10-Q: BT Brands Reports Mixed Results in Second Quarter Amidst Expansion Efforts

BT Brands reports a net loss for the second quarter of 2024, despite increased sales and strategic acquisitions.

Summary

• BT Brands reported a net loss of $69,952 for the second quarter of 2024, compared to a net loss of $233,734 in the same period last year.
• The company's sales increased to $4,110,639 from $3,999,965 in the second quarter of 2023, primarily due to improved performance at Burger Time and Pie in the Sky.
• Restaurant operating costs increased to 89.4% of sales, up from 84.2% in the prior year, due to higher labor and occupancy costs.
• The company acquired Schnitzel Haus in May 2024 for $943,000, expanding its portfolio of restaurants.
• BT Brands' restaurant-level EBITDA was $437,613 for the quarter, down from $632,049 in the same period last year.
• For the first half of 2024, the company's net loss was $515,652, compared to a net loss of $375,520 in the first half of 2023.
• The company's cash, cash equivalents, and marketable securities totaled $5.2 million as of June 30, 2024, with a net working capital of $4.4 million.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with increased sales but also increased losses and operating costs. The company is expanding through acquisitions, but faces significant challenges in the current economic environment. The sentiment is cautiously negative due to the increased losses and operational challenges.

Positives

• Net sales increased in the second quarter of 2024 compared to the same period in 2023.
• The average customer transaction at Burger Time restaurants increased by approximately 10% in 2024.
• The cost of sales for food and paper decreased to 38.1% of restaurant sales, down from 40.2% in the second quarter of 2023.
• The company successfully acquired Schnitzel Haus, expanding its restaurant portfolio.

Negatives

• The company reported a net loss of $69,952 for the second quarter of 2024.
• Restaurant operating costs increased to 89.4% of sales, up from 84.2% in the prior year.
• Restaurant-level EBITDA decreased to $437,613 in the second quarter of 2024, down from $632,049 in the same period last year.
• The company's net loss for the first half of 2024 was $515,652, compared to a net loss of $375,520 in the first half of 2023.

Risks

• The company faces challenges in attracting and retaining food service workers.
• Rapid inflation in the cost of input items is impacting the company's margins.
• The restaurant industry is highly competitive, with major companies rapidly adopting new technologies and delivery methods.
• The company is vulnerable to increased food, commodity, and energy costs.
• The company's internal controls over financial reporting were deemed not effective at a reasonable assurance level.

Future Outlook

The company expects to see moderation of inflationary pressure during the remainder of 2024, but margin improvements may be difficult to achieve due to the competitive nature of the restaurant industry. The company continues to consider new acquisition opportunities.

Management Comments

• The increase in sales was principally the result of improved sales performance at Burger Time.
• The increase in the percentage cost resulted from the continued tightness of labor markets, higher-than-historical costs to train new employees and continued upward competitive pressure on hourly wage costs.
• Margin improvement will be achieved through operational enhancements, equipment advances, and increased volumes offsetting food cost increases.

Industry Context

The report highlights the challenges faced by the restaurant industry, including intense competition, rising labor costs, and inflationary pressures on food and commodity prices. The company's focus on acquisitions and diversification reflects a broader trend in the industry to expand and adapt to changing market conditions.

Comparison to Industry Standards

• The company's restaurant-level EBITDA margin of 10.6% for the second quarter of 2024 is below the industry average for quick-service restaurants, which typically ranges from 15% to 20%.
• The increase in labor costs to 37.7% of sales is higher than the industry average, which is typically around 30% to 35%.
• The company's expansion strategy through acquisitions is similar to other restaurant chains, such as Restaurant Brands International (QSR) and Inspire Brands, which have grown through acquiring multiple brands.
• The company's focus on menu price increases to offset rising costs is a common strategy in the restaurant industry, but it can impact customer traffic if not managed carefully.
• The company's challenges in attracting and retaining staff are consistent with the broader labor shortages experienced by the restaurant industry.

Related Party Transactions

• BT Brands' CEO and CFO also serve as Chairman and CFO, respectively, of NGI Corporation (NGI).
• BT Brands owns 336,496 common shares and holds warrants to purchase 358,000 common shares at $1.00 per share, expiring March 31, 2028, and 34,697 warrants to purchase additional shares of NGI at $1.65 per share of NGI.
• In June 2024, BT Brands, Inc. advanced $25,000 to NGI on a demand note.

Stakeholder Impact

• Shareholders may be concerned about the increased net loss and decreased profitability.
• Employees may be affected by the company's efforts to manage labor costs and improve operational efficiency.
• Customers may experience changes in menu prices and service as the company adapts to market conditions.
• Suppliers may be impacted by the company's efforts to manage food and commodity costs.
• Creditors may be concerned about the company's ability to service its debt given the current financial performance.

Next Steps

• The company will continue to consider new acquisition opportunities.
• The company will focus on operational enhancements, equipment advances, and increased volumes to offset food cost increases.
• The company will work to identify, develop, and retain quality employees.

Key Dates

Keywords

restaurant, acquisition, EBITDA, sales, net loss, operating costs, Burger Time, Schnitzel Haus, food service, labor costs