Good Times Restaurants: 2023 Annual Update
I review each position in my portfolio on a yearly basis and now it’s time for Good Times Restaurant Ticker:(GTIM). Linked here in this sentence are my two previous articles with more background information on the company and why I like it Link1 and Link2. I’ve been trying to find four key metrics to track for all my positions. For GTIM the four key metrics are restaurant store growth, comparable restaurant sales, AFCF Margins, and restaurant-level margins with a focus on the Bad Daddy’s(BD) brand as that one is where the growth is.
In short, GTIM had a bad 2022 with no restaurant growth as the number of restaurants declined from 74 to 72 and margin decay as Restaurant-level margins went from 17.4% in 2021 to 14.6% in 2022. So far in 2023, things haven’t improved. You could say comparable restaurant sales(CRS) of 11.2% in 2022 is good but that wasn’t enough to offset the massive amount of inflation the restaurant industry experienced in 2022.
GTIM Key Metrics
| Year | Q1 2023 | 2022 | 2021 |
| Number of Restaurants | 72 | 72 | 74 |
| BD Restaurants | 41 | 41 | 42 |
| Restaurant Margins | 12.3% | 14.6% | 17.4% |
| BD Restaurants Margins | 12.6% | 13.40% | 16.72% |
| BD CRS | 2.4% | 11.2% | 18.2% |
| AFCF Growth | N/A* | 3% | 7% |
– I calculate AFCF as operating cash flow minus capex for maintenance and distributions to noncontrolling interests
Looking at the whole industry or at least all the ones I track there was a 10% overall decline in restaurant-level margins(which is the cash flow that a single restaurant generates excluding depreciation and corporate expenses) from 16.5% in 2021 to 14.8% in 2022. As I said above this is caused due to massive inflation in food and labor costs. Good Times had food costs and labor costs increasing 21% and 13% over 2021.
| Restaurant Level Margins | ||
| Ticker | 2022 | 2021 |
| ARKR | 13.880 | 14.790 |
| BJRI | 11.30 | 11.90 |
| BLMN | 15.600 | 16.500 |
| CAKE | 12.000 | 14.100 |
| CBRL | 9.500 | 10.500 |
| DENN | 10.200 | 16.000 |
| DIN | 4.019 | 6.370 |
| DRI | 20.800 | 20.800 |
| EAT | 8.600 | 11.800 |
| GTIM | 14.599 | 17.954 |
| KRUS | 21.200 | 4.900 |
| NDLS | 11.600 | 15.900 |
| RUTH | 15.600 | 19.000 |
| SHAK | 17.40 | 16.70 |
| STKS | 16.600 | 19.800 |
| TXRH | 15.700 | 16.900 |
| WING | 19.000 | 18.300 |
| FWRG | 17.900 | 19.500 |
| PTLO | 22.600 | 26.600 |
| LOCO | 13.200 | 18.400 |
| RRGB | 13.000 | 14.300 |
| CHUY | 19.600 | 24.600 |
| JACK | 16.500 | 24.300 |
| Average | 14.800 | 16.518 |
| Percentage G/L | -10.40% | |
Future
I’m still in the fade inflation camp and there are signs that things are getting better.
Looking at food away from home inflation(Blue Line) which is a proxy for restaurant menu price increases. Food away from home is now outpacing input cost inflation from food(Red Line) and labor(Green Line). I use beef prices as a proxy for food costs as most restaurant’s largest food cost is beef. The fact that menu price increases are above input costs starting in Q4 2022 suggests to me that 2023 could see margin expansion for restaurants. So far in Q1 2023 GTIM saw a decline. Last year this chart was the other way around and margins came back terrible I’m hoping this year with the chart the right way round things might finally turn around this year.
Another indicator I looked at in my last article was Tyson’s beef production. This was a proxy for the supply chain. Both 2021 and 2020 beef production was well below 2019 which was pre covid. Tysons beef production in 2022 is now fully recovered from covid. So we should see continued moderation in food prices going forward.
Tyson’s Beef Production per Week (Unit=Heads of Cattle)
| Fiscal Year | 2022 | 2021 | 2020 | 2019 |
|---|---|---|---|---|
| Production | 155K | 120.9K | 119.35K | 131.75K |
Other restaurant chains are forecasting much lower inflation in food than in 2022. Darden (DRI) is forecasting low-single-digit inflation and BJ’s is forecasting mid-single digits food inflation. Both had mid-double digits last year. So this is another reassuring point.
Survival
GTIM is still in a good position to continue to survive in these tough times as I highlighted in my last article.
- Even though in Q1 2023 GTIM had negative operating cash flow this was mostly due to a large negative change in working capital. So GTIM is still most likely going to generate positive cash flow
- GTIM has 7M in cash with 1.1M in Receivables (Link)
- GTIM has no debt currently and has a line of credit of $8M that they can access
- The lawsuit that GTIM was in last year seems to now be over. The judge dismissed White Winston Select Asset Funds(The plaintiff) claims on January 25th 2023. This could save GTIM between $500K to $1.5M by my estimate. Assuming the plaintiff doesn’t appeal.
The risks still are
- Inflation does not moderate next year. More supply chain shocks could cause this.
- GTIM needs to raise equity. They were able to avoid this during covid but we’ll have to see if they can steer the ship safely.
- Restaurant level Margins decline below 10% and stay there with no hope of improvement.
- Recession !!! Considering the 10Y-3M yield curve is inverted could be about to happen.
Conclusion
GTIM had a bad 2022 but I do think that inflation could finally moderate and hopefully GTIM could at least maintain margins YOY. GTIM’s financial position should keep the company alive until these headwinds go away.
