Nathan’s Famous, Inc. — Form 10-Q Summary
Business context and reporting period
For the 13 weeks ended June 30, 2019 (fiscal 2020 first quarter), Nathan’s Famous reported results from branded foodservice sales, product licensing, company-operated restaurants and franchising. At quarter-end, its system included 253 franchised units and four company-operated units. Interim results are seasonal and may not indicate full-year performance.
Key financial results
| Metric | Quarter ended June 30, 2019 | Comparable 2018 quarter |
|---|---|---|
| Total revenue | $30.518 million | $30.168 million |
| Operating income | $9.448 million | $9.087 million |
| Net income | $5.369 million | $4.795 million |
| Diluted EPS | $1.28 | $1.13 |
| Operating cash flow | $(1.036) million | $(2.812) million |
| Cash and equivalents at quarter-end | $73.903 million | $53.018 million |
Gross profit was $4.815 million, or 23.8% of sales, compared with $5.025 million, or 24.5%, a year earlier. Management attributed the lower margin chiefly to higher beef costs in the Branded Product Program. EBITDA was $10.145 million and Adjusted EBITDA was $10.173 million; both are non-GAAP measures.
At June 30, 2019, current assets were $90.398 million and current liabilities were $13.854 million, producing reported working capital of $76.544 million. Face-value debt was $150 million; debt carrying value, net of issuance costs, was $145.622 million. The notes bear 6.625% interest and mature November 1, 2025, with no scheduled principal amortization before maturity. Stockholders’ deficit was $65.148 million.
Changes versus the comparable period
- Revenue increased 1.2%, operating income increased 4.0%, and net income increased 12.0%. EPS rose from $1.13 to $1.28 diluted.
- License royalties grew 7.7% to $8.722 million, primarily reflecting higher retail volume under the John Morrell & Co. agreement. Branded Product Program sales fell 2.0% to $16.113 million; management estimated shipments down about 3.4% excluding distributor-transition effects.
- Company-operated restaurant sales increased 2.4% to $4.124 million. Excluding a restaurant sold in the prior year, comparable sales rose about 14%, aided by favorable weather at Coney Island locations. Comparable domestic franchise sales increased 3.2%.
- Operating cash use improved by $1.776 million year over year but remained negative. Receivables increased $4.828 million during the quarter, and the company paid $4.969 million of semiannual note interest and $1.479 million in dividends.
- The company adopted lease accounting Topic 842 on April 1, 2019 without restating the comparative period. At June 30, it reported operating lease assets of $7.655 million and lease liabilities of $8.373 million.
Outlook, commentary, risks and contingencies
No specific earnings or revenue guidance was provided. Management said cash, cash equivalents and expected operating cash generation should be sufficient for operations, debt service and stock repurchases for at least 12 months. It expects to invest in restaurants and branded programs, service debt, fund dividends and may continue repurchases. The Board raised the regular quarterly dividend to $0.35 per share; a subsequent $0.35 dividend was declared August 9, 2019, payable September 6.
Management highlighted exposure to beef and other commodity-price volatility, the ability to pass cost increases to customers, New York minimum-wage and other labor rules, weather-sensitive Coney Island sales, receivable collection, and dependence on John Morrell & Co. for significant licensing revenue and profitability. A 10% short-term change in food and paper costs would have changed quarterly cost of sales by approximately $1.370 million. The company had no open hot-dog purchase commitments at quarter-end.
The company was in compliance with the 2025 Notes’ covenants. The indenture restricts certain dividends, debt, investments and other actions; future dividends remain subject to the indenture and Board determination. The filing reports a $217,000 liability for a Brooklyn restaurant lease guarantee. Management said routine litigation was not expected to have a material adverse effect, while noting litigation outcomes are uncertain. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the licensing relationship with John Morrell & Co. remains stable, and how much revenue and profitability depend on it.
- Whether beef, labor, distribution and other cost increases can be offset through pricing or efficiencies without further margin erosion.
- Whether receivables normalize and operating cash flow improves, given the quarter’s negative operating cash flow and higher receivables.
- How dividend and any repurchase plans interact with the 2025 Notes’ restricted-payment provisions and available cash.
- The effects of lease obligations, seasonal restaurant performance, and the disclosed lease guarantee and other contingencies.