Business Overview and History

BT Brands, Inc. (NASDAQ: BTBD) is a diversified restaurant group that has been strategically expanding its portfolio beyond its core Burger Time concept. The company's recent acquisitions and investments have positioned it to weather the current inflationary environment, though challenges remain.

BT Brands was incorporated in 2016 as Hartmax of NY Inc. and later acquired BTND, LLC in 2018, which operated eight Burger Time fast-food restaurants in the North Central region of the United States. In 2022, the company made a significant move by acquiring a 40% stake in Bagger Dave's Burger Tavern, which operates six casual dining locations across the Midwest. This investment diversified BT Brands' revenue streams and geographical footprint.

The company's restaurant portfolio has expanded significantly since its inception. As of September 29, 2024, BT Brands owns and operates eighteen restaurants, comprising eight Burger Time fast-food restaurants, six Bagger Dave's restaurants, Keegan's Seafood Grille, Pie In The Sky Coffee and Bakery, Schnitzel Haus, and Village Bier Garten. This diverse portfolio covers a wide range of cuisines and dining experiences.

Burger Time restaurants, the company's original concept, offer a variety of burgers, other affordable foods, sides, and soft drinks. Keegan's, located in Indian Rocks Beach, Florida, has been operating for over thirty-five years and specializes in traditional fresh seafood items. Pie In The Sky features an array of fresh baked goods, sandwiches, and locally roasted coffee. The company has also ventured into German-themed establishments with Schnitzel Haus, a restaurant and bar, and Village Bier Garten, which combines dining, drinking, and entertainment.

BT Brands' expansion strategy has been marked by strategic acquisitions. In addition to the Bagger Dave's investment in 2022, the company acquired three operating restaurants that same year. More recently, during the second quarter of 2024, BT Brands acquired the assets and assumed the remaining lease obligation for the Schnitzel Haus restaurant in Hobe Sound, Florida.

The company's growth has not been without challenges. BT Brands has had to navigate intense competition in the restaurant industry, with major players rapidly adopting new technologies and implementing aggressive promotional strategies. Labor shortages and rising labor costs have been persistent issues, forcing the company to offer higher wages to attract and retain quality employees. Additionally, increasing food and commodity costs have put pressure on profit margins.

Despite these obstacles, BT Brands has continued to grow and diversify its operations, expanding into new geographic regions. The company's focus on offering quality food and dining experiences, coupled with its central management structure, has helped it maintain its position in the competitive landscape. BT Brands' strategy of expanding beyond its core Burger Time concept has been a key focus in recent years, reducing its reliance on a single brand and positioning the company to better weather industry challenges.

Financials

For the fiscal year ended December 31, 2023, BT Brands reported total revenue of $14.08 million, a 11.9% increase from the prior year. However, the company incurred a net loss of $887,368 due to increased labor and occupancy costs. The company's operating cash flow was negative $258,787, and it generated negative free cash flow of $747,175 for the year.

In the third quarter of 2024, BT Brands reported revenue of $4.35 million, a 7.8% increase from the same period in 2023. The company's net loss for the quarter was $219,480, compared to a net loss of $3,490 in the prior-year period. The increase in net loss was primarily due to higher labor and occupancy expenses, which offset the revenue growth.

For the 39-week period ended September 29, 2024, BT Brands reported total sales of $11.65 million, an increase of 5.2% compared to the prior year period. However, the company reported a loss from operations of $894,380 during this time, compared to a loss of $289,690 in the prior year period.

The increase in sales was primarily driven by improved performance at the Burger Time locations, including the addition of a new unit in Ham Lake, Minnesota. In the 39-week period ended September 29, 2024, Burger Time sales ranged from $437,000 to $925,000 per unit, with average sales per unit of $716,000, an increase of $95,000 from the prior year period.

Food and paper costs as a percentage of sales decreased from 36.2% to 35.9% due to menu price increases, particularly at Burger Time. However, labor costs increased from 37.7% to 39.0% of sales due to higher wage rates and staffing challenges. Occupancy and other expenses also increased from 13.7% to 14.2% of sales.

Restaurant-level EBITDA, a non-GAAP metric used by the company to gauge the overall profitability of its core restaurant operations, decreased to $863,910 or 7.4% of sales in the 39-week period, compared to $1.16 million or 10.4% of sales in the prior year period. This decline was largely due to the increase in labor and occupancy costs outpacing the revenue growth.

Liquidity

As of September 29, 2024, BT Brands had $5.10 million in cash, cash equivalents, and marketable securities, down from $6.69 million at the end of 2023. The company's current ratio stood at 3.94, indicating a strong liquidity position. However, its debt-to-equity ratio of 0.27 suggests a moderate level of leverage.

Additional liquidity metrics include: - Cash and cash equivalents: $5.30 million - Current ratio: 4.67 - Quick ratio: 4.53 - Debt-to-equity ratio: 0.59

Risks and Challenges

BT Brands faces several risks and challenges, including intense competition in the restaurant industry, difficulty in hiring and retaining skilled employees, and the ongoing impact of inflationary pressures on its cost structure. The company's diversification strategy has helped mitigate some of these risks, but it must continue to adapt and innovate to maintain its competitive edge.

The restaurant industry has seen challenges with labor shortages and rapid food cost inflation over the past year. These trends have impacted BT Brands' financial performance, as evidenced by the increase in labor costs and occupancy expenses.

Geographic Markets

BT Brands operates primarily in the eastern two-thirds of the United States. The majority of its restaurants are located in the North Central region. The company's Burger Time restaurants are concentrated in the North Central region, while its other concepts are spread across different states, including Florida, Massachusetts, Michigan, Ohio, and Indiana.

Restaurant Segments

BT Brands operates several distinct restaurant concepts:

1. Burger Time: Eight fast-food restaurants located in the North Central region of the United States. 2. Bagger Dave's: BT Brands owns approximately 40% of Bagger Dave's Burger Tavern, Inc., which operates six casual dining restaurants in Michigan, Ohio, and Indiana. 3. Keegan's Seafood Grille: A dine-in restaurant located in Florida offering traditional fresh seafood items. 4. Pie In The Sky: A casual dining coffee shop and bakery located in Woods Hole, Massachusetts. 5. Schnitzel Haus: A German-themed full-service restaurant and bar located in Hobe Sound, Florida. 6. Village Bier Garten: A German-themed restaurant, bar, and entertainment venue located in Cocoa, Florida.

Outlook and Conclusion

BT Brands' strategy of expanding beyond its core Burger Time concept has shown promise, with the company's recent acquisitions and investments providing more revenue streams and geographic diversification. However, the company must navigate the current inflationary environment, which has put pressure on its profitability.

The company's ability to effectively manage costs and drive sales growth across its portfolio of restaurants will be crucial to its future profitability and success. While BT Brands has seen revenue growth, particularly in its Burger Time segment, the increase in labor and occupancy costs has outpaced this growth, resulting in decreased profitability.

Investors should closely monitor BT Brands' ability to manage costs and drive growth across its diversified portfolio of restaurants. The company's liquidity position appears adequate, but continued operational losses could put pressure on its financial resources in the long term.

As BT Brands continues to integrate its recent acquisitions and navigate the challenging restaurant industry landscape, its success will depend on its ability to leverage its diverse concepts, optimize operations, and adapt to changing consumer preferences and economic conditions.