Description

Summary: Good Times Restaurants (GTIM) is a Colorado-based microcap ($26 million EV) restaurant operator with a long history of losing money. At about $2.50/share, the stock trades below book value and at just 5x depressed (September-ended) FY23 adjusted EBITDA despite having minimal long-term debt. I think it is being set up for a sale sooner rather than later and should be acquired for at least $5/share, or double the current price. GTIM traded above this price as recently as 2021.

History/Background

The most amazing thing about Good Times is that it still exists. The company operates two distinct hamburger restaurant chains. Its first restaurant opened in Boulder, CO in 1987, and the company went public in 1992. Good Times has been anything but a good time for its shareholders ever since. From its 2023 10-K: “We have incurred losses in 29 of our 36 years since inception.” Wow. This statistic is slightly misleading since the company has typically generated positive EBITDA but has often had write-downs. Even so, it is obvious that Good Times has barely hung on against the onslaught of competition in American fast food over the past 30 years.

Good Times’ original concept was Good Times Drive-Thru Burgers, now known as Good Times Burger & Frozen Custard. It is (obviously) a fast-food burger place. For simplicity, I will refer to the restaurant chain as “Drive Thru” (as the firm sometimes does) and the entire company as “Good Times.” There are presently 31 Drive Thru locations: 29 in Colorado and two in Wyoming. Of the 31 stores, 25 are owned and operated by Good Times and six are franchised. Drive Thru stores are primarily drive-through and walkup only with no indoor seating and are freestanding. The average customer check is about $13 and owned stores generated an average of $1.5 mil. in sales per store in FY23, or about $30K/week.

As will be discussed more later, Drive Thru was nearly sold a few years ago and it is viewed by management as having limited prospects. Although its recent results have been respectable, Drive Thru only produced 26% of Good Times’ total revenue in FY23, the number of locations has been dwindling, and no openings are planned. Good Times has tried to improve results at Drive Thru for years with various new food items and partnerships and nothing has really worked. Meanwhile, the Colorado fast food market just gets more and more competitive, with both In-N-Out and Whataburger entering recently.

Good Times’ second restaurant concept, Bad Daddy’s Burger Bar, is its focus. Unlike Drive Thru, Bad Daddy’s is full-service dining. Founded by two restaurant entrepreneurs, the company opened its first location in Charlotte, North Carolina in 2007. Around 2011, Good Times’ management decided to add another restaurant chain to its portfolio because fast-food hamburger restaurants were becoming commoditized and overbuilt. It looked at a couple dozen of possible acquisition before choosing Bad Daddy’s, a concept with a more varied menu than Drive Thru. In 2013, Good Times bought 48% of Bad Daddy’s and acquired the franchise rights for Colorado, Kansas, and Arizona. Soon after, Good Times began to open Bad Daddy’s stores in Colorado. The Bad Daddy’s investment and store openings were partially funded by a secondary offering at $2.50/share. 

Good Times acquired the remaining 52% of Bad Daddy’s for $21 million in 2015. At the time of the deal, there were 13 Bad Daddy’s locations, including three that had been opened by Good Times in Colorado. As Good Times’ stock price was a lot higher in 2015 than it had been in 2013, the company was able to complete a secondary offering of 2.4 mil. shares at $8.15/share to finance the deal and further development of Bad Daddy’s.

Bad Daddy’s is a “better burger” concept with stores with indoor dining and bars. Alcohol accounts for about 12% of its sales. Unlike Drive Thru, Bad Daddy’s locations are in strip malls rather than freestanding. After acquiring some joint venture interests last year (discussed later), Good Times now owns and operates 40 Bad Daddy’s locations in seven states, with most in North Carolina and Colorado. There is an additional location in the Charlotte airport that is operated by a licensee. The breakdown of owned locations by state is below. Bad Daddy’s accounted for 74% of Good Times’ revenue in FY23 and the typical store averages about $50K/week in sales. In FY23, the average Bad Daddy’s location that had been open for at least 18 months achieved an average of $2.6 million in sales.

As was the case when the acquisition was completed about a decade ago, Good Times’ management believes that Bad Daddy’s has more potential than Drive Thru. There are no plans to open more Drive Thru locations, but Good Times wants to open a couple Bad Daddy’s stores per year. However, construction and rent costs have been rising and Bad Daddy’s recent results have been disappointing. The chain bounced back from the pandemic with a profitable year in FY21, but then recorded operating losses in both FY22 and FY23 due to depressed sales and higher wage and input costs. Given these factors, Good Times is unlikely to open more than one or two new Bad Daddy’s stores over the next couple of years.

