Category Archives: consumer stocks

GTIM Q1 earnings

I was overall pleased with GTIM’s Q1 earnings, and liked what I heard on the earnings call about the company’s strategic direction going forward.  Some notes:

  • The North Carolina Bad Daddy’s have an average unit volume of around $2.7 million with around a 20% restaurant level operating margin.
  • New store openings are targeting $2.5 million average unit volume and around 17% restaurant level operating margin, generating 40% cash on cash returns.
  • The Colorado Bad Daddy’s, excluding the Cherry Creek location, generated $3.3 million in restaurant level cash flow last fiscal year, generating 28% cash on cash returns.
  • Construction around the Cherry Creek location should be done around March. Company has an out on the lease at year end if store does not rebound to pre-construction sales level.
  • Management believes they can maintain Colorado restaurant level operating margins with 3.5% price increases the next few years.
  • Fiscal 2017 and 2018 store openings are generating sales 12.3% above the system average.
  • Management believes that they can grow Bad Daddy’s store count by 20-25% annually from internally generated cash flow once they reach around 45 Bad Daddy’s locations.
  • Gross debt should peak towards the end of fiscal 2020 Q2.
  • As the company grows to $10 million + in EBITDA, with 8-10 new store openings per year, very little additional debt will be needed.
  • Management believes they can grow adjusted EBITDA by 40%+ the next few years while keeping debt/EBITDA below 2.
  • As Bad Daddy’s sales continues to grow, the overhead efficiencies from Good Times restaurants becomes less impactful, and company can evaluate alternatives from continuing to harvest cash flow, monetizing assets, or franchising locations.

I believe management laid out a clear, credible path to increased profitability and shareholder value.

In contrast, I do not believe the recently departed directors have articulated a clear strategy at all. Their first SEC filing merely mentioned an increased focus on productivity, without providing any details or specific proposals. Their second filing mentioned re-franchising Colorado restaurants, as well as franchising other areas.

I am not against franchising. I could point to successful examples of both franchised and company owned (as well as mixed) models. However I do not believe franchising is the right approach for Bad Daddy’s at this time.

As the company mentioned, the Colorado Bad Daddy’s excluding the Cherry Creek location generated $3.3 million in restaurant level cash flow last year, which is accretive to earnings. If the company were to re-franchise those units they would be exchanging that cash flow for a franchise fee of maybe around 5% of sales, which would be significantly less.

I think franchising works best for concepts suited to large numbers of locations, such as Subway, McDonalds, etc. Bad Daddy’s is not such a concept. The higher price point, and more finesse required to execute the concept limit the potential number of locations compared to more quick serve or fast casual concepts.  For a concept such as Bad Daddy’s I believe that the benefits of the company owned model of capturing all the operating profit and greater quality control outweigh the benefits of the franchise model, which is primarily the use of other’s capital to expand rapidly and collect franchising fees.

Additionally, if you believe the Bad Daddy’s concept is solid long term (which I certainly do), then re-franchising now seems the equivalent of selling them at the low, when their profitability is likely at a low point due to absorbing the increases in the Colorado minimum wage. After the last of the minimum wage increases in January 2020, profitability should be on the upswing again.

I think management is doing a good job, and keeping an even keel with an eye on long term shareholder value. I think complaints by the departed directors of the stock under-performing during a period of strong overall market returns is not a valid complaint. GTIM should be compared to peers, specifically smaller emerging restaurant concepts. If you look at that cohort, they have almost all gotten crushed – from Habit Burger, to Zoe’s Kitchen, Noodles & Company, Shake Shack, Rave Restaurant Group, etc.

The departed directors reliance on straw man arguments such as that and lack of a clearly defined strategy lead me to believe that they are simply upset that they got stuck in an out of favor, under-performing sector while the rest of the market was ripping higher, and they wanted a quick pop, instead of sticking it out for the longer term, larger opportunity. I believe the franchising approach they are advocating is risky at this time because there simply won’t be a large enough installed store base to generate a meaningful enough franchise royalty stream capable of supporting a significantly higher stock price, not to mention increased execution risk.

