I added a little more GTIM around $3 this week. I wish I had more cash to buy more here, but I never expected GTIM to go this low. I think the decline in GTIM (70% from its high) is overdone. The current market environment does not want to pay up for growth, and GTIM is not showing earnings currently as it invests for Bad Daddy’s expansion.
GTIM’s adjusted EBITDA is positive and growing year over year, however. As I mentioned previously I think it is important to look at adjusted EBITDA in GTIM’s case since depreciation and store pre-opening costs are significant percentages with the small store base. Adjusted EBITDA per share has not grown as much however because of the dilution over the past few years to pay for the initial Bad Daddy’s stores and Bad Daddy Inc acquisition last year. I think it was definitely worth it, however, as I expect Bad Daddy’s to account for practically all of GTIM’s growth going forward, and I think the Bad Daddy’s concept will eventually become far larger than the Good Times concept. Going forward however I expect there to be far less dilution, and I expect adjusted EBITDA per share growth to keep up with adjusted EBITDA growth.
GTIM’s conference call did nothing to change my opinion of the validity of my investment thesis. I have gone over it in-depth already, so I will just mention a couple points from the call which I felt confirmed the investment thesis is still on track.
Management said that they have not seen any changes in their customer behavior or spending patterns due to macro-economic conditions. This confirmed my belief that all the problems which have been bandied about for the decline in stocks (Europe, China, oil, other commodities) really have very little effect on GTIM.
Management said they really see their competition as casual dining (Applebee’s, Chili’s, Olive Garden, Outback Steakhouse, Lonestar Steakhouse, etc) instead of fast casual. This confirmed my thoughts which I mentioned in my previous post, which I thought was a good thing since I thought the competition was more fierce in fast casual than it is in casual dining.
In fact management said one of the best leading indicators for how their new stores will perform has been the concentration of chain casual dining stores in the area. I think this confirms my thoughts that consumers are looking for sort of newer, cooler places instead of the old chains, and that the Bad Daddy’s concept is appealing to these consumers and taking share from the sort of commodity casual dining places like Applebee’s and Chili’s. This is also encouraging since there are approximately 30 Applebee’s and 30 Chili’s in Colorado, indicating plenty of room for expansion still just in Colorado alone.
Management said that the Bad Daddy’s economic model is proving itself, with the Northglenn and Aurora locations (which have been open for more than a year now) both having produced cash-on-cash returns in excess of 50% in their first year. Management also said that the three most recent openings are expected to meet the system average/target with two above average and one below.
I kind of look at GTIM like an investment manager, with each store opening being another stock pick. Some picks will perform better than others, but what is important to me is the overall batting average. As long as GTIM can keep hitting their target model on average with their new store openings then I have no doubt that GTIM will become very profitable. So what does the track record indicate so far? Through the 13 company-owned stores open so far, they are meeting their target on average. Of the 6 stores opened in Colorado thus far they are also meeting their target on average, with 4 above the average and 2 below. The two below are still expected to grow and become profitable, and management believes they have learned why those two opened lower than expected. Specifically, the under-performing stores are in more urban and urban adjacent areas with little surrounding retail, while the more successful stores are in more life-style center type developments. Management said their future openings are of the latter type and that the company is developing relationships with the larger life-style center developers.
Those are the main points I wanted to mention which give me confidence that the investment thesis is still very much on track. And I feel that GTIM’s valuation at $3 had become ridiculously cheap. Perhaps this is best shown by looking at GTIM’s price to adjusted EBITDA ratio divided by expected growth in GTIM’s adjusted EBITDA per share (basically the PEG ratio, but using adjusted EBITDA per share instead of earnings per share).
GTIM’s ttm adj EBITDA is $2.638M. With 12.26M shares outstanding, GTIM’s ttm adj EBITDA/share is $0.22. At $3, GTIM’s price to ttm adj EBITDA ratio was 13.94. GTIM’s adj EBITDA per share is expected to grow approx 70% over the next twelve months, resulting in a price-to-adj-EBITDA/growth ratio of .2. Usually below 1 is considered fair, and higher growers usually deserve better because a 30% grower trading at a 30 times is worth more than a 20% grower trading at 20 times. In GTIM’s case we have a 70% grower that was trading at 14 times. Just ridiculously cheap in my opinion. I would not be surprised if in 5 years or so GTIM was producing adjusted EBITDA close to its current market cap.