Boyd Hoback - Chief Executive Officer, President and Director James Zielke - Outgoing Chief Financial Officer Ryan Zink - Chief Financial Officer.

Will Slabaugh - Stephens Inc. Jeremy Hamblin - Dougherty & Company Steve Anderson - Maxim Group.

Good day. And welcome to the Good Times Restaurants, Incorporated Fiscal 2017 Third Quarter Earnings Call and Webcast. By now, everyone should have access to the Company's third 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. And now, I would like to turn the call over to Boyd Hoback. Please go ahead, sir..

Thank you, Brandon. Thanks, everybody, for joining us again this afternoon. I’ve got with me today, Jim Zielke, our outgoing Chief Financial Officer; and Ryan Zink our incoming new Chief Financial Officer. Jim will be with us until the end of this month, working with Ryan on the transition, and we certainly wish him great success in his next venture.

And I’m really appreciative of all he has done for us. We’re also very excited to have Ryan on-board and look forward to great things.

I'll cover a summary of our third 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 fiscal '17 and our initial guidance for fiscal 2018.

We were generally pleased with our results for the third quarter for both of our brands. However, we faced some unexpected cost of sales increases due to escalation in almost all of our protein costs impacting our third quarter operating margins and our fiscal year guidance.

Jim again will provide more detail on what we’re expecting for the balance of the year, but we as well as others in the industry anticipate that beef and bacon costs particularly will begin to come down by the first quarter of our fiscal 2018. We took small price increases at both brands on August 1, which should help our cost of sales this quarter.

Our total revenues for the quarter increased 20% to $21.7 million with comp sales increasing 0.1% at Bad Daddy’s and 3.7% at Good Times. And again, excluding the Cherry Creek location, which continues to be significantly impacted by construction in the surrounding area, Bad Daddy’s comp sales increased 1% for the quarter.

The sales at Good Times marks the fourth straight quarter sequential improvement in comp sales, and was slightly better than the guidance given last quarter of 3% to 3.5% for the quarter.

Our sales for the Bad Daddy's restaurants for the quarter increased 28% versus last year to about $13 million, and restaurant level operating profit due to non-GAAP measure, increased 18% to $2,235,000 or 17.2% as a percentage of sales.

And again, as I mentioned last quarter, on a current average unit volume of approximately $2.7 million, our North Carolina stores have a restaurant-level operating profit of over 20%, so we anticipate we will see improved operating margins here next year into the coming years as we anticipate most, if not all, new stores will be in states with a similar wage structure as North Carolina.

Our Good Times sales reflected results of our $3 West Coast Burger and $5 combo intro, which went into place at the very end of our second quarter. While we saw a small reduction in our average transaction, it was more than made up for in-traffic gains.

Later in the quarter, we shifted our television advertising media to the new hotter, juicy, and cheesier message on our core burgers, along with the introduction and merchandising onsite of a premium burger of the month. We’re currently this quarter splitting our advertising between the West Coast message and our Better Burger message.

When we opened up our new store in Greeley, New Good Times in March, we implemented a new kids meal, which I mentioned last quarter that had a new menu line-up and price point, and we subsequently put that into an additional store, and we’ve seen more than a doubling in our kids meal sales and family transactions.

So with those results, we plan to roll that out system-wide in our first fiscal quarter of 2018 with media advertising support.

And really the focusing of that message still being on our core positioning of all natural burgers and chicken offering for kids, but now with a much wider product choice at an attractive introductory price point that we have also included a token for a free custard cup or cone. So that whole program has been resonating and working very well.

We’re also pleased with our Bad Daddy's same store sales trend during the quarter, particularly given the weakness in the casual theme bar and grill segment nationally. We continue to push our weekly and monthly chef specials and we’ve actually accelerated some of those.

Most of those are focused on premium burgers and sandwiches, and we’re in development of a lower price and smaller portion lunch menu.

