Boyd Hoback - CEO, President and Director James Zielke - CFO.

Jeremy Hamblin - Dougherty & Company Andrew Stevenson - Stephens Inc. Greg Fontana - Convergent Capital Partners.

Welcome to the Good Times Restaurants, Inc. Fiscal 2017 Second Quarter Earnings Call. By now, everyone should have access to the company's second quarter 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. As a remainder, this call is being recorded. And now, I would like to turn the call over to Boyd Hoback.

Please go ahead, sir..

Thank you, Gary. Thanks, everyone, for joining us this afternoon. With me today is Jim Zielke, our CFO.

I'll cover a brief summary of our second quarter and current developments and then Jim will provide more details on our financial results for the quarter and year-to-date as well as providing some additional color on our guidance for the remainder of this fiscal year.

At a high level, we're very pleased with our results for the second quarter for both of our brands. Total revenues increased 19% to about $18.2 million during the quarter, with comp sales increasing 3.2% of Bad Daddy's and 0.1% of Good Times.

Excluding the days that we had some Good Times Restaurants closed for kitchen remodels during the quarter, to add our new production line equipment, comp sales increased 0.5% for the quarter in Good Times.

The sales of Good Times marks the third straight quarter of sequential improvement in comp sales which we were happy with and was little better than the guidance given last quarter flat to slightly negative comps for the quarter. And the 3.2% increase in Bad Daddy's also exceeded our guidance of a 1.2% increase.

Sales for the Bad Daddy's restaurants for the quarter increased 33% versus last year to $11.2 million and restaurant-level operating profit which is a non-GAAP measure, increased 35% to $1.8 million or 16.1% as a percent of our sales.

I'd like to reiterate, again, that our Colorado stores have an approximate 500 basis point higher labor costs than our North Carolina stores, simply due to the tip credit minimum wage of $6.28 per hour in Colorado versus $2.13 an hour in North Carolina which is, obviously, very significant.

On a current average unit volume of $2.7 million, the North Carolina stores have a restaurant-level operating profit of over 20%. So we're excited to ramp up our expansion with additional stores, both later this year and in 2018 in the Southeast and Midwest where we can capture that additional margin.

We completed the rollout of a new production line equipment and implemented our product improvements in all of our Good Times stores at the end of the quarter. We rolled new television advertising at the beginning of April.

And as we stated last quarter, our advertising for fiscal 2017 is very heavily weighted toward the last 2 quarters of the year to support those new product enhancements and new product introductions.

It's the first time we've offered a $3 sandwich and a $5 combo price point on our core menu items which we think adds compelling price points to our overall menu between our small Bambinos and our premium sandwiches.

And so far so good, because since its introduction in the beginning of the TV advertising support, the West Coast Burgers are highest-selling burger by a fairly wide margin and the guest feedback has been very positive.

While it carries a slightly higher cost of sales on our more expensive burgers, we continued to stay away from the discounting and how much food can we sell for $4 tactics of our competitors, while our book value proposition continues to be defined by high quality and price choice across the menu.

Later on this quarter, we began television advertising around our hotter, juicier, cheesier, changes to our core burger lineup in tandem with the West Coast Burger promotion which we think are compelling changes and improvements that will continue to resonate.

We're very pleased with the sales results so far this quarter with some further sales acceleration since the 1st of April. So we're very comfortable with our guidance of plus 3% to plus 3.5% comps for Good Times for the last 2 quarters of the fiscal year with those initiatives and additional advertising in place.

In March, we opened a new Good Times in Colorado, with a new prototype design we were very excited about. It also included a new broader kids menu. The new store not only has been our highest volume unit each week since it opened, but both our kids new incidence and our overall check average has been the highest in the company.

And most importantly, the store has generated record sales of well over 2x our average weekly sales. So needless to say, we'll continue to look for new site opportunities for Good Times throughout Colorado.

Our Bad Daddy's same-store sales continued their strong trend during the quarter, particularly given the weakness in the casual theme bar and segment grill - casual theme bar and grill segment nationally.

We continued to position Good - Bad Daddy's to steal share from the commoditized casual theme concepts by focusing on our operational execution of high-quality unique products and the high-energy environment we got to drive word of mouth. And at this point, we've only supported that.