Here’s some financial data on Good Times’ two restaurant concepts:

Like all restaurant companies, Good Times has been stung by higher costs in food, packaging, and wages over the past few years. This has been especially true in Colorado, where there have been minimum wage increases and the unemployment rate is super low at 3.4%. Good Times has been able to raise prices in some cases, but its sales are presently not strong enough to recapture all the added expense.

Management Dispute

Barry Hoback was Good Times’ CEO from the time of its IPO in 1992 until 2019. Hoback was a lifer at the company, having started at Good Times’ predecessor company as a 16-year-old busboy. In late 2017, with the company reporting losses, two of its institutional shareholders and board members, Charles Jobson and Robert Stetson, demanded changes. Claiming that their business plans were being ignored, they quit the board and began to call for change from the outside. A few months later, they agreed to rejoin a downsized board, effectively increasing their influence at the company. Soon after, they nearly sold Drive Thru (discussed in the next section).

Hoback remained as CEO after the dispute, but he eventually resigned under pressure in October 2019. He was replaced in the position by Ryan Zink, who had been the acting CFO. Today, Good Times has just four board members: Jobson (chair), Zink, Jennifer Stetson (daughter of Robert Stetson), and Jason Maceda, a former executive at Dunkin’.

The management changes over the past few years likely increase the probability of a sale. Jobson is Good Times’ largest shareholder, owning about 20% of the outstanding shares. He is a former hedge fund manager and has experience in private equity. In one recent deal, he was part of a group that took a European food company private in 2019. Jobson launched a SPAC in 2021, but it dissolved without a deal last year. After that disappointment, I can only assume that he is eager to find a buyer for Good Times after years of terrible returns (i.e., 10-year annualized return of negative 2%). A sale probably would have happened by now if not for an ongoing lawsuit.

White Winston Lawsuit

Good Times is involved in a lawsuit related to its efforts to sell Drive Thru about five years ago. In mid-2018, just after the dispute between Jobson and Stetson and the rest of the board, Good Times’ board decided to sell Drive-Thru to raise capital to build Bad Daddy’s. The original plan was to sell Drive Thru for 6x-8x its annual EBITDA of about $2 million, or about $12 million-$15 million. Early attempts to solicit buyers did not generate much interest, probably because Good Times was reporting negative same-store sales at the time. One of the few interested parties was a Texas restaurant called Hat Creek Burger Company, but it could not afford to buy Drive Thru by itself. In December 2018, a Boston-based private equity firm called White Winston heard about Hat Creek’s interest and approached Good Times about a plan to buy Drive Thru on its behalf. In a complicated move, White Winston intended to combine Hat Creek, Drive Thru, and a third (dying) restaurant company that it controlled called Larkburger.

Over the next few months, Good Times and White Winston negotiated over details and price. There were a few disagreements over leases and such. Ultimately, White Winston was unwilling to meet Good Times’ original asking price, offering $9.75 million with $8 million in cash and the rest in promissory notes. Good Times’ management grudgingly accepted this offer because Drive Thru’s comparable sales were consistently negative in the early part of 2019. Good Times and White Winston signed a non-binding letter of intent (LOI). 

Then, in late spring 2019, Drive Thru’s sales numbers began to improve. So, in June, Hoback tried to convince the board to either call off the sale or demand a higher price. The board originally decided to stick with the original deal but, with the sales process dragging out, reconsidered, and voted in August to raise its asking price to $11 million in cash. White Winston refused to accept the new price and claimed that it had a binding offer to close at $9.75 million even though the final Stock Purchase Agreement (SPA) had not been signed. Neither side was willing to budge, so White Winston sued Good Times in Delaware court, demanding $18 million in damages. 

The main issue in the lawsuit was whether Good Times had violated the LOI by acting in bad faith. White Winston argued that Good Times raised its price to kill the deal intentionally. In FY2022, Good Times recognized a $332K charge for contingent legal expense. In January 2023, the judge in the case ruled in favor of Good Times, deciding that it had a legitimate reason to ask for a higher price (better results) and that evidence showed that it was willing to close at $11 million. Unfortunately, White Winston decided to appeal the ruling.

The recent news is that the appeals court was expected to hear oral arguments in the case in late January 2024, but did not. Good Times’ latest 10-Q discloses that the oral arguments were cancelled and that the court could rule at any time. My (non-expert) assumption is that the court did not need any more information and is going to dismiss the case. If this is correct, Good Times can release the $332K contingency and save on litigation expense related to the case. I don’t know exactly how much Good Times has spent on it, but its professional fees increased $1.5 million in FY21 and then another $600K in FY22 and I believe that most of the increases were due to the lawsuit.

