GTIM update

I haven’t posted in a while because I haven’t made any portfolio changes. After GTIM’s most recent results I still think the long term growth thesis is intact and the risk/reward ratio is very attractive at current prices.

Here are some of my main takeaways from earnings and the earnings call.

  • The five Bad Daddy’s units opened so far this fiscal year are averaging slightly above the target model of $2.5 million in sales annualized.
  • Although fiscal 2016 Bad Daddy’s openings will fall slightly short of guidance due to delays in delivery of locations by landlords, management has learned a lesson and is going to manage their pipeline better going forward. Management expects to catch up with their original Bad Daddy’s development schedule by the end of fiscal 2017, and to reach $100 million revenue run rate by the end of fiscal 2017.
  • They expect to reach over 30 Bad Daddy’s by the end of fiscal 2018.
  • Plan to open 4-5 more Bad Daddy’s in Colorado and 3-4 more Bad Daddy’s in North Carolina over the next few years, which will substantially complete build out in those states.
  • Next two new markets for Bad Daddy’s are Phoenix, AZ and Nashville, TN. Arizona could support 10-12 Bad Daddy’s while Nashville allows for expansion to Huntsville, Birmingham, Lexington and Louisville.
  • Other markets that management has looked at include Salt Lake City, Oklahoma City, Kansas City, Wichita, Omaha, Tulsa, areas in the Midwest (cities not specified). If Colorado, North Carolina, and Arizona end up with around 12 Bad Daddy’s each, and other areas can support around 5 Bad Daddy’s each, I see room for expansion to 50 locations, and then later 100 locations.
  • Management might consider changing the company’s name or ticker.

As for why GTIM continues to trade down, I can only guess that it is some combination of the following: unfavorable environment currently for most restaurant stocks, growth stocks, and small cap stocks; GTIM falling slightly short a couple of times on their Bad Daddy’s development guidance; GTIM’s per-share increases in revenue and adjusted EBITDA year-over-year are not as high as the absolute increases in the same due to the dilution to pay for the Bad Daddy’s acquisition; GTIM’s trend of adjusted EBITDA growth is being obscured by pre-opening costs and depreciation, causing operating and net income to look less impressive.

I think all those factors will be overcome in time, however. If GTIM can reach 100 Bad Daddy’s in 10 years it won’t matter if they opened 1 or 2 fewer locations this fiscal year. I do not expect significant dilution going forward so per-share increases in revenue and EBITDA will closely match absolute increases. As GTIM grows, pre-opening and other costs will become smaller percentages, resulting in positive operating and net earnings. Eventually market sentiment for small cap and growth stocks will become favorable again.