We've limited social media advertising and local store marketing initiatives. Our highest bar sales mix store is now over 24% of sales as we continue to become known for having a compelling craft microbrew lineup and female friendly cocktails.

While we have several new product ideas in development, our new menu items recently and particularly last quarter, have been our rotating monthly chef specials. We continue to believe our biggest opportunity to grow sales is not necessarily through new items are really through focus on execution at a very high level.

And our guest feedback is really supporting that proposition with customers willing to be $3 to $5 more per person for our quality service and unique offerings. And the elements of our Bad Ass Bar that continue to evolve as well.

We're moving into a test of online ordering platform to enhance our existing take-out business at Bad Daddy's that we believe will improve order accuracy and internal efficiencies versus our current order by phone method. And we're also exploring some delivery alternatives.

But we plan to take that a real step at a time as improving our take-out business is a larger opportunity. We have one of our smaller footprint restaurants that does over 18% of it sales in take-out and we believe that we have the opportunity to really enhance that at all stores with better technology and execution.

In addition to our - continuing our strong same-store sales trend at Bad Daddy's, we opened our second new restaurant this year in the second quarter of fiscal '17 in Fayetteville, North Carolina and that's open with very strong initial sales.

In this quarter, we opened our 11th location in the Front Range of Colorado which is also opened with pretty strong sales. Now we have 5 more stores in development in Colorado, North Carolina and Oklahoma, with projected openings in May, June, August and September, to meet our goal of opening a total of 8 stores this fiscal year.

Jim will speak to it in more detail and quantify, but our biggest challenge, I think, along with the rest of the industry is the labor environment and the impact of both the shipping legislative initiatives at the state level and simply the supply of available hourly employee labor pool.

We're continue to look at ways to be more labor efficient and we've instituted more prep-efficient processes at Bad Daddy's, the implementation of the new production lines and equipment at Good Times and we're working on the effectiveness of hiring and screening processes, particular Bad Daddy's as we hire for our new stores.

We recently hired a new training coordinator from the Outback Steakhouse system, who we think has one of the better training programs in the industry. So we're excited to take our training programs and employee recognition engagement to the next level that, ultimately, we think will have some impact on turnover and our labor costs.

I'd like to turn it over to Jim now to review a few of our financial results for the quarter..

Thanks, Boyd. As it relates to Good Times brand, as Boyd mentioned, comp store sales were up about 0.5% for the quarter, adjusted for those kitchen closures which was slightly better than our guidance. We had about a 3% year-over-year menu price increase in place. So our traffic/mix was down approximately 2.5% this quarter versus last year.

Food and packaging costs at Good Times were flat to last year's second quarter, but did improve 0.5% sequentially over the first quarter and improved 0.5% over last year on a year-to-date basis. These costs were approximately 6% higher than last year for the quarter, but declined sequentially versus the first quarter by approximately 7%.

Total labor costs at Good Times increased to 35.7% from 34.1% for the quarter last year. And most of this relates to the increase in average wage rate of approximately 8% for the quarter versus last year.

This is due to the very competitive labor market in Colorado as well as Boyd mentioned, statutory increase in Colorado minimum wage which increased 12% on January 1. Restaurant-level operating profit at Good Times decreased $86,000 to $977,000 from $1.63 million last year during the quarter.

As a percent, restaurant-level operating profit margin declined by 1.7% versus last year. As it relates to the Bad Daddy's brand, sales increased 33% versus last year from $6.7 million to $11.2 million for the quarter.

This was due to the 6 new units opened since the end of last year's fiscal first quarter, resulting in 56 more store weeks this quarter versus last year. We achieved positive 3.2% comps for the quarter which exceeded our guidance of plus 1% to plus 2% comps.

10 Bad Daddy's restaurants were included in the comp base for the entire quarter and 1 more Bad Daddy's will be added to the comp base this upcoming quarter. Cost of sales at Bad Daddy's improved 0.9% to 30.6% of sales compared to 31.5% last year and improved 0.4% sequentially versus the first quarter.

