Good Times: Equals Good Times For Your Wallet
Introduction
I see restaurants benefiting post Covid because lots of competition got eliminated during the shutdown. This should lead to an attractive competitive environment which should offset margin pressure from labor and food delivery. In this space Good Times (GTIM) sticks out as an enticing business with restaurant operating margins close to its peers, and has plenty of growth ahead of itself. However none of that is reflected in the stock price; trading at less than .5 times sales well below peers. I’ll go over trends in the restaurant industry then delve into why I like GTIM.
Restaurant Industry Trends
Covid Destroyer of all Restaurants
Covid as we all know shut down the country. Restaurants in particular were hurt badly, down 30-40% on sales. Thousands of independent restaurants were put out of business(see link). In the Fortune Article “Of restaurants that closed permanently in 2020, the majority were established businesses and fixtures in their communities; these eateries had been in business, on average, for 16 years, and 16% had been open for at least 30 years. Within this subgroup, these restaurants employed an average of 32 people; and 17% employed at least 50 people before they closed. Roughly 72% of restaurant owners who closed for good admitted it’s unlikely they’ll open another restaurant concept in the future. Only 48% of owners said they plan to stay in the restaurant industry in some form in the months or years ahead.”
Sucks to be those restaurants. But for the restaurants that made it out alive the competitive landscape is much more favorable. This could provide the opportunity for the industry to earn supernormal profits for the next few years. Making me bullish on the industry.
Labor Labor Labor
Labour in general takes up around 30-40% of a restaurant’s sales. So an increase in the minimum wage to $15 an hour assuming restaurant averages are at $10-$12 an hour(just a guess). Could mean a 33% – 20% increase. Which puts a 6-10% hit in margins for all restaurants. Considering most restaurants only have a 10% operating margin. That would be devastating. However if everybody in an industry is hit with the same cost won’t prices just re rate up to a new competitive equilibrium?
Delivery
The big three delivery companies DoorDash, Uber, and GrubHub are eating at the margins of the restaurants. Sales exploded for these companies because of the pandemic. However only DoorDash has any cash flow, so the viability of food delivery at least for now is still in question. As the reopening continues sales will probably decline for these companies. I see either these companies somehow becoming profitable and vertically integrating with the restaurants. Or the restaurants build out their own apps and the food delivery companies disappear.
About GTIM
Good Times operates two brands: the legacy brand of Good Times and the 2015 Acquisition Bad Daddy. Good Times is a cheap fast food burger joint. The average check size is $9.50 per person. Bad Daddy’s is a sit down full service diner specializing in gourmet burgers with an average check size per person of $17. The company has halted the development of Good Times in favor of putting all their effort into growing the Bad Daddy restaurant chain. When they bought Bad Daddy back in 2015 they owned 12 Bad Daddy’s . In five years they tripled that amount reaching 37 restaurants. Bad Daddy has the better economics out of the two restaurants which I’ll go into later in the article. Good management as well as good customer experiences are reflected in its 4.4 star rating via Facebook.
The other business Good Times has had it’s restaurant count decline slightly from 27 back in 2015 to 24 in 2020. Mostly due to covid closures. However, Good Times is no dying business.
Per management:
“Fiscal 2019’s minimal same store sales decline of (0.4%) followed comparable sales growth of 4.2% in fiscal 2018, 2.1% in fiscal 2017, 0.3% in fiscal 2016, 0.9% in 2015 and 14.6% growth in 2014.”
As you can see Good Times is a stable business unit. During Covid we saw very good results from Good Times.
Up 22% year over year. Bad Daddy’s as you can see roared back to flat year over year. So GTIM has pretty much already recovered from the Covid shut down that destroyed a whole bunch of other restaurants and still has restaurant chains like Cheesecake factory, Darden and BJ’s down significantly. To summarize we have a staple legacy brand to anchor the business coupled with a huge growth opportunity in Bad Daddy.
Why I’m Buying
Macro
I’m bullish on Good Times Restaurant Inc and restaurants in general due to what I was saying above that restaurants should enjoy supernormal profits for the next few years and I am not totally convinced that labor will be a huge deal.
Unit Economics
Per the company in their 10K it would cost a franchisee about 1.5 mil to build out a Bad Daddy restaurant which will net 2.5 mil in sales. Slap a 5-10% OP Margin on that and you get somewhere between a 8%-16% Unleveraged ROE at the corporate level. Restaurant margins are even higher at 15-17% which compares with peers Exhibit Z1. That’s around a 30-35% cash on cash return. Good Times is more of a 1-1 cost to sales ratio with about the same margins. So it makes sense that they are pivoting towards this concept. Exhibit A1 and A2 show how I get these numbers. Also the fact that they only have 37 total restaurants for Bad Daddy means they have a long growth runway ahead. And as they increase the store count they should be able to bring that general & administrative costs down from 8.5% of Revenue to a 5% where most larger restaurants are at, increasing that OP Margin by 3%.
Exhibit A1
- FCF= OCF+Pre Opening Costs-Maintenance CAPEX(Representing a FCF number if they stopped growing)
- As you can see, the average margin is around 8% for the past 5 years.
- FCF per share is adjusted for noncontrolling distributions which historically has been higher than the earnings attributed to noncontrolling interests.
Exhibit A2
- Restaurant Level Margins = -4.7+3+1+9.9+2.2+4.3=15.70
Exhibit Z1
| Name | Big Daddys | Texas Roadhouse | Darden | BJ’s |
| Restaurant Level Margins | 16% | 17% | 20% | 17% |
| SG&A as a Percent of Sales | 8.8% | 5.4% | 4.7% | 5.3% |
Management
Insiders own 25% of the company so they are pretty incentivized. Recently they even were buying shares at close to current prices which is what I like to see. See Exhibit B1.
Exhibit B1
Valuation
Currently GTIM stock is trading at less than .5 times Sales. Which means that the market thinks this stock has a 5% margin and has no growth potential which seems extremely pessimistic. Exhibit A3 shows GTIM compared to other restaurant stocks showing relative undervaluation. If we do a simple 10 times FCF multiple on their .58 cents of FCF a share (see exhibit A1) we get a 6 dollar share price then add $1 per share of cash they have on the balance sheet and we get $7 a share. Giving a 40% margin of safety at current prices and we don’t even have to pay for growth plus we get the free option of this turning into a winning franchise. And it’s not even in the Russell 3000 yet.
Exhibit A3(2019 sales used to compute to back out covid distortion)
Data: Collected from 10-k’s
Disclosure: This was my first article so it’s alittle rough.