Bottom line, I want to see management continue on the path they outlined, growing adjusted EBITDA to $5 million, then $10 million, and on. As adjusted EBITDA reaches those levels, all sorts of possibilities for accelerating increases in shareholder value open up – from accelerating store unit openings, to stock buybacks, to issuing dividends. I still believe that GTIM has the potential to be a 10-bagger, and that management has the best plan to get there.

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.

2016 Year in Review

My 2016 Year in Review is going to be really easy because I didn’t make any changes in 2016. I added a small amount of GTIM early in the year, but that was it. I was down around 34% in 2016, compared to the S&P 500 which gained 12%.

I continue to hold all my GTIM, I have not sold a share. I think my investment thesis is still intact. Fundamentals have become a little tougher in the industry, and sentiment towards the industry has become decidedly worse, but I think GTIM continues to perform largely as management indicated they would. GTIM is a young growth story in the sector, taking share from the larger players, so I do not think their growth is as dependent on the macro conditions in the industry.

Importantly, same store sales, average weekly unit volumes, and restaurant margins at Bad Daddy’s are still at management’s target model in this tougher environment. 2017 guidance for new store openings and revenue are still on track, despite the company deciding to shift planned new openings from the Phoenix market to the Midwest and Southeast instead due to a minimum wage/health care law that was passed in Arizona.

I think the next 12-24 months will be key for GTIM. If new markets perform as expected, then the Bad Daddy’s concept will have proven itself in roughly a dozen metropolitan markets in roughly a half dozen states, with no reason to think that the concept cannot continue to expand nationwide.  As revenues, margins, and profits continue to grow, I would expect GTIM’s multiple to expand. If new markets do not perform as expected, then it would be cause for me to reevaluate my investment thesis in GTIM.

GTIM More Insider Buying and May Investor Presentation

Insider buying has continued at GTIM. The CFO bought an additional 30,000 shares over the past several days, the CEO bought an additional 3,000 shares, and a director (Robert Stetson) bought 26,300 shares. Stetson is the director who founded US Restaurant Properties, a restaurant focused REIT, and who has held CEO and CFO positions at various restaurant and food companies, so he has deep industry experience. Stetson already owned something like 850,000 shares, so I think the fact that he still wanted to add more says a lot. Stetson had sold around 30,000 shares in September of last year, so he pretty much replaced those shares. So overall, I think this recent bout of buying by multiple insiders shows a strong conviction in GTIM’s prospects.

Also today, there is a new GTIM investor presentation which is part of investor meetings GTIM is attending.

GTIM Valuation and Industry Comparison

I decided to do a more in-depth valuation analysis on GTIM to demonstrate why I think it is so attractive currently.

Before getting into it however, I wanted to mention that there were more insider purchases last week. The CFO bought 30,000 shares and the CEO bought 5,000 shares. The June quarter earnings should be good. June is a seasonally strong quarter, it will have more than double the Bad Daddy’s restaurant operating weeks year over year, there will be no acquisition costs unlike last year, and with only one Bad Daddy’s opened during the quarter and the delay in the next opening, pre-opening costs should be down. So adjusted EBITDA should be strong. Hopefully that gives the stock some support, but regardless of whether it does or not I still believe the long term picture is very bright for GTIM, which I think my valuation analysis will show.

To perform the analysis I looked at all the US listed restaurant stocks I could find which had share prices above $1, positive EBITDA, and were regularly reporting. I ended up with a comparison group composed of slightly over 50 stocks.

I compiled statistics on several measures of valuation including price to sales, trailing and forward PE ratios, and EV/EBITDA ratios. I decided the best measure to use was EV to adjusted EBITDA. For most of the stocks in the group EBITDA and adjusted EBITDA were very close. However for the smaller, faster growing companies there were more significant differences between EBITDA and adjusted EBITDA due mainly to pre-opening costs being a higher percentage of operating income. If these smaller companies weren’t expanding so quickly they would be showing greater earnings, thus I felt that using EV/adjusted EBITDA made for a fairer comparison.