The decrease in cost of sales over the last year was primarily a result of a decrease in beef costs, mainly due to purchasing efficiencies in both Colorado and in North Carolina. Bad Daddy's labor costs increased to 37.7% from 36.9% last year for the quarter.

Again, this increase versus last year is due to a higher mix of stores in Colorado than last year which as Boyd mentioned, has the highest tipped employee minimum wage rate as compared to North Carolina.

The minimum wage increase in Colorado, mentioned earlier, has an even larger impact on Bad Daddy's than on Good Times, as the tipped employee wage increased 19% on January 1 in Colorado, resulting in approximately 150 basis point increase in our hourly wages in Colorado locations.

Overall, restaurant-level profit for Bad Daddy's was $1.8 million for the quarter or 16.1% of sales compared to $1.336 million last year or 15.8% of sales, an increase of almost $500,000 and improvement of 0.3% as a percent of sales. G&A expenses increased to $1.746 million during the quarter from a $1.005 million last year.

The decline as a percent of total revenues from 9.9% last year to 9.6% this year. We anticipate the G&A expenses will continue to decline as a percent of revenue in fiscal '17 and in future years even as we expand our base of restaurants and increase our G&A spending in key areas.

Our net loss for the quarter was $711,000 versus a loss of $673,000 last year in the second quarter. Year-to-date, adjusted EBITDA increased 22% from $884,000 to $1.077 million this year.

As noted in past calls and obviously from our guidance of adjusted EBITDA of over $4 million for the full year, the last 6 months of our fiscal year are seasonally significantly more favorable than the first 6 months for both the Good Times and Bad Daddy's brands.

We're reiterating our expectations for fiscal '17 with total expected revenues of $78 million to $80 million and revenue run rate at the end of the year of $92 million to $94 million.

This revenue estimate includes same-store sales assumptions for the balance of fiscal '17 of 3% to 3.5% growth at Good Times and plus 1% to plus 2% comps for Bad Daddy's. We expect to open a total of 8 new Bad Daddy's restaurants in fiscal '17.

Total adjusted EBITDA is expected to be between $4 million and $4.5 million as compared to fiscal '16's adjusted EBITDA of $3.4 million. We expect approximately $7 million in G&A expenses, including approximately $800,000 in noncash equity compensation expense.

We also expect preopening expenses of approximately $2.5 million to $3 million and capital expenditures of about $12 million, including $2 million estimated for early fiscal '18 development incurred this fiscal year. We finished the quarter with $4.8 million in cash and had drawn down $1.4 million on our $9 million debt facility.

We believe our excess cash balance and our debt facility will support our total CapEx needs related to new store development through the end of fiscal '17 and we have plans to expand our senior debt facility for fiscal '18 development. And now, I would like to turn the call back over to Boyd..

Thanks, Jim. We're, again, very pleased with the progress we're making in one of the very challenging, competitive environment. And we also believe we now have a good pipeline of good locations for fiscal '18 development with additional leases and letters of intent signed or pending in North Carolina, Oklahoma, Georgia and Tennessee.

We're now regaining not only our same-store sales growth at Good Times done recent traffic growth as well and now we have our 8 Bad Daddy's stores for this fiscal year fully in development. We're finalizing on development plans financing and expectations for fiscal 2018 which we plan to share as we move into our next quarter.

Again, appreciate your time with us today. And with that, operator, we'll open the call for questions..

[Operator Instructions]. The first question comes from Jeremy Hamblin with Dougherty & Company..

I wanted to just first ask you about the acceleration in Good Times results.

Is that purely you think being driven by the addition of the West Coast double and the classic double to the menu? How granular can you be in terms of attributing that acceleration?.

We certainly think most of it is attributable to that. We haven't released and quantified that for this quarter, but we're really happy with the results so far with that acceleration. It's not a coincidence that it's really coincided - we had a good March overall, but we've seen significant further acceleration in April once we rolled television.

We've been off air for almost 4 months. So coming back on air one being on the air consistently, but also with a pretty compelling new offering, we think it's absolutely tied to that. It's obviously bowing out in the sales mix. The West Coast is just screaming in terms of its sales mix..

Right. And then, can we - can I assume that in terms of thinking about the guidance 3% to 3.5%, is - how does April compare in what you're lapping versus May and June in terms of thinking about? Are the comparisons getting tougher throughout the quarter? Because I'm guessing that you may be tracking ahead of that 3% to 3.5%..

