Nathan’s Famous, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended September 24, 2023, corresponding to fiscal 2024’s second quarter and first half. Comparisons are with the periods ended September 25, 2022. Results are unaudited and seasonal; interim performance is not necessarily indicative of the full year.
Business context
Nathan’s markets branded food products through its Branded Product Program, product licensing, and company-owned and franchised restaurants, including virtual kitchens. At September 24, 2023, the system included 235 franchised locations excluding virtual kitchens, four company-owned restaurants, and 262 virtual kitchens. The company identifies its licensing and Branded Product Programs as major revenue and profit drivers.
Financial performance
| Metric | Second quarter | First half |
|---|---|---|
| Revenue | $38.7 million, up 3% | $80.7 million, up 5% |
| Operating income | $9.1 million, down 8% | $20.6 million, down 5% |
| Net income | $5.7 million, down 4% | $13.1 million, essentially unchanged |
| Diluted earnings per share | $1.40, versus $1.46 | $3.20, versus $3.20 |
| Adjusted EBITDA | $9.8 million, versus $10.3 million | $21.8 million, versus $22.4 million |
All dollar figures are U.S. dollars. In the second quarter, sales rose 5%, but cost of sales increased 10%. Gross profit, defined as sales less cost of sales, fell to $4.4 million from $5.4 million; gross margin on sales declined to 15% from 20%. For the first half, gross profit was $8.5 million versus $9.6 million, and gross margin fell to 15% from 18%. Operating income as a share of revenue was about 23.5% for the quarter and 25.5% for the first half, versus 26.4% and 28.1%, respectively, a year earlier.
Second-quarter Branded Product Program sales increased 6%, while hot dog volume declined about 2% and average selling prices rose about 9%. For the first half, program sales increased 7%, volume rose about 0.4%, and average prices increased about 7%. Second-quarter licensing royalties dipped 1%; first-half licensing royalties rose 1%. Company-owned restaurant sales declined 1% for the quarter and 2% for the first half, with management citing unfavorable summer weather at Coney Island. First-half franchise restaurant sales increased to $36.4 million from $34.5 million.
Cash, liquidity and debt
- Cash and cash equivalents were $37.0 million at September 24, 2023, up $7.1 million from fiscal year-end. Working capital was $40.0 million, versus $30.7 million.
- First-half operating cash flow was $11.4 million, compared with $9.8 million. Capital spending was $0.2 million, versus $0.4 million. Cash dividends paid were $4.1 million.
- Long-term debt was $80.0 million face value, represented by 6.625% senior secured notes due November 1, 2025; carrying value net of issuance costs was $79.2 million. No principal amortization is scheduled before maturity. Management estimates annual interest expense of about $5.3 million, plus approximately $0.4 million of annual debt-cost amortization.
- The company reported no stock repurchases during the first half. It paid two quarterly dividends of $0.50 per share and declared a further $0.50 dividend after quarter-end, payable December 1, 2023. The indenture restricts future dividends.
Changes, outlook and risks
Higher beef costs pressured margins: the average cost of hot dogs rose about 17% in the quarter and 12% in the first half. The company had no beef purchase commitments during either current-period comparison and does not hedge commodity prices. Management says price increases and product-mix adjustments have generally helped offset inflation, but further pricing may be constrained by competition and consumer demand. It expects commodity-price volatility to continue through the remainder of fiscal 2024; the filing provides no formal earnings or revenue guidance.
Other risks include labor-cost inflation and staffing, including New York minimum-wage increases; weather-sensitive restaurant traffic; supply-chain and commodity costs; and reliance on Smithfield Foods, whose agreement is significant to licensing revenue and overall profitability. Management reported no significant supply disruptions to date. Two Branded Menu locations in Ukraine remained temporarily closed due to the Russia-Ukraine conflict. The company says available cash and operating cash flow should fund operations, debt service, dividends and planned investment for at least the next 12 months.
Unusual or notable items include adoption of the expected-credit-loss standard, which reduced opening retained earnings by $0.2 million net of tax, and a $0.5 million discretionary cash bonus approved after quarter-end for the Executive Chairman. Management reported effective disclosure controls and no material change in internal control over financial reporting. It stated that routine litigation was not expected to have a material adverse effect; Part II reports no legal proceedings.
Most important facts for investors to verify
- Whether price increases can offset further beef, labor, distribution and other cost inflation without materially weakening demand or margins.
- The terms, renewal or replacement prospects of the Smithfield agreement and the effect of that dependence on licensing revenue and profitability.
- The company’s capacity to refinance or repay the $80.0 million of notes due in November 2025 while maintaining dividends and funding operations.
- The timing of interest payments: the cash-flow statement reports $2.65 million of interest paid in the first half, while MD&A says payments were made May 1 and November 1; November 1 falls after the September 24 reporting date.
- The sustainability of restaurant and franchise growth, including weather-related Coney Island sales, virtual-kitchen performance, and New York labor-cost exposure.
- Future dividend decisions, which remain subject to board approval and note-indenture restrictions, and the impact of the post-quarter $0.5 million executive bonus.