We provide not only unique recipes and great food, but we really sell big food with large side portions, and we’re finding that that can be a little bit of a limitation for lunch, and people may want an al carte sandwich or a smaller portion with a slightly lower price point, so So we’re testing that new lunch menu with wider price and portion choices, but without discounting any of our core menu at all, it’s really comprised of new menu items.

We’re also in development of an expanded happy hour food menu that we believe can both better support the brand position and have an impact on transactions in the 3 o'clock to 6 o'clock and 8 o'clock to close day parts.

In some markets, North Carolina and Oklahoma, particularly that we’re going into, we’re not able to offer any happy hour discounts on beer or liquor, but we can have compelling food offerings to drive transactions during those occasions.

So we hope to accelerate our same store sales trends through really a three pronged approach at Bad Daddy’s around lunch and happy hour transactions, happy hour comprising five to six hours of the day.

And then thirdly, through a continued focus on the execution of our three basic brand tenants, which we like to call the artfully created burgers, a Bad Ass bar, and radical hospitality.

While we execute very well and are rated higher than almost all of our competitors in each market, we have the benefit of quite a bit of guest feedback through social media that we consolidate every morning. So we have a good idea of where our opportunities lie to continue to widen out leadership gap in quality and service.

We’re finalizing our test of an online ordering platform that should be ready to go hereby into the system in our first fiscal quarter, and that we expect to enhance our existing take-out business and our order accuracy and internal efficiencies on our take-out business.

We’ve also moved into test this quarter with one of the larger delivery companies at two stores, seeing very encouraging initial results. But as I mentioned last quarter, we plan to take that slowly and take that a step at a time and make sure that we’re carefully evaluating its efficacy and fit for Bad Daddy’s.

Our class of 2017 Bad Daddy’s stores that we’ve opened so far continued to generate above average sales, and we project them to maintain that slightly higher volume into fiscal 2018.

We have one new store in Oklahoma that’s slated to open this month, and two more stores under construction in North Carolina that we’ll open in late-September to meet our goal of opening eight new Bad Daddy’s in this fiscal year.

We’ve given guidance and plan to open seven additional stores in fiscal 2018 with all of those funded out of cash flow from operations, and additional senior debt. We are currently expanding our development line of credit with Cadence Bank from $9 million to $12 million, which will provide funding for the fiscal 2018 plan.

We anticipate that that expansion of that credit line will be completed this quarter. With 21 Company-operated stores open today and 12 of those in Colorado, we again anticipate that our overall operating margins will improve as the next 10 planned stores, three this year and seven next year, are all in lower minimum wage states.

With that, I’d like to turn it over to Jim to review more of our Good Times and Bad Daddy’s financial results for the quarter..

Thanks, Boyd. As it relates to Good Times brand, sales increased 10.8% from $7,715,000 last year in the third quarter to $8,546,000 in the current year, driven by the 3.7% comps that Boyd had mentioned plus strong sales in our new Greeley restaurant. The 3.7% comps for the quarter, again were slightly better than our guidance of 3% to 3.5%.

And for the quarter, traffic was up right around 3% in comparable units. And we do have about year-over-year menu price increase of approximately 3%, but with some mix shifts into the West Coast burger, as Boyd mentioned, our average check was up right around 0.7% for the quarter.

Food and packaging costs at Good Times were 32.7% for the quarter, and this was an increase of 0.6% versus last year’s third quarter and an increase sequentially over our previous quarter, the second quarter, by 1%. Total labor costs at Good Times increased to 33.3% from 31.7% for the quarter last year.

Most of this relates to the increase in average wage rate of approximately 8% to 9% for the quarter versus last year. Again, as we’ve mentioned in past calls, a very competitive labor market here in Colorado. Plus on January 1, 2017, there was a statutory increase in the Colorado minimum wage of 12%.

Restaurant-level operating profit for Good Times increased $28,000 to $1,536,000 from $1,508,000 million last year during the quarter. And as a percent of sales, restaurant-level operating profit margin declined by 1.5% versus last year.