Jeremy, we're - again, we're comfortable with 3% to 3.5% as our guidance. Just to kind of let you know last year, it didn't really fluctuate that much. We're down between negative 1% and negative 3% each month of last year's third quarter. So wasn't - it didn't bounce around a whole lot. So that's what we rolling over, is negative 2.0% for the quarter..

Okay. Great. And then I wanted to just transition to Bad Daddy's for a second. And you mentioned, I believe, in the script that your North Carolina average unit volumes are like $2.7 million. And I think you said restaurant margins are over 20%.

Did I hear that correct?.

You did, yes..

How does that compare to Colorado? What are the AUVs in your Colorado locations? And what are the restaurant-level margins?.

Well, we have a lot of image for stores. So it's kind of tough, including stores that have not even been open a full year. So it's just kind of tough to give a fair comparison. We certainly have the advantage of the Carolina stores all having been opened in their second year and beyond and are fully mature.

I think our expectation here, as we get towards the end of this fiscal year with the 2 additional stores we have underway in Colorado, as we move into '18, we will be approaching $2.5 million, $2.4 million to $2.5 million. The store - one store we've opened, obviously, opened strong.

We've got another one opening up in North Carolina this month and then another one in Colorado in June which we have pretty high expectations for. We anticipate we'll be a couple of hundred thousand dollars behind. And as I mentioned in the script, we have about a 5% margin hit just on our tip credit minimal wage.

So North Carolina is running 20, 21, we're going to be 5 points behind that in Colorado - 5 to 6 points just because of the operating leverage and the additional sales plus the labor we had..

Great. That's very helpful. And obviously, that's going to alter your color into some degree what your future openings are looking like.

It sounds like you're going to be concentrating more in the Southeast?.

Yes, partly because Colorado is built out and we'll have - we're getting our 12 stores under construction right now. So we're pretty fully developed out here. Opportunistically, if we think we've got a store that can do 2.7-plus, we'll probably continue on with it here in Colorado.

But because of the margin difference and again, that's why we pivoted off of Arizona, the same reason, that the margin difference, the labor friendliness, plus we think the concept's going to continue to resonate real well on the Southeast. So we've got our first Atlanta store that will open in October.

We've got our stores in Tennessee that we're working on right now that we've got in the pipeline. And then we've got 2 additional Charlotte stores that will open this fall - first quarter of fiscal 2018 as well. So we plan on continuing to develop very heavily shifting towards the Southeast and some in the Midwest in 2018..

Okay. Great. And then, just in terms of the - following up on unit openings, you mentioned that you've got 5 more that should get opened this quarter - I mean, sorry, this year.

How many of those are leases actually executed at this point? And then, the second one is how many of them are actually under construction as of today?.

4 out of the 5 are actually under construction. The fifth lease is signed. We've got 3 that are frapping around here between September and October and 2 out of those 3 are signed. We're - the third one is getting ready to sign here. So all 5 are fully - 4 under construction and the fifth one, we've got permitted and entitled.

And then are - the ones we've got slated for October and November, we're also in final permitting and those leases are signed..

Okay.

So it seems like the risk at this point is pretty limited in terms of not getting to the 8? Or is there a chance that one of them slips maybe into Q1?.

Yes. That could happen based on just landlord delivery on the last one or if we run into a contractor problem, but they're all finished shells that are up and existing.

So unless we run into a permitting problem on one of those last ones, right now our openings are slated, I'll tell you, for the last week of May in Raleigh - our third store in Raleigh. June 26, here in Arvada and then we've got Norman, Oklahoma in August and 2 in September. One of those 2 could slip a week, but I think, we're going to be okay..

And Jeremy, just from kind of a risk to the guidance standpoint, not the historic number, but just kind of store week's contribution. We've got about 10 to 11 store weeks in our model for those last 3.

So those are the ones that could move around a little bit, but again, only about 10 to 11 store weeks are in our expectations for this year, for those 3..

Great. And then, again, on the Bad Daddy's side, wanted to ask 2 other questions, just on kind of mix of business and so forth. I think you said that your alcohol mix at Bad Daddy's is about 24%.

