higher than where it currently is.

The company has gone through a transition period during the last three years and they are exiting it now. We believe that there are several options to materialise the hidden value of the company. Being the most probable, from our point of view, being acquired either by another company or taken private. In the meantime, the company is ready to grow again. We will need to closely monitor food inflation, the labour market situation and consumer sentiment. But we are confident enough about the future of the company and we have built a position during January.

Disclaimer: This should not be taken as investment advice. As specified in the text, the author of the analysis is long on the company. And not intentionally but some opinions could be subjective. Investing in illiquid microcaps entails a considerable amount of risk. Before investing in any company, deep due diligence and an understanding of the risks associated with it are needed.

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