I thought the best way to visualize the data was to plot EV/adjusted EBITDA versus the long term expected growth rate, resulting in a sort of PEG ratio, except using EV/adjusted EBITDA. To calculate adjusted EBITDA, I started with the ttm EBITDA from Yahoo Finance, which it gets from Capital IQ. To arrive at adjusted EBITDA I added ttm pre-opening costs, obtained from company filings. I did not make any other adjustments to arrive at adjusted EBITDA. The long term expected growth rate is the 5 year expected growth rate, also from Yahoo Finance, which it says is from Thomson Reuters.

I also compiled statistics on store counts, restaurant level operating margins, and sales per square foot from company filings. These statistics help gauge how realistic the long term expected growth rate is. Smaller store counts mean longer runways for growth, strong restaurant level operating margins can be indicative of a concept with strong consumer appeal, and high sales per square foot can indicate strong cash-on-cash returns (which were not readily available for all compaines otherwise I would have listed it instead of sales per square foot).

Now I can describe the chart below. On the Y-axis is the 5 year expected growth rate. On the X-axis is the EV/adjusted EBITDA ratio. Next to each data point is ticker symbol, number of worldwide store units, restaurant level margin, and sales per square foot. Lastly the colored backgrounds indicate long term expected compounded annual stock returns (more on this in a bit).

At a given EV/adjusted EBITDA ratio, a higher growth rate is favorable. Likewise, at a given growth rate, a lower EV/adjusted EBITDA ratio is favorable. Therefore, generally, the more towards the upper-left area of the chart the better it is, and the more towards the lower-right area of the chart the worse it is.

The blue diagonal lines are drawn at constant EV/adj EBITDA to growth ratios of .5, 1 and 2. This is referred to as the PEG ratio when using PE ratios, but here I am using EV/adj EBITDA instead. The idea is the same, though. A ratio of 1 (meaning the valuation ratio is equal to the growth rate) is generally considered fair. A ratio of .5 (meaning the valuation ratio is half the growth rate) is considered inexpensive, while a ratio of 2 (meaning the valuation ratio is double the growth rate) is considered expensive. So again, being above and to the left of the 1 line, and especially the .5 line, is good, whereas being below and to the right of the 1 line, and especially the 2 line, is worse.

Lastly the colored backgrounds indicate expected long term annual compounded stock returns if the company grows earnings at the expected rate for 10 years and trades at a valuation ratio equal to its growth rate at the end of those 10 years. For example, consider a stock which currently has an EV/adj EBITDA ratio of 10 and an expected long term growth rate of 20%. It is in a green region (an expected compounded annual return of between 20% and 30%). So if the stock grew earnings 20% a year for 10 years, and at the end of those 10 years traded at an EV/adj EBITDA multiple of 20, the stock price would appreciate from both the increase in earnings and an expansion of its multiple, resulting in a 20-30% compounded annual return. Conversely, stocks which currently have a relatively high EV/adj EBITDA multiple compared to their growth rates would sit in orange or red regions, actually resulting in negative annual compounded returns if the stock grew earnings at the expected rate for 10 years and traded at a multiple equal to that growth rate at the end of those 10 years.


The average EV/adj EBITDA ratio for the group is 12.43 with a standard deviation of 7.19. The average expected growth rate for the group is 15% with a standard deviation of 6.2%.

GTIM compares very favorably to the group. It is nearest to the upper-left corner of the chart, and is one of only two stocks in the darker blue region (40-50% compounded annual return). This is due to GTIM’s high expected growth rate (30%) compared to its EV/adj EBITDA ratio (12).

Just to show what a difference pre-opening costs can make for smaller, faster growing companies, the average difference between EBITDA and adjusted EBITDA for the entire group is 6% (adjusted EBITDA is 6% higher than EBITDA) whereas for GTIM the difference is 100% (adjusted EBITDA is double EBITDA).