Was that just for this quarter? Is that on a run rate?.

No. No, what I said was our highest mixed stores....

Yes, highest mix. Right..

Yes, we're continuing to run just a little under 20 in Colorado and we run around 13 to 14 in North Carolina and that's pretty consistent. We're moving it up a little bit in Colorado. We've got some bar initiatives in place for this summer.

Our best-selling cocktails or Bad Ass Rocks Margarita, we've got a version of that in test in a little bit different profile. We've got some other cocktails in test that we plan on rolling this summer. So we anticipate that being pretty consistent here. Seasonally, it will pick up a little bit with the warm weather..

And over the last couple of years, has that mix of alcohol been pretty consistent? Or you - is that kind of a major initiative at some point?.

It has moved up a bit. I mean, we were about 90% in Colorado in the kind of the original 3 stores and we - again, we've seen a little bit growth there. And then, the higher volume bar store is actually one of our newer ones. So that's raised that Colorado average to 20 or maybe a just a slight bit over..

Okay. And then the last thing is on - you've talked about takeout and online and some work being done on online ordering.

What is your overall mix at Bad Daddy's for takeout? And then how many of your locations have online option today?.

Well, let me answer the second one - answer the second one first. We don't have any online capability today. It's all done by phone..

Okay..

And that's part of the difficulty. So we're working right now with an online ordering company that will be fully integrated with our POS system through our website. And then on a separate test, we're working with a delivery company which will also have online ordering integrated to the POS through their website.

I don't have off the top of my head our takeout. I think we run from mid-single digits to - again, our top - highest volume takeout stores runs in the high-teens, around about 18%. So big broad range depending on kind of the profile of restaurants and if they're in the midst of office and that sort of thing..

And then, is the charge - are you going to charge higher prices if you do go online? Because I know a lot of those systems are charged kind of a flat rate of, maybe, 15% to 20% for it..

That's the delivery, that's not the online. So - no and that's why we're taking that real slow. We're taking that a step at a time. The online, we're trying to accelerate as much as we can. There won't be any additional charge for that.

And simply, where our customer can online, go to our website order, pay online and then come into the restaurant and pick it up and not have to go through the phone ordering process. The delivery is the delivery charge and then the delivery company takes that 20%, 25% charge. We're wanting to see how much of that is actually incremental.

There - the history is so far, particularly in full services it appears a lot of that is incremental. That's really the bet on the whole delivery piece. We would not charge higher on delivery orders..

The next question comes from Will Slabaugh with Stephens..

This is actually Drew on for Will.

So just first I wanted to take a step back and kind of get your thoughts on the competitive landscape right now and QSR and kind of the casual bar and grill segment? And when you're ordering both brands, do you feel like it's kind of setting you apart right now?.

Well, the QSR, I think, is - remains as competitive as it has been, particularly with the bundling. I don't - I think the recent additions over the last quarter or so with the last ones that you jump in a big way with SONIC and some other ones.

We're - I think we've seeing the worst of the worst on the QSR side, but we anticipate that it's not going to change much. That it's still a share gain and people will continue to be pretty aggressive on the pricing side and particularly the bundling side.

So our response has been with the West Coast $3 and $5 combo price points, at Good Times and with our quality, it's really ringing the bell. We're not going to play the bundling game or the dollar game.

So we've just been trying to create and engineer products that we can offer at compelling price points that still fit the brand and so far so good on that one. On the full-service side, I think, it's getting more and more competitive and more and more discount-oriented with the challenges that are going on there.

It's going to be interesting to see, again, from Bad Daddy's standpoint, we're taking strategically kind of the same approach. We're not doing any of the 2 for $20 or the bundling.

We're looking hard at our day-part mix and we may choose to be a little bit more price choice - offer more price choice at our lunch particularly, since we sell kind of big food. But we haven't really been impacted too much yet by the discounting environment.

I'll tell you Denver tends to be a little more competitive than North Carolina, both in terms of the level of saturation on seats per capita with full service and particularly with casual theme and the build-out that we have here in Denver as well as the other independents.

