Nathan’s Famous, Inc. — Form 10-K Summary
Business context and reporting period
The filing reports on Nathan’s Famous, Inc. and subsidiaries for the 52 weeks ended March 26, 2023, compared with the 52 weeks ended March 27, 2022. It is an annual report, not a standalone 2022 fourth-quarter report. Nathan’s operates through branded foodservice product sales, product licensing, and company-owned and franchised restaurants.
At year-end, the company operated four company-owned restaurants and had 232 franchised or licensed locations and 267 virtual kitchens. Its products were distributed across multiple foodservice and retail channels. Licensing and the Branded Product Program are the largest revenue and profit drivers.
Financial performance
| Metric | FY2023 | FY2022 |
|---|---|---|
| Total revenue | $130.8 million | $114.9 million |
| Net income | $19.6 million | $13.6 million |
| Diluted earnings per share | $4.80 | $3.30 |
| Cash from operations | $19.8 million | $16.5 million |
| Cash at year-end | $29.9 million | $50.1 million |
| Gross debt principal | $80.0 million | $110.0 million |
- Revenue grew 14%. Product sales increased 18% to $91.0 million; license royalties rose 5% to $33.5 million; franchise fees and royalties increased 11% to $4.3 million.
- Branded Product Program sales rose 19% to $78.9 million, with hot-dog volume up approximately 15%. Company-owned restaurant revenue increased 12% to $12.2 million, alongside approximately 12% higher customer traffic.
- Operating income increased 15% to $34.4 million. Gross profit was $15.9 million, or 17% of sales, versus $12.1 million, or 16%, in FY2022. Company-owned restaurant cost of sales declined to 62% of restaurant sales from 66%.
- Adjusted EBITDA, a non-GAAP measure, was $36.4 million versus $31.2 million. Net income benefited from lower interest expense and a smaller debt-extinguishment loss, as well as higher operating income.
- Cash used in investing activities was $0.6 million, primarily for capital expenditures. Cash used in financing activities was $39.5 million, including $30.0 million of debt principal redemption, $7.6 million of dividends, and $1.9 million of share repurchases.
- Net working capital was $30.7 million, down from $49.0 million, principally reflecting the cash used to redeem debt. Stockholders’ deficit was $44.6 million.
Material changes and capital structure
- The company redeemed $30.0 million of its 6.625% senior secured notes in March 2023; $80.0 million remained outstanding, due November 2025. It recorded a $0.36 million loss on extinguishment, primarily from writing off debt issuance costs. FY2022 included a $1.35 million extinguishment loss.
- Interest expense declined to $7.7 million from $10.1 million. Management expected annual interest expense of approximately $5.3 million after the redemption, plus approximately $0.37 million of annual debt-issuance-cost amortization.
- Quarterly dividends increased during the year: the company paid three dividends of $0.45 per share and one of $0.50 per share. A $0.50-per-share dividend for FY2024 was declared after year-end; future dividends remain subject to board approval and debt-indenture restrictions.
- Franchise locations declined to 232 from 239: 11 opened and 18 closed during FY2023, compared with 54 openings and 28 closures in FY2022.
Outlook, commentary, and risks
- No specific quantified revenue or earnings guidance was provided. Management said available cash and expected operating cash flow should fund operations, debt service, dividends, and repurchases for at least the next 12 months.
- Management expected inflationary pressures to continue into FY2024. Beef, labor, packaging, freight, utilities, and insurance costs were identified as pressures; beef-product price volatility was expected. The company said price increases and product-mix adjustments had generally helped offset inflation, but warned that competitive conditions and consumer spending may limit further increases.
- COVID-19 effects had eased, supporting restaurant traffic and foodservice venue sales, but renewed outbreaks, staffing constraints, or renewed restrictions could still affect operations.
- Concentration is material: Smithfield Foods generated approximately 23% of FY2023 revenue through licensing royalties and supplied 95% of product purchases. The five largest Branded Product Program customers accounted for 76% of that program’s revenue. Dependence on major licensees, customers, suppliers, and manufacturing facilities exposes results to interruption or loss of business.
- Other disclosed risks include intense competition, labor availability and wage increases, supply-chain disruption, food safety and reputational risks, seasonality and weather, cyber incidents, regulatory changes, and the company’s substantial debt due in 2025. The company reported compliance with note covenants at year-end and no ongoing financial maintenance covenants.
- Routine litigation was not expected by management to materially affect financial position, cash flows, or results, though unfavorable outcomes remain possible. The auditor issued an unqualified opinion on the financial statements and internal controls; it reported no critical audit matters.
Important facts for investors to verify
- Review the full statements and notes for debt terms, maturity, redemption provisions, covenant limits, and dividend restrictions.
- Assess Smithfield Foods’ licensing and supply dependence, including the 2032 agreement term, minimum royalties, and contingency plans for supply disruption.
- Check customer concentration, receivable collectability, and the performance and renewal status of major Branded Product Program accounts.
- Monitor beef, labor, and other operating-cost trends, and whether pricing and product mix continue to protect margins without reducing demand.
- Compare franchise openings and closures, restaurant traffic, and virtual-kitchen royalties in subsequent filings to determine whether FY2023 recovery continued.
- Confirm subsequent debt repayments, cash balances, capital returns, and any changes to the board’s dividend policy.