The number of units, restaurant level margin, and sales per square foot listed for GTIM are for Bad Daddy’s only since Bad Daddy’s will come to represent the vast majority of GTIM’s growth and sales. With only 17 Bad Daddy’s units, GTIM has the longest runway by far, and the restaurant level margin is solid at 15.9% compared to the group average of 18.0%, and the sales per square foot is above average at $693 compared to the group average of $587.

If GTIM can grow as expected I have no doubt the stock will provide spectacular returns. So I wanted to review once more the reasons why I think GTIM will grow as expected.

  • I think Bad Daddy’s is taking share from all the large, established casual dining chains such as Applebee’s, Chili’s, Outback Steakhouse, Olive Garden, etc.
  • I think Bad Daddy’s is appealing to millenials who like trying new places instead of going to the aforementioned chain restaurants.
  • Reports suggests that contrary to the popular narrative, millenials are increasingly moving to the suburbs. However they still want the things urban living provides ready access to – farm to table restaurants, craft beers, walk-able areas. There is even a name for it – “hipsturbias.” This is fueling demand for the types of lifestyle centers that Bad Daddy’s is locating in.
  • I like that Bad Daddy’s is positioned in the casual dining space instead of the overcrowded fast casual space.
  • User reviews for Bad Daddy’s continue to be very good.
  • Bad Daddy’s is proving itself. The locations opened so far are meeting the target economic model.
  • With only 17 locations so far, the runway for growth is very, very long.
  • I think there are some trends favoring the restaurant sector such as increased eating out versus cooking at home, consumers increasingly spending on experiences as opposed to goods, and more recently lower commodity prices.
  • I feel I can understand restaurants fairly well and I do not think they can be “Amazoned.”
  • I think management really gets it. On the most recent earnings call they mentioned where they believe their sales are coming from. They mentioned that they don’t want to appear anything like a chain restaurant. They mentioned that they don’t want to do any big media advertising for Bad Daddy’s for fear of ruining the local, independent feel. They mentioned Texas Roadhouse as a model for using local and social advertising. Texas Roadhouse (TXRH) is one of the few restaurant stocks near an all time high, so I would be very happy if GTIM could emulate TXRH’s success.
  • I think management has really zeroed in on where to place new locations. Management has mentioned how the best leading indicator for store openings is the level of outperformance of competing local chains. Coincidentally I happened to catch a feature on Nightly Business Report the other day on the CEO of Texas Roadhouse where he mentioned that that was one of his best indicators for new location success as well.
  • I think management is honest and forthright in its communication. Having held the stock for around 21 months now, and having listened to numerous conference calls and presentations, and having increased my knowledge of the restaurant sector, I feel that management has been transparent, has largely delivered on what they said they would, and has not clammed up when addressing their problems. I also feel that management is long term oriented, and are good capital allocators.

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.

Added more GTIM

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.

Thoughts entering the New Year

As I mentioned in my year end review, I feel very comfortable entering 2016 with GTIM as my only position. The big picture reason I like GTIM is simple.  With its Bad Daddy’s Burger Bar concept,  it is a classic regional retail/restaurant stock with national expansion potential. However there are many such stocks, most of which will go nowhere. So why do I feel confident betting that GTIM can fulfill its potential? There are several reasons.

1) I believe that the Bad Daddy’s concept is appealing to consumers. It was named by Zagat as one of the best burgers in the country and it is getting good scores on the review sites (Yelp, Google, Urbanspoon, Tripadvisor, etc). The food covers the biggest segments (burgers, sandwiches, and salads) and has options for different diets, and customizable build your own burger and salad options. While Bad Daddy’s is not for the healthier eating conscious, they do have options for vegetarian, gluten free, and low carb diets.

2) I like that Bad Daddy’s is positioned in the full service segment, rather than the fast casual segment. I believe that fast-casual has become very crowded – Bad Daddy’s would have to compete with Chipotle, Panera, Zoes, all the fast casual better burger places like Shake Shack, Habit, Five Guys, all the other fast casual upstarts in other categories too numerous to count, and even all the fast food chains which are trying to upgrade their offerings.