And so, I think, we're going to continue to see some washout there and some decline in supply as some restaurants close. But again, our response is really to rely on the brand tenets and that's all about unique offerings and premium offerings and the differentiated service experience..

Yes. Thanks. That's helpful. And it sounds like all your recent offerings have been performing well. So that's good.

And then kind of shifting to the cost side, I'm sorry, I might have missed it, but did you give your beef outlook or commodity outlook for the full year? And then could you just give us any updates on the labor initiatives in Colorado?.

Yes, we actually didn't give specific kind of color on it. It seems right now relatively stable. For us, the beef has picked up a bit here somewhat recently, but not significantly.

So I think, we're going to be relatively flattish on cost of sales kind of from where we're now through the balance of the year with possibly a small increase on the Good Times side, mainly because of this mix shift to the West Coast Burger, as Boyd mentioned, has a slightly higher cost of sales.

And certainly, with the TV advertising right now, we're a little - little bit skewed towards that product. When we change the TV advertising more just to talk about our general cheesier, better burger, that might move some of that mix down a bit, but right now the West Coast mix is causing a little - slightly higher cost sales.

I wouldn't say more than 1 point, maybe 50 basis points at this point, but it will see. So that's - on the labor side, again, we're going to face the minimum wage increase the next several years here in Colorado. That's statutory.

So right now, our average wage rate has been up 7% kind of year-to-date, 8% for the quarter itself, but the quarter was all after the January 1 increase. So that's why it went up a little bit more.

So we're really fighting the labor battle and not just with the statutory minimum wage increase, but just with supply and demand here - especially, here in Colorado on Good Times' side. So again, most of our price increase at this point pays for the labor increase, may not margin percentages, but we're trying to cover the dollar margin impact.

So far, for the first 2 quarters, with pretty much flat comps, we were unable to cover that margin difference in labor costs as the percent of sales went up and our margin dollar went down slightly, but with 3% to 3.5% comps for the balance of the year, I think, we get back to flat to slightly higher margin dollars, although percent of sales still may erode just slightly because of the big labor hit..

Sure. That's very helpful. And then one just kind of housekeeping question. You might have mentioned that as well, I apologize.

On - you had one store in the Good Times base has been affected by construction, I believe nearby, is that still going on or is that sort of all that?.

In the Bad Daddy's, no, it's still going on. It's our Cherry Creek location and I feel like I should post a picture out there somehow. The road in front of us is still reduced to one way. We've got cranes in front of us, cranes in back of us. The new Marriott Hotel next to us is at least now framed up with the structure.

And so we're hoping hereby maybe the end of this summer, we can get the road reopened in front of us. But it's - and that's impacting our - we have such a small number of stores in our same-store sales base, it's certainly affects that. But it's running negative still and will continue to do so here for the balance of the year.

Good news is as we wait this thing out, when it's all done, it's going to be fantastic, but there is one more thing to come..

[Operator Instructions]. Our next question comes from Greg Fontana with Convergent Capital Partners..

It's going to get exciting the second half of this year, next year.

Going into these new markets, I was appreciative that you disclosed the margins and the alcohol mix in some of the differences between the different geographies, but when we look at the newer markets, the Georgia, Oklahoma, Florida, is this modeling, are you thinking about these new units to be closer to comparative to the North Carolina stores? Or is this going to be somewhere between Carolina and the Colorado store in unit level margins?.

Greg, on Georgia, again, most of the margins, as Boyd mentioned, has been related to hourly labor. And most of it is based on the statutory rate for tipped employees. That's the big difference in Colorado versus North Carolina. And Georgia has the federal minimum wage for tipped employees of $2.13 an hour. Oklahoma is a little bit higher.

It's still under $4. So it's not close to Colorado's $6.28. So Oklahoma is going to be closer to Carolina, maybe kind of a 1/3 of the way between your Carolina and Colorado. But Georgia is going to be kind of similar margins to North Carolina. South Carolina is the same..

Really, everywhere in the Southeast. We're not going in the - Florida has tip credit of $5, Oklahoma I think is $3.15, something like that. So it's only about $1 higher than the federal minimum. So - and we have close to the same backdoor cost. We do a little bit better on our distribution here in Colorado.

