2017 Year in Review

My 2017 Year in Review is really easy again because I didn’t make any changes in 2017. I didn’t make a single trade in 2017. My positions remained the same as the beginning of the year. I was down around 16% in 2017, compared to the S&P 500 which gained 22%.

Like I said a year ago, fundamentals in the restaurant sector have become tougher and sentiment towards the industry has gotten even worse, but I think GTIM continues to outperform the industry and will continue to grow despite the industry’s troubles. I think a healthy shakeout is happening in the restaurant industry where weaker brands are slowing growth or closing units. This will take awhile to play out but will ultimately lead to a stronger environment for GTIM. While many other publicly traded restaurant companies had roughly flat sales, declines in same store sales, and declines in EBITDA, GTIM still managed to grow sales robustly, grow same store sales, and grow EBITDA in 2017.

Same store sales and average weekly unit volumes were still healthy in 2017, although restaurant margins took a slight hit, mostly due to the Colorado minimum wage increase. This will continue to be an issue as Colorado’s minimum wage continues to increase every year through 2020. The company expects restaurant margins to improve in 2017 however, as most of their new store openings will be in states with lower minimum wages. A proposed change by the Department of Labor to allow tip pooling with back of house workers may also help if it is instituted.

I continue to think the next 12-24 months will be key for GTIM. If things go as management expects, then new stores will perform as expected, and with the more favorable wage structure overall margins will improve, adjusted EBITDA will increase significantly, and I would expect the share price to recover. If new stores do not perform as expected, then it would be cause for me to reevaluate my investment thesis in GTIM.

Also noteworthy is that several of GTIM’s largest shareholders are proposing board changes and changes to increase (near term) profitability. I am honestly not sure how I feel about this at the moment. The large shareholders have not provided any details on how they would achieve this increased profitability other than ‘a sustained focus on productivity at all levels of the company’. I feel that current management has done a good job in a tough environment and I wouldn’t want any changes made which could damage the long term growth opportunity of the company by cutting back on quality, service, etc. However, I do think it is good that some external pressure is being applied to management to keep them vigilant in looking at all ways they can improve operations and profitability without compromising long term growth.

While I do not believe that GTIM’s long term prospects have changed appreciably, with the benefit of hindsight I should have diversified and taken at least a little off the table when GTIM was in the $10s. The extremes that stocks go to continue to surprise me, as I never anticipated GTIM dropping all the way to $2. Having more of a cash cushion would have made a world of difference to my flexibility and overall returns of the past few years. Another lesson learned.