By positioning itself in the full service segment instead, I think Bad Daddy’s competition is rather places like Buffalo Wild Wings, BJ’s, higher end burger places like Zinburger and Hopdoddy’s, steakhouses, gastropubs and sports bars. Still crowded, but far less so than fast casual in my opinion.

3) I think the positioning as full service, slightly higher priced, fits well with where new retail developments and remodels are going – more upper scale, experiential, lifestyle type developments instead of the declining legacy malls and strip mall sites. I think this opens up different, and better long term site opportunities for Bad Daddy’s than if it were competing for the same spots that all the fast casual places are vying for.

I think some of the details of the Bad Daddy’s concept, such as the addition of rooftop bars to some locations,the selections of local craft beers, and the build your own burger and salad options fit in well with the trend towards experiences in both restaurant and retail.

4) Whereas in most industries being the dominant, established player brings tremendous advantages (economies of scale, brand recognition, etc), I think that in a few cases it actually starts to work against the industry leaders, such as when a brand becomes associated with fast or cheap (McDonald’s or Walmart) rather than better-for-you or upscale. In food in particular, I think the trend among the younger demographic (call them millenials if you want) is to discover and try new places rather than the old familiar chains. I think Bad Daddy’s is designed to appeal to this demographic in particular, with its small-box concept.

I think Bad Daddy’s is doing well to avoid the chain perception, even as it adds locations, by making each location feel like a one-off by doing things such as not having all the exteriors look exactly the same, and having the local craft beer selections in different regions.

5) Bad Daddy’s unit economics are attractive, with a high average unit volume (around $2.5 million), high sales per square foot (above $700/sq ft), good restaurant level operating margin (target of 20%), and attractive cash-on-cash returns (40% return after second year open). If Bad Daddy’s maintains those targets as they open more locations I think GTIM will become quite profitable.

6) I think the restaurant sector has some tailwinds which make it attractive for the foreseeable future. Data has shown a long term trend towards eating out versus cooking at home, with recent data showing  spending on dining out surpassing spending on groceries for the first time.

I think restaurants and other small-luxury type indulgences are benefiting from lower gas prices. Even if gas prices were to move up, I am not too concerned because I think these types of small luxuries are among the few indulgences still affordable to the increasingly squeezed middle class consumer.

Dining out is not in danger of being ‘Amazoned’, as many other retail sectors have been. In fact shopping site developers are courting more of the types of businesses which are resistant to online shopping, such as restaurants, exercise/workout places, and other experiential destinations.

7) I think food commodity prices, in particular beef prices, have peaked for the foreseeable future. As they come down that should help restaurants margins. While wages are increasing, to the extent that they are the product an improving economy, I do not think it is something to be overly concerned about.

8) GTIM’s senior management is experienced in the restaurant business. Board members include  former CFO experience at Burger King and Pizza Hut as well as experience in restaurant property REITs.  Directors and executive officers collectively own a lot of GTIM’s shares.

I believe that management is honest and forthright in their communication with shareholders, and have the long term interests of the business at heart. I think management is being prudent in their expansion plans, waiting for the right sites to come along instead of pursuing growth at all costs.

Management has largely delivered on what they said they would do in the roughly year and a half I have been following the company. They acquired complete ownership of the Bad Daddy’s concept and they have mostly met their store opening schedule. If I had one complaint about management it would be that they have been slightly optimistic in their store opening guidance, with the shortfall due mostly to factors outside of their control. I would prefer if they accounted better for such uncertainty.

9) GTIM’s insiders have bought shares recently. Although it could be called just a token amount, the CEO bought 2,000 shares around $6.10 in August. Perhaps more encouraging, the CFO bought 30,100 shares around $4.24 last month (December).

10) It is still early enough in GTIM’s story that I feel saturation is not a near term concern, and GTIM’s valuation is still reasonable enough that I think just a couple years of expansion could have a significant impact on GTIM’s share price. This is in contrast to the plethora of fast casual IPOs of the past few years, which debuted with high valuations and were much further along with their store counts. In almost all of those cases I could envision a scenario in which they grow store counts as expected for several years but the stock price hardly appreciates as it grows into its valuation.