So there is maybe 0.5 on the cost of sales line in the new markets that will take on cost of sales, but the big, big difference is that 5 points of labor..

Okay. And I think you've made a comment, I don't know if it's - I could look here probably the last call, you once said that your plans when you look at the opportunity set across the immediate time frame, the intermediate term of Southeast, I think, you said 60 stores or potentially in that zone.

Is that still accurate? Have you done any more work on that? And again, so these 60 stores are also going to be stores with margins closer to the Carolina's or somewhere between the 2?.

Yes, I think, the capacity in the Midwest and Southeast is a lot more than 60.

I'm not sure where that reference is, but as we lay out - as we lay out Nashville, Chattanooga, Atlanta, Alabama, South Carolina, North Carolina, even moving up in the Kentucky as well as the Midwest, with Texas, Oklahoma, Nebraska, Kansas, there is a lot more than 60 stores, all of which capture that additional margin.

So I think, we've got a tremendous amount of opportunity of white space with that better margin. So we haven't quantified that.

We're certainly taking a deep dive on each of these markets, both the primary markets as well as the secondary and tertiary markets in the Midwest to really understand capacity and without - part of our - part that we think the allure of Bad Daddy's is continuing to focus on each store appearing to be a one-off.

So we don't want to overpenetrate any of these markets. So we haven't done a deep dive on how many stores we think we can fit in each one of these. And we've got just lots of opportunity. We want to capture as much operational efficiency and distribution efficiency as we grow, but by the same token, not overpenetrate..

So those new markets you're likely to put, rather than growing contiguously and saturating one area after another, you're more likely to go out to the whole space and open up the best sites you can possibly get, play Texas off of Oklahoma, for example, off of Georgia and look for the best AUV as well as margin opportunity across the whole space for the next couple of years?.

I think that's somewhat accurate, but there will be some concentration just for distribution purposes. We don't want to hopscotch and have individual stores in individual markets. But Texas and Oklahoma work really well together as do Nebraska and Kansas. Same thing with Georgia, Tennessee, Alabama, North Carolina and South Carolina.

We're trying to work kind of concentrically out from our existing operating bases and that's probably the most important, rather than getting too far off field and having more from the stores. So as we move into the Midwest, we don't want to pop one in any market.

We'll have - we can put 4 in Oklahoma City and 2 in Tulsa and without ever even going into Texas. We can put quite a few into Kansas City and Omaha is probably a 3 to 4 store town plus Lincoln. So we'll going in and put those stores, but we want to have enough markets in development where we can be selective and take the best sites first..

Okay. And then, financing that's at least for the 20 - fiscal '18, that's another round of credit from the existing credit structure that you have.

And then, I guess, looking forward from that, we'll see where we're and what the options are ahead of us? Or any other thoughts on that, that you want to share?.

I think you probably summarized it pretty well. It's - yes, fiscal '17 and first part of '18 is covered with our facility. And again, there would be - if we expand at the pace that we did here in fiscal '17, there's going to be need to be some expansion of that facility and - in '18 and then kind of beyond.

So we'll see what kind of the best way to do that. Has not been determined, but we think we've got options available to us..

Certainly, there is a limit based on the pace of growth. And I think we'd like to continue to moderate our pace of growth as best we can and be as aggressive as we can of what we can handle. Financing will need to come along with that. So we'll be looking at options as we get later on in '18 and what's the best way for us to accelerate that growth..

Okay, great. And one other thing that unit, the FlatIron Crossing, Brookfield, you guys should be killing it this summer in that store. I just - I think that the opportunity there is just amazing.

Should be one of your best stores, don't you think?.

I hope you're right.

I'm going to take it, you visited it?.

Yes..

It's a good location and again, the one we just opened up is fantastic. And the next one we have coming in Colorado, we think is going to be, hopefully, one of the best. So this summer and a lot of these stores they have not gone through the summer season yet. So we're excited about the spring/summer..

This concludes our question-and-answer session. I would like to turn the conference back over to Boyd Hoback for any closing remarks..

Again, thanks, everybody, for joining us. Really appreciate it. And appreciate all the work that everybody on our team, particularly, our operations folks, have been doing. That's been yeoman's work. Thanks for joining us. Have a good evening..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..