The litigation between Good Times and White Winston has probably prevented Good Times from selling either Drive Thru or the whole company by now. Drive Thru is probably worth more than 2019’s $11 million asking price because its operating income is much better. Good Times doesn’t provide segment-level EBITDA but Drive Thru had $2.3 million in operating income in FY23, quite a bit higher than in either 2018 ($500K) or 2019 ($700K). 

PPP Loan

Good Times got an unexpected boost from the global pandemic. In the years after it acquired Bad Daddy’s, it opened several stores each year and partly funded this expansion with bank debt. Consequently, the company had nearly $13 million in net debt when the pandemic broke out in 2020. Luckily, it received a PPP loan in May of that year for $11.6 million that it did not need to pay back. Good Times used the proceeds from this loan to help fund debt paydown in FY20 and FY21. By the end of FY21, Good Times was completely debt-free. The company currently is in a net cash position with bank debt of just $1.25 million.

Store Purchases

Good Times has been acquiring Drive Thru and Bad Daddy’s locations that were either franchised or not 100%-owned. In March 2022, Good Times acquired a Bad Daddy’s store in South Carolina from a franchisee for about $700K. Ten months later, in January 2023, it paid $4.4 million to buy out joint venture partners (affiliates of the original owners) in five Bad Daddy’s stores in the Carolinas. This deal valued the stores at about $1.8 million each, or about 5x EBITDA. Soon after, near the end of FY23, it acquired two Drive Thru restaurants in Colorado from franchisees for $1.3 million. These sorts of deals are probably easier and more economical than opening new stores. For example, construction costs for a Bad Daddy’s store that opened in FY23 were $1.9 million. 

These acquisitions will allow Good Times to invest in needed upgrades in these stores. The company has been installing digital menu boards and such. Moreover, the deals should make it easier to sell the company as there are fewer parties are now involved. There is a possibility of more deals soon as five of the Drive Thru stores are joint ventures in which Good Times has 50% ownership.

Comparable Sales and Efforts to Improve Results

Good Times’ biggest recent problem has been Bad Daddy’s weak same-store sales. In Q1 FY24, Drive Thru recorded 4.1% same-store sales growth, but Bad Daddy’s comparable sales dropped 6.2%. These results were a continuation of the previous quarter’s (Q4 FY23) trends in which Drive Thru’s same-store sales grew 2.4% but those of Bad Daddy’s fell 4.9%. Bad Daddy’s problems have included service levels, weather, and even construction near some important locations. On recent earnings calls, CEO Ryan Zink has discussed several efforts to improve results at Bad Daddy’s, including improvements in service, new food and drink items, extended hours, and targeted price increases. While Bad Daddy’s results are not expected to improve much in the short term, Zink is confident that they will turn around later in the calendar year. Good Times probably needs to post better results at Bad Daddy’s before looking for a buyer for the company.

Stock Buybacks

As openings of Bad Daddy’s have slowed, Good Times has had extra capital for share repurchases. In August 2021, Good Times announced a tender to purchase up to 1.4 million shares at $4.60/share. The tender was very undersubscribed as only about 333K shares were purchased. As it turns out, this was a lucky break for the company as the stock price is down by nearly 50% since then.

In February 2022, Good Times approved a $5 million share buyback. Under this program, Good Times has (through December 2023) repurchased 1.3 million shares for $3.7 million, or an average of $2.84/share. Given the share price (which I think is extremely low), it makes sense for the company to prioritize buybacks over other uses of capital, such as store openings.

If (as I expect) the lawsuit is close to its end, Good Times should be able to use the $332K reserved for the case for repurchases.

NOLs

Given its long history of GAAP losses, it is not surprising that Good Times does not pay income taxes and has significant tax loss carry forwards. As of the end of FY23, the firm’s NOLs totaled about $13.7 million. It also had an additional $6.3 million in general business tax credits from 2014-23. In FY23, the company recognized a valuation release of $10.5 million as it determined that its tax assets were likely to be recognized. As of the end of the most recent quarter, it reported a deferred tax asset of $11.5 million on its balance sheet. Good Times’ tax credits could be attractive to a buyer, but their use would be limited by change of control regulations.

Income Statement

Making projections on Good Times is difficult as there is no guidance from the company or analyst estimates. The fiscal year is off to a difficult start due to Bad Daddy’s poor Q1 sales numbers. My assumption is that Good Times’ results don’t improve much this fiscal year and that the company reports a small net loss.

EBITDA Calculations

Good Times’ adjusted EBITDA has averaged $6.1 million over the past seven fiscal years. If we use this as a baseline amount, Good Times is trading at less than 5x adjusted EBITDA at its current enterprise value of about $26 million. It will be difficult for Good Times to reach FY23’s adjusted EBITDA of $5.5 million after the poor Q1 results.