As it relates to the Bad Daddy's brand, sales increased 28% versus last year to $10,164,000 from there to $12,972,000 this year. This was due to the six new units opened since the end of last year's fiscal third quarter, resulting in 56 more store weeks this quarter than last year.

We did achieve 0.1% positive comps for the quarter, 1% excluding the Cherry Creek location. 10 Bad Daddy's restaurants were included in the comp base for the entire quarter, and one more was added during the third quarter. And for Q4, we’ll add three more additional locations, entering the comp base this coming quarter.

Costs of sales at Bad Daddy's were 31.1% for the quarter, an increase 0.8% versus last year and increased sequentially over the second quarter by 0.5%. Bad Daddy's labor cost increased to 36.2% from 35.6% last year.

This increase was largely due to higher mix of source in Colorado than last year, which as Boyd mentioned, has higher tip employee minimum wage as compared to North Carolina.

The minimum wage increase in Colorado, mentioned earlier, has had an even larger impact on Bad Daddy's than on Good Times, as the tipped employee wage actually increased 19% this past January 1st, and that resulted in approximately 150 basis points increase in our hourly wages in those Colorado locations.

Overall, restaurant-level operating profit for Bad Daddy's was $2,234,000 for the quarter or 17.2% of sales compared to $1,889,000 last year or 18.6% and that was an increase of $345,000 over last year. General and administrative expenses increased to $1,831,000 during the quarter from $1,585,000 million last year.

But again, decline -- continues to decline as a percent of total revenues from 8.8% last year to 8.4% this year. Again, we anticipate that G&A expenses will continue to decline in future years even as we add our base of restaurants and increase G&A in key areas.

Our net loss for the quarter was $247,000 versus net income of $547,000 last year in the third quarter, mainly due to the increase in preopening costs from just over $100,000 last year to over $800,000 this year. Our year-to-date adjusted EBITDA increased from $2,317,000 last year to $2,476,000 this year.

In the release, we did provide guidance for the balance of fiscal 2017. The total expected revenues of $78 million to $79 million and a revenue run rate at the end of the year of $92 million. The revenue estimate includes same store sales assumptions for the balance of the year of plus 3% for Good Times and flat to slightly negative for Bad Daddy's.

We expect to open three new Bad Daddy's restaurants during the fourth quarter for a total of eight in fiscal 2017. Total adjusted EBITDA is expected to be $3.5 million to $3.7 million for the year, and we expect $7 million in G&A expenses, which includes approximately $800,000 in non-cash equity compensation expense.

We also expect pre-opening expenses of approximately $2.5 million and capital expenditures of approximately $11 million to $11.5 million, including about $1 million to $1.5 million estimated for early 2018 development that will be incurred in fiscal ‘17.

We expect the year-end debt balance of $5 million to $5.5 million; again, against that $9 million credit facility at Cadence. We've also provided guidance for 2018 in the release. Our total expected revenues for next year are $100 million to $102 million with the revenue run rate at the end of the year of $108 million to $110 million.

The revenue estimate includes same store sales assumptions for the year of 3% to 3.5% at Good Times and 1% to 2% at Bad Daddy's with for Bad Daddy's a range of flat to slightly negative in the first quarter to ranging from there to about 2% in the third and fourth quarters.

We expect to open seven new Bad Daddy's restaurants during fiscal 2018, which would include two joint venture units. Total adjusted EBITDA is expected to be between $5 million to $5.5 million. We expect approximately $8 million to $8.2 million in G&A expenses next year with again approximately $700,000 of that being a non cash compensation expense.

We also expect pre-opening expenses of around $2 million to $2.5 million and capital expenditures of approximately $10 million. So that -- roll that together and that debt would cause us expected year end debt balance of about $11 million to $11.5 million.

We finished the quarter with $4.1 million in cash and had drawn $4.1 million on our Cadence credit facility.

We believe our excess cash balance and our debt facility will support our total CapEx needs related to new stores through the end of fiscal '17, as Boyd mentioned, with the increased expansion of the senior debt facility to $12 million that would support our fiscal 2018 development. Now, I would like to turn the call back over to Boyd..

