Executive Summary / Key Takeaways

• Good Times Restaurants Inc. (NASDAQ:GTIM) operates a dual-brand strategy with Bad Daddy's Burger Bar (full-service) and Good Times Burgers & Frozen Custard (quick-service), positioning itself across different segments of the competitive restaurant industry.
• Recent performance reflects a challenging operating environment, with Q2 2025 seeing same-store sales declines at both brands (Bad Daddy's -3.7%, Good Times -3.6%), primarily driven by reduced customer traffic, unfavorable weather, and intense competitor discounting, partially offset by menu price increases.
• The company is strategically focused on operational excellence, product quality enhancements (including new burger builds, smashed patty tests, custard improvements), and targeted digital marketing shifts to drive long-term traffic and improve value perception, rather than engaging in deep discounting.
• Cost pressures, particularly escalating ground beef prices and higher labor costs driven by market forces and minimum wage increases, continue to weigh on margins, especially at the Good Times segment.
• Investments in remodels, strategic acquisitions of previously franchised units, and a cautious approach to new unit development, alongside a temporary pause on share repurchases to bolster liquidity, underscore a focus on strengthening the existing asset base and managing capital prudently in the current environment.

A Tale of Two Brands: Navigating the Restaurant Landscape

Good Times Restaurants Inc. stands at a unique intersection of the restaurant industry, operating two distinct concepts: the full-service Bad Daddy's Burger Bar and the quick-service Good Times Burgers & Frozen Custard. This dual-brand strategy allows GTIM to address different customer occasions and competitive dynamics within the broader market. Bad Daddy's competes in the casual dining segment, known for its indulgent, pub-style burgers, while Good Times operates primarily as a drive-thru focused quick-service burger and frozen custard chain, emphasizing speed and convenience.

The company's history, rooted in the Colorado origins of the Good Times brand dating back approximately thirty years, has shaped its current footprint and strategic focus. Recent years have seen GTIM actively manage its portfolio through strategic acquisitions of previously franchised Good Times locations, consolidating ownership to ensure operational continuity and brand consistency. Concurrently, the company has demonstrated a willingness to prune underperforming assets, such as the closure of a Bad Daddy's in Longmont, to enhance overall portfolio health. This disciplined approach to asset management and ownership consolidation forms a foundational element of GTIM's strategy to build a more robust and controlled operational base.

The competitive landscape is fierce, populated by larger, more financially resourced players across both segments. In quick-service, GTIM faces off against giants like Yum! Brands (YUM) and innovative fast-casual players like Chipotle Mexican Grill (CMG), which increasingly offer drive-thru options and leverage significant scale advantages in purchasing and technology. In casual dining, Bad Daddy's competes with diversified operators like Darden Restaurants (DRI) and premium burger concepts like Shake Shack (SHAK). These competitors often possess greater brand recognition, more extensive marketing budgets, and more sophisticated digital platforms. GTIM's strategy is not to mimic the deep discounting prevalent among some QSR competitors but to differentiate through operational excellence, product quality, and targeted value offerings.

Central to GTIM's strategy is a focus on enhancing the guest experience through operational improvements and targeted technological applications. While GTIM does not possess a single, groundbreaking core technology like some industry disruptors, its technological differentiators lie in implementing systems and processes that improve efficiency and product quality. The ongoing rollout of the Toast point-of-sale system across Good Times restaurants is a key initiative, aiming to streamline order taking and payment processing, thereby freeing up staff to focus on customer interaction and speed of service – critical in the drive-thru segment. Furthermore, the company is actively testing new operational processes, such as smashing burger patties with automated clamshell grills at Good Times. This test is designed to bring the concept closer to a true cook-to-order model while crucially maintaining the speed and efficiency required for drive-thru lane times. These efforts, alongside improvements in product builds (like the shift to shredded lettuce at Good Times) and ingredient quality (new custard base, new buns), are intended to enhance the perceived value and quality of the product, directly addressing competitive pressures and customer expectations. These technological and operational initiatives are foundational to GTIM's ability to compete effectively against larger rivals who benefit from scale-driven efficiencies and extensive digital ecosystems.

Performance Under Pressure: A Look at Recent Financials

The second fiscal quarter of 2025, ending April 1, 2025, revealed the impact of the challenging operating environment on GTIM's financial performance. Total net revenues decreased by $1.17 million, or 3.3%, to $34.28 million compared to $35.45 million in the prior year quarter. This decline was primarily driven by a $1.59 million decrease in Bad Daddy's revenues, partially offset by a $0.42 million increase in Good Times revenues.

Bad Daddy's saw restaurant sales decrease to $24.82 million from $26.45 million, a result of the closure of one restaurant, reduced customer traffic, and a negative mix shift towards lower-priced items like the successful smashed patty burgers, despite a roughly 4.7% average menu price increase. Same-store sales for Bad Daddy's decreased 3.7%. While profitability was less affected than Good Times due to solid cost controls and menu engineering, the segment's income from operations declined to $0.16 million from $0.38 million. Restaurant-level operating profit remained steady at 13.6% of sales, demonstrating effective cost management relative to sales declines.

Good Times restaurant sales increased to $9.32 million from $8.82 million, primarily benefiting from the acquisition of three previously franchised restaurants over the past year. However, same-store sales for Good Times decreased 3.6%, significantly impacted by unfavorable weather, particularly in Colorado, and reduced customer traffic. The segment's income from operations increased to $0.35 million from $0.26 million, but restaurant-level operating profit decreased sharply to 8.0% of sales from 12.2%. This decline was attributed to the deleveraging impact of lower sales on fixed costs and elevated operating expenses, including increased repair, maintenance, and technology costs, alongside higher labor costs.