In the case of GTIM, I would be more concerned if they were already at 200 Bad Daddy’s locations, or even 100. But at only 15 or so units, I think Bad Daddy’s should be able to grow to at least 50 units easily. There are numerous public restaurant stocks with 100+ units which are profitable and have much higher market caps than GTIM, but whose concepts don’t have the potential I think Bad Daddy’s does.

11) Although Bad Daddy’s base is very small at only around 15 units, it has been proven in 4 states (Colorado, North Carolina, South Carolina, and Tennessee) in 6 metropolitan areas. One of the Colorado locations has the highest average unit volume in the system. This, plus the appeal of the concept, give me confidence it will work as GTIM expands the concept to other geographic locations.

12) GTIM has a healthy balance sheet, with around $14 million in cash and $3 million in debt. With cash on hand, cash from operations, and a modest amount of debt, GTIM has the resources needed to fund their expansion plans well into 2017 with minimal dilution.

13) As it stands currently, GTIM is trading at around 10-11x fiscal 2016 (which ends in September, not December) EV/adjusted EBITDA. I think adjusted EBITDA is appropriate to look at in GTIM’s case since they are growing off such a small base and pre-opening costs are a meaningful percentage.

I think GTIM can open roughly 10 Bad Daddy’s units a year for the next several years. At $2.5M AUV, that will add $25 million in sales each year. Add in a little same store sales growth, and perhaps a few new Good Times units each year and I think GTIM could increase sales by $30 million a year for the next several years. GTIM has guided to around $70 million in revenue for fiscal 2016. So I think they could do $100 million in fiscal 2017, and $130 million in fiscal 2018. GTIM has guided to adjusted EBITDA at around 6.5% of sales for fiscal 2016. That should expand by a couple of percentage points over the next few years.

If GTIM’s growth pans out as I think it could, then I think GTIM would deserve to trade at least at industry average EV/EBITDA ratio (around 15x) or EV/sales ratio (around 2x) for healthy, growing concepts. Either way I arrive at a price target of at least $15-$20 by the end of 2018. That represents compounded annual growth of over 50% over the next three years.

14) GTIM is a company I think I can easily understand. I feel I understand the restaurant industry fairly well. And GTIM is a purely domestic story so there are no foreign macro conditions to consider. I can follow the user reviews to see if ratings are slipping. As new locations are opened I can monitor if they are producing unit volumes and economics equal to the system average. If things play out as I expect, then sales, earnings, cash flow, cash and margins should all grow and be fairly easy to track.

15) I think the risk/reward at current prices is very attractive. I think the downside at current levels is only around 10-20% and the upside is 200% or more.

So all the above are why I am comfortable with my GTIM position going into 2016, and also partially explain why I was reluctant to sell any GTIM last year, even as I grew more nervous about the overall markets.

This turned into a rather long post, so I will go over the rest of my New Year’s thoughts in a follow-up.

2015 Year in Review

My winning streaks (of both positive returns and beating the averages) came to an end in 2015. I was down 34% in 2015, compared to the S&P 500 which was down around 2%.  Yet I feel better about the risk/reward of my portfolio going forward than I ever have.

I entered 2015 with positions in AA, GTIM, SFM, HABT and YELP, with around 12.5% cash.

My first move of 2015 was to sell YELP in mid January for around a 7% loss. I had just bought YELP near the very end of 2014, but was starting to become nervous about the overall markets and wanted to raise cash, and YELP was my smallest and lowest conviction idea.


In mid February I sold my entire position in AA, largely because I thought other ideas had better risk/reward. I made around 35% on AA. I put some of the proceeds into more GTIM and raised my cash position some more as I continued to grow concerned about the overall markets.


In early May I sold my entire position in SFM. SFM had been a core position for awhile, but by the time I sold I had become convinced that the story had fundamentally changed for the worse. I put some of the proceeds into RAVE, and raised my cash levels yet again.