Thanks, Jim. We're pleased with the progress we're making in what remains a very challenging, competitive environment. But we’re disappointed that we weren't able to flow through more of our sales gains to the bottom line due to both the commodity cost increases and the continued disproportionate increase in Colorado wages.

But we believe our core commodity cost will come down and hopefully significantly; based on what’s happening in the protein markets; we've moderated our expectations a bit for fiscal 2018 and we've also projected a growth rate that we will maintain a relatively conservative amount of debt on our balance sheet; but that we believe can deliver 40% to 50% growth in our adjusted EBITDA over the next few years as we plan to fund that growth really only from internally generated cash and reasonable senior debt without any other financing sources.

We appreciate your time with us today. With that, Brandon, we'll open the call for questions..

Thank you. We will now begin the question and answer session [Operator Instructions]. Our first question comes from Will Slabaugh with Stephens Inc. Please go ahead..

Just want to clarify on the guidance reduction that that was primarily cost of goods associated.

And was anything else going on there with regard to either timing of openings or same store sales that might be trending a little bit lower than you thought before today?.

So the main thing -- well, the main thing is the cost of sales increased compared to our prior call. There’s only about six weeks that moved around on our store weeks. Our Norman store is going to open a couple of weeks later than originally planned, and then the stores in North Carolina are opening right at the very end of the fiscal year.

In those, we had a few more store weeks in for those. So really that’s only about 40 to 50 grand of the EBITDA change would be the store weeks moving. The other is, we did have -- we’re running closer to that 1% to 2% even a little bit higher on Bad Daddy’s comps.

And again, we ran pretty flat this last quarter; and right now based on that trend we kind of projected flat to slightly negative next quarter. So that’s a little bit of impact there.

But again, the main thing really is the cost of sales, especially on the Good Times side where some of that increase happened in the third quarter, but it really is more impacting this fourth quarter and that’s why we accelerated our price increase; we usually take in October, we took that in August instead to help mitigate some of that.

But it's mostly the cost sales change..

And as far as 2018, what do you factor into your guidance in terms of cost of goods inflation?.

For the most part, because we started the year of fiscal ’17 quite a bit lower than we’re ending, the fiscal ’18 guidance really had really relatively flat total for the year compared to fiscal ’17; might start a little -- again we’ll start out higher than we were in fiscal ’17, but hopefully in a little bit lower because we’ll be kind of rolling over where we are right now.

And we do expect, again, expect some decreases to take place here in this next quarter. So it’s relatively flat on the cost of sales side in ’18 versus ’17..

And I want to ask about development too. Can you talk about how confident you are in the scale of development for 2018? It sounds like those are all pretty well signed or at least drawing close. So it seems like you feel pretty good there.

And I’m curious on timing and the potential for any of those to slip versus what we’ve seen in the past?.

I think we’re -- and again, we try to be very reasonable in our expectations on those openings. Most of those are signed or about to be signed; we have one new store in Atlanta, one new store in Chattanooga; we’ve got some more coming into North Carolina; one into the existing market in South Carolina. So we’re real confident on those.

We’ve got a taste set of one in the first quarter and then two, two, and two, right now and certainly have the capabilities from our real estate standpoint to do more, but we really are moderating the growth based on our cash flow and access to debt and the level of debt we want to maintain..

So we’ll be -- again, just slightly back loaded on that. And again, we opened seven and I think we’ll be in that 3 -- weighted average of about 2.9 or 3, is kind of what’s built into the guidance..

And one last thing about -- what was the amount of pricing that you took at both brands recently?.

So it’s roughly about 1.5..

Our next question comes from Jeremy Hamblin with Dougherty & Company. Please go ahead..

So I want to just come back to the visibility here on the seven units for next year, and just get a sense of the timing over the course of the calendar that you are expecting, front half back half loaded. And it looks like you’re choosing to have two JVs in this group of seven. So I want to get a little insight on that.