Balance Sheet

Good Times had about $0.20/share in net cash at the end of Q1. Its only debt is a $1.25 million bank loan that has an interest rate of 8.45%.

Good Times trades below its BV of $32 million.

Cash Flow Statement

Despite its problems, Good Times consistently generates positive operating and free cash flow. There have been several non-cash writedowns over the years.

Valuation

Good Times is extremely cheap by just about any measure. There are currently about 11.4 million shares outstanding, and the company has $0.20/share in net cash, so the current EV is about $26 million. At this valuation, Good Times is being valued at a woeful 0.2x sales and 0.8x book value even though it does not appear to be at risk of financial distress.

Good Times’ acquisition of 52% of Bad Daddy’s in 2015 valued the chain at about $40 million. Since then, the firm has spent tens of millions of dollars to add nearly 30 Bad Daddy’s locations and acquire the joint ventures. Thus, Good Times’ current valuation implies that the expansion of Bad Daddy’s since 2015 has wiped out a huge amount of value. Moreover, Good Times nearly sold Drive Thru in 2018 for about $10 million but its results have since improved. I believe that Drive Thru could be sold for $15 million today. If accurate, then the current EV implies that Bad Daddy’s by itself is only worth about $10 million, or about 10% of its annual sales. While I concede that Good Times has not been any great winner, I do not think the massive value destruction implied by its current EV is justified.

I think the fairest way to value Good Times is by looking at its EBITDA and cash flow. Over the past seven years, Good Times’ annual adjusted EBITDA averaged $6.1 million. If we use this as a typical level, then the stock is trading at less than 5x adjusted EBITDA. While adjusted EBITDA can be a manipulated number, Good Times’ annual FCF has also been around $6 million over the past few years. Moreover, its operating cash flow has been even higher at annual average of $7 million over the past seven years. The company recorded nearly $8 million in operating cash flow in FY23 even though it was not a particularly strong year.

Given these EBITDA and cash flow numbers, it’s not difficult to justify a price of $5/share, which is an EV of about $55 million. At $5/share, Good Times would be valued at about 7x-9x adjusted EBITDA or cash flow. The stock traded at $5/share as recently as 2021.

Another way to value the company is by considering the value of the stores. The recent acquisition of joint venture interests valued each Bad Daddy’s location at about $1.8 million. If I use this valuation for all the owned locations, then the Bad Daddy’s stores alone would be worth $72 million. The 25 owned Drive Thru stores could be worth about one third as much per store, or a total of about $15 million. Based on this method, Good Times would be worth about $8/share, or triple the current stock price.

Possible buyers of Good Times include FAT Brands, MTY Food Group, Inspire Brands, or private-equity investors. FAT Brands would seem to be an obvious acquiror since it has been aggressively acquiring restaurant concepts and already owns three hamburger-focused chains in Fatburger, Elevation Burger, and Johnny Rocket’s. One complication is that Fat Brands’ stock price looks as about sickly as that of Good Times. A better option may be Canada’s MTY, which owns about 80 restaurant brands and has been expanding in the U.S. In 2022, MTY acquired BBQ Holdings, parent of Famous Dave’s and others, for $200 million, or about 7x EBITDA. Finally, Inspire Brands owns Arby’s and Sonic, a clear comp for Drive Thru.

Overall, I believe Good Times should be acquired at a price above $5/share. If the company is not sold entirely, it could look for a buyer for Drive Thru that would generate cash that could be used for buybacks and to build Bad Daddy’s. Moreover, it would potentially make it easier for investors to see the extreme undervaluation of Bad Daddy’s that is implied by the market.

Risks

• This is an obscure microcap with practically no institutional ownership and a limited float. The usual warnings apply.

• Good Times has a long history of losing money and there is no clear path to consistent profitability.

• The restaurant industry is extremely competitive and many costs, such as food, labor, and packaging, have been rising.

• Good Times has a tiny board and management team and only recently hired a new CFO.

• There are the usual risks that apply to all restaurant companies, such as the risk of contaminated food, health emergencies, labor shortages, the health of the economy, etc.

• One shareholder holds more than 20% of the outstanding shares and could attempt a take-private deal at a low price.

Summary: After decades of futility, I think Good Times will be sold, probably within the next two years. The main goal to attract a decent offer must be to achieve better results from Bad Daddy’s. While it works on fixing Bad Daddy’s, it makes sense for Good Times to repurchase its shares below book value and buy franchises when possible. My assumption is that Good Times will be sold for at least $5/share, double the current share price.

Catalyst

sale of company, better results from Bad Daddy's, stock buybacks, lower inflation