At the end of May I sold my entire position in HABT, and I added another new position, BSQR. Despite adding a few new positions which I thought had attractive risk/reward, I was still worried about the overall markets and so wanted to maintain alot of cash. So that led to my opting to sell HABT. I made around 15% on HABT.


Near the end of July I sold my entire positions in RAVE and BSQR. I continued to grow concerned about the overall markets and wanted to pare back to my highest conviction ideas. I lost around 7% on BSQR and 4% on RAVE. This also marked the high point for my cash levels on the year at around 40%.



In August I bought and sold a position in GM-B warrants. Despite my concern about the overall markets I thought the risk/reward warranted a position, but I shortly afterwards had a few ideas I liked better, so I sold. I lost around 5% on the GM-B warrants.


Near the end of August I established a position in a new stock, NEWM, and in early September I bought an unnamed nano-cap stock. By mid September concern about overall markets caused me to want to pare back to my highest conviction ideas again so I sold both positions. I broke even on NEWM and lost 5% on the unnamed nano-cap.


At the beginning of October I bought positions in BABA, BIDU, and HABT. Despite my concerns about overall market conditions, I felt the long term prospects of these companies were sound and their sell-offs were overdone. I sold all three positions a few weeks later for 10-20% gains.




The only stock I never sold was GTIM. In fact I added to it as I was selling my other positions. I added to GTIM in July, August, and November. GTIM is my only current position.


2015 was largely about managing the portfolio to weather growing concerns I had about overall market conditions while still trying to find ideas I felt had attractive risk/reward profiles. So I tried a few new positions while selling off others. Ultimately I could not gain enough conviction in those ideas and my market concerns caused me to concentrate in the only idea I did have strong conviction in – GTIM.

Overall I think I had the right idea, but my execution was slightly off. I feel if I had I executed slightly better it would have made a significant impact on my performance for the year. I feel good about closing out the positions I entered the year with when I did. YELP, AA, SFM, and HABT were all significantly lower after I sold them. Likewise I was happy closing out most of my new ideas when I did. In some cases the fundamental stories had deteriorated or were not as strong as I originally thought, and in other cases they were not the types of holdings I wanted going into what I thought would be worsening market conditions. All the positions I sold saved me from significant losses.

GTIM, the one position I held on to, was the major negative contributor to my performance for the year. I maintained my GTIM position, and even added to it, because I felt the long term risk/reward was very attractive. Even at $10, I thought GTIM could still be a 5-10 bagger in the long run, and the downside risk was limited to perhaps 50% at worst. Although I was prepared for GTIM to decline 50%, I wasn’t really expecting it to drop that far, which is partially why I did not sell any at $10. Attempting to avoid a potential 20% decline did not seem worth taking the tax hit. And when GTIM did fall 20% from its high, I only saw downside risk of about another 20%, not an additional 50%. So selling again did not seem worth it for tax reasons. Instead I decided to start adding to my position, as the long term risk/reward had only gotten better.  I saw the worsening technicals but thought fundamentals would win out. If I had it to do over, I would have paid more heed to the technicals. I probably still would have started adding too early, but I would have added more shares around the $4 level when GTIM had started to base.

Besides making my average cost on GTIM more attractive, another benefit would have been having more cash available for the few trades I did have strong conviction – my purchases of BABA, BIDU and HABT in October. Not only could I have made those positions larger, but with larger positions I might have held at least a portion of them longer into their rallies, both of which would have significantly improved my performance for the year.

As it stands, I was down 34% for 2015, compared to the S&P 500 which was down about 2%. The main lesson I take from 2015 is respecting technicals, no matter my level of fundamental conviction in an idea. Had I done that my performance for the year would have been much closer to the S&P 500, and my upside would be that much greater.

As I stated at the beginning of this post, I feel as good about the risk/reward of my portfolio as I ever have, and am comfortable holding just GTIM going into 2016. I will review my current thinking on GTIM and what else I have on my radar in another post.