But let's first start with the timing and visibility on these fiscal '18 units..

Sure. So the one we’ve got slated for the first quarter is actually already under construction, so we’re confident on that, it will be middle of the first quarter. And then we’ve got slated two for each of the following three quarters. And assuming that they’re appropriately mid quarter on all of those, we’re highly confident on those.

And then we’ve got most of those signed and are working on the last couple now. And then we’ve also got actually our first few for fiscal 2019 that are in new developments that are also already signed, and a couple more that are pending on that.

And so, again we’ve tried to be conservative on what we thought might be at the end of 2018, we’ve actually pushed into beginning of 2019 and have others then that we’ve got slated in for 2018. So the one, two-two and two we’re very confident of..

And you have leases signed for the Q2 fiscal '18?.

We do, yes. We have five out of the seven leases signed, and we’re down to the short stokes on the final two..

And then how are construction costs coming in versus expectation?.

They have gone up a little bit, I think from our standpoint, we’re still hitting on and are comfortable with our average of about $1 million net of landlord contributions. The landlord contributions can vary fairly significantly, safe to say.

But as we negotiate those contributions against the rev, we’re still coming-in in that $1 million, anywhere from probably $950,000 $1.1 million, so averaging just over a million on our 3,700 square foot standard prototype.

That does not include a rooftop unit, which tends to be couple of hundred thousand dollars more such as [indiscernible] that we just opened in Raleigh last quarter, but generally our model is still maintaining right around that $1 million net investment level..

And then I want to come to the margin guidance for the year. And obviously, it looks like you’ve run into some cost that you didn’t expect. And I think the -- in terms of getting -- the guidance implies that you’re going to be roughly in the 5% to 5.5% range on your EBITDA guidance, but really you’ve seen a step down now.

You are at 5.7% EBITDA margins in '15 and that step down now the last two consecutive years, how do we build -- give me some credibility here or confidence around that 5% to 5.5%? Where is that going to come from? Because I don’t think you’re really going to see a lot of relief on the labor side..

Yes, I think -- and you’re exactly right, Jeremy. And if you look at the last couple of years; again, most of our development -- well, practically all of our development on the Bad Daddy's so far has been Colorado where we face the wage pressures.

And then you add to that companywide then the Good Times being all Colorado, has faced not necessarily just the statutory wage impact but just the market wage impact here, 8% to 9% pretty much the last couple of years of wage inflation.

So again with flat to only slightly positive comps this year, wage inflation like that does -- it does cost overall erosion of the contribution from Good Times.

So going forward, I think the big thing for us is opening all of these stores in Federal minimum wage states, the only one, that exception is Oklahoma, has 363 minimum wage versus 213 but that's compared to 628 in Colorado. So Oklahoma is the only one that's not at the 213.

So the margin structure or store, like Boyd said earlier, $2.7 million average in North Carolina, which is current average we’re well over 20% restaurant level profit. So opening stores in those higher margin states is really going to be the key to helping improve the EBITDA margin contribution..

And then in terms of maybe even looking a little past next year in the seven units.

How should we be thinking about fiscal ’19 and beyond? Are we looking at the six, seven, eight, nine units that's a run rate that's may be a better way to be thinking about it rather than on a percentage basis?.

Yes, I think it'll probably be. I think that would be the very low end.

Again, based on what we hope is a conservative estimate for fiscal 2018, we would hope to be able to accelerate from that seven to eight pace as we look into ‘19 and ‘20 based on our projected EBITDA and then access again to how we pegged our senior debt and what leverage ratio we're comfortable with.

Hopefully, we would be getting into the 10 to 12 range in those years. And again assuming we don't raise any additional capital, which we don't have any plans to it $350 a share..

So I think the other question just on the run rates here in the stores. And you're guidance implies 3% to 3.5% for Good Times for next year, which I think given the run rates that we're seeing in the industry, feels like it could be aggressive. The 1% to 2% in Bad Daddy's seems reasonable. But you have seen a step down here in recent months.