Consolidated results showed a net loss of $627,000 for the quarter, a significant shift from net income of $680,000 in the prior year period. Year-to-date results for the 27 weeks ended April 1, 2025, paint a slightly different picture, with total net revenues increasing 2.9% to $70.61 million, primarily driven by Good Times acquisitions and an extra week in the current fiscal year's first quarter. However, year-to-date net loss widened to $453,000 from net income of $197,000 in the comparable 26-week prior year period, reflecting the impact of increased operating costs, impairment charges ($494,000 related to lease right-of-use assets and new assets in previously impaired restaurants), and the shift to a net loss in the second quarter.

Liquidity remains a key focus. As of April 1, 2025, the company had a working capital deficit of $9.5 million. While the business benefits from quick cash collection on sales, the deficit is influenced by short-term lease liabilities. Management believes existing cash and the $8.0 million Cadence Credit Facility (with $2.25 million drawn and $5.74 million available as of April 1, 2025) will be sufficient to meet fiscal 2025 working capital and recurring capital expenditure needs. The company temporarily paused its share repurchase program in Q2 2025 to redirect cash towards accumulation, debt repayment, and CapEx for Good Times remodels and signage, signaling a prioritization of balance sheet strength and investment in core assets.

Strategic Initiatives and Forward Outlook

GTIM's strategic response to the challenging environment is multifaceted, focusing on operational execution, product innovation, and targeted marketing across both brands.

At Good Times, a significant leadership change occurred with the promotion of a new Director of Operations tasked with improving kitchen execution, consistency, and product quality. This aligns with the broader strategic shift towards prioritizing "high-quality product at QSR speed" over "speed at all costs." The rollout of new burger builds with shredded lettuce, testing of smashed patties using existing automated grills to achieve cook-to-order while maintaining speed, and the introduction of a softer bun are all aimed at improving the value perception and eating experience. Efforts to enhance the frozen custard product, including a new base and smaller batch production, and the planned launch of a limited-time fried ice cream product in June, demonstrate a commitment to revitalizing this core offering. Menu condensation is also underway to simplify operations and focus on core strengths.

Bad Daddy's continues to leverage menu engineering, with the success of the classic smash and steakhouse smash burgers contributing positively to margins. The recent launch of the Smash and Stack LTO, a bacon double cheeseburger with smashed patties, immediately became a top-selling item and is delivering favorable margins. The overhaul of the beverage menu, featuring an $8 all-day Badass Margarita and zero-proof cocktails, is another initiative to drive sales and improve mix.

Marketing strategy is evolving, particularly at Good Times, with a shift away from traditional radio advertising, which management believes has run its course. Testing of connected TV, video streaming, outdoor advertising, and targeted digital display and search advertising is underway for both brands, aiming to reach customers more effectively and modernize the brand image.

From a unit growth perspective, GTIM is exercising increased scrutiny on real estate selection and maintaining a conservative approach to leverage. While unit growth opportunities exist, the focus is on opportunistic, limited new unit development, particularly for Bad Daddy's, alongside significant investment in remodels and signage for the aging Good Times asset base. Management expects the operating environment in the third fiscal quarter to remain equally challenging. They anticipate ground beef costs will continue to increase throughout fiscal year 2025 due to tightening supply. Good Times labor costs are expected to remain elevated into Q3 due to training and deleveraging. General and administrative costs are projected to be between 6-7% of total revenues for the full fiscal year 2025.

Risks and Challenges

Several key risks could impact GTIM's ability to execute its strategy and achieve its objectives. The challenging operating environment, characterized by a value-oriented customer and intense competition, particularly deep discounting in the QSR segment, poses a significant threat to sales and traffic. Persistent inflation, especially in commodity costs like ground beef and labor expenses driven by market forces and statutory minimum wage increases (particularly in Colorado), could continue to pressure margins if price increases cannot fully offset these costs without negatively impacting demand. Unfavorable weather, as experienced in Q2 2025, can cause unpredictable sales declines.

The company's working capital deficit and reliance on its credit facility highlight the importance of maintaining sufficient liquidity and compliance with debt covenants. While currently compliant, adverse financial performance could strain these metrics.

Furthermore, the ongoing litigation related to the failed sale of the Good Times Drive Thru subsidiary, despite a favorable recommendation for damages ($3.83 million plus interest) from a court-appointed special master, carries uncertainty. White Winston has indicated it will object to the recommendation, and there is no assurance of successful recovery or the final amount, which could impact the company's financial resources.

Conclusion

Good Times Restaurants Inc. is navigating a demanding period marked by macroeconomic pressures and intense competition across its quick-service and casual dining segments. The company's strategic focus on operational excellence, product quality enhancements driven by targeted technological applications (Toast POS, new burger processes, custard improvements), and a shift towards more effective digital marketing represents a deliberate approach to differentiate and build long-term value rather than engaging in potentially margin-eroding discounting wars.

While recent financial performance, particularly the Q2 2025 net loss and same-store sales declines, reflects the headwinds of reduced traffic, unfavorable weather, and persistent cost inflation, management's outlook acknowledges these near-term challenges while emphasizing a commitment to fundamental operational improvements. The strategic investments in remodels and acquisitions aim to strengthen the core asset base, while a cautious approach to new development and capital allocation prioritizes financial prudence. The success of initiatives like the smash patty burgers and beverage menu overhaul at Bad Daddy's, and the ongoing product and operational overhauls at Good Times, will be critical indicators of the company's ability to drive traffic and improve profitability in the face of rising costs and aggressive competition. Investors should closely monitor the execution of these strategies, particularly the impact of product quality improvements on sales trends and the company's ability to manage cost pressures and maintain adequate liquidity amidst the challenging operating environment.