So my first question is, what do you think is driving the step down in Bad Daddy's to these lower comps? And then building the bridge here on the 3% to 3.5% for Good Times in fiscal ’18 on your comps? What's the composition of checked, and traffic and….

So, I'll take that second question first. So on the Good Times comps and really on the Bad Daddy's as well, I mean we're really -- we're pretty much assuming flat traffic. Our historical at least the last year right now we're at 3% year-over-year price; although, with a little change in the mix, we're not getting the full 3% right now.

But because of the West Coast, but we certainly have made it up in traffic, and have been able to achieve 3 plus comps here since April. So really, we’re assuming continuation of what we’ve been experiencing the last four months on Good Times, is relatively flat traffic, little bit of traffic gain but then we’ve got around 3% price in there.

So that’s really the underlying assumption on the Good Times. On the Bad Daddy’s, 1% to 2% does imply maybe even a small traffic decline, because we’re probably going to be in the, around 3% range in terms of price increase on Bad Daddy’s as well.

So in terms of what happened with comps on the Bad Daddy’s; again, it’s a small number of units in the comp base; you have a couple, the Cherry Creek store; again, we believe at some point that thing is not only going to flatten out but it’s going to improve substantially when the hotel right next to us and the road is opened up to both ways inside of a one way street right now.

That, as you see us, that was 9/10 of our impact in this recent quarter and about 6/10 to 7/10 impact year-to-date. And then again just take one or two other stores that we’re running, declined 3% to 4% each. We have a couple of stores we’re doing double-digit comps, are now single-digits.

And then we do have a couple of stores that have slipped to slightly negative. And then there is one store and another one in Colorado that’s again negative in the mid to high single-digits. So it really is a matter of just a few stores impacting overall as opposed to the entire bell curve moving negative..

We have a pretty wide range on that small base of same-store sales from, as Jim mentioned, one restaurant that had six new competitors opened across the street and a new development, which historically we take a near-term hit and then we get them business back.

But we have from raging from that to a store that still high mid-teens same-store sales growth, and everything in between. So it’s a small base and you almost can take it store-by-store on evaluating the same-store sale..

Our next question comes from Steve Anderson with Maxim Group. Please go ahead..

Just want to continue the discussion on the Cherry Creek location. Is there any indication of when you expect this comp drag to lift? And I have a follow-up..

Well, I wish I could have a crystal ball. The street in front of the restaurant still close, so one way; the Marriott Jacquard Hotel next door has got their structure up, but they still have a crane in place. The two twin residential towers right behind us have cranes in place. So there is still a fair amount of traffic disruption.

I can tell you, we are seeing some improvement here this quarter for whatever reason and we anticipate that as soon as the Marriott structure is complete and they take their crane down, will have the street in front of us back open and we can reopen our patio again.

We anticipate that being probably over the next four to six months, that’s the first event. And then the hotel itself really being complete is probably about nine to 12 months away for the opening of the Jacquard.

Then I think then we certainly expect, particularly once we’re -- when we’re comping over double digit down that we should be able to be copping double digit up and get back to flat pre-construction..

And my follow up question will be on Good Times. I know there has been -- there’s recently to increase the throughput.

Can you give me a little bit of an update on that initiative, and what kind of -- can you just say what kind of comp that you’re seeing from the increased number of transactions?.

Yes, I think what you’re probably referring to is the cook lines that we put into -- new cook lines we put in as of March, and that initiative wasn’t really so much around throughput as it was around pretty significant quality improvements to the product.

And that’s been very well received, and that’s part of I think where we’re seeing some of our gains from a traffic standpoint. That we did in April and then we’ve been advertising it. But we really haven’t had initiatives against our speed of service.

Our speed of service, which we track pretty carefully, has maintained pretty consistent with prior year in terms of our total transaction time. So we haven’t seen much difference there..

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

Again, thank you all for joining us today. And for those of you that had some questions, if you have any follow up, you feel free to call in. We’ll be happy to get into that at a deeper level. Thanks very much..

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