Nathan’s Famous, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the thirteen weeks ended June 24, 2018, the first quarter of fiscal 2019, compared with the thirteen weeks ended June 25, 2017. Nathan’s markets branded food products through foodservice sales, product licensing, and company-operated and franchised restaurants. At quarter-end, the system included 271 franchised units and five company-operated units.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Total revenue | $30.168 million | $30.803 million |
| Operating income | $9.087 million | $8.450 million |
| Net income | $4.795 million | $2.922 million |
| Diluted EPS | $1.13 | $0.69 |
| Operating cash flow | $(2.812) million | $4.388 million |
- Total revenue declined 2.1%; operating income rose 7.5% and net income rose 64.1%. Reported operating margin was 30.1% of revenue versus 27.4%; net margin was 15.9% versus 9.5%.
- Sales fell 7.9% to $20.471 million, while license royalties increased 9.4% to $8.098 million. Gross profit on sales improved to $5.025 million, or 24.5% of sales, from $4.820 million, or 21.6%.
- Interest expense decreased to $2.650 million from $3.663 million, principally reflecting refinancing of the prior 10% notes with 6.625% notes. The effective tax rate was 26.4%, down from 39.7%, largely due to the federal corporate tax-rate reduction.
- Cash was $53.018 million at June 24, down $4.321 million during the quarter. Working capital was $58.322 million. Current assets were $71.742 million and current liabilities $13.420 million.
- Operating cash use, versus cash generated in the prior-year quarter, reflected working-capital outflows, including higher receivables and lower accrued liabilities, as well as the timing of interest payments. Capital expenditures were $0.138 million; dividends paid were $1.197 million.
- Debt was $150 million face value, reported net of issuance costs at $144.931 million, under 6.625% senior secured notes due November 2025. No scheduled principal amortization is due before maturity. The company reported compliance with note covenants.
- Stockholders’ deficit was $82.917 million. The company began a regular quarterly dividend of $0.25 per share; the quarter’s dividend was declared and paid.
Changes, outlook, risks, and unusual items
- Branded Product Program sales declined 8.3%, with volume down about 4.1% and average selling prices down about 5.0%; management attributed pricing partly to lower beef costs and noted prior-year sales benefited from a new distributor’s implementation. Company-operated restaurant sales declined, primarily due to unfavorable April weather at Coney Island.
- Retail hot-dog licensing royalties increased 12.2%, supported by 8.5% volume growth and higher average selling prices. Management reduced certain foodservice royalties to John Morrell by $143,000 to seek additional business. Franchise restaurant sales declined, principally reflecting units closed in the prior fiscal year, partly offset by 1.4% comparable domestic sales growth.
- ASC 606 was adopted using the modified retrospective method. Franchise and development fees are now generally recognized over agreement terms; advertising-fund revenue and expense are grossed up. Adoption reduced opening accumulated equity by $2.004 million net of tax. The filing reports $18,000 less quarterly net income than it estimates under the prior treatment; advertising-fund revenue and expense each added $495,000 without a stated net-income effect.
- Management said cash and expected operating cash generation should fund operations, debt service, and stock repurchases for at least 12 months. No revenue or earnings guidance was provided. The estimated fiscal 2019 tax rate is 27%–30%, excluding specified discrete items and excess stock-compensation tax benefits.
- Two property sales were pending: a Bay Ridge restaurant sale for $12.25 million was extended to October 2018, with additional payment and an extension fee received after quarter-end; a Fort Lauderdale office sale for $1.45 million was expected to close in the second quarter of fiscal 2019.
- Key risks include dependence on John Morrell & Co. for supply and licensing economics; beef and other commodity volatility; ability to pass costs through; rising New York labor costs and scheduling requirements; weather sensitivity at beach locations; franchisee viability; and debt-service and indenture restrictions. Management expects labor and food costs to remain pressures. Ordinary-course litigation was disclosed, with management not expecting a material adverse outcome, while noting litigation uncertainty.
- The 2025 notes require semiannual interest payments of approximately $4.969 million; one payment was made in the quarter. The filing also describes a Brooklyn franchisee lease guarantee with a recorded liability of approximately $204,000, plus potential costs not reasonably determinable.
Important facts for investors to verify
- Whether branded-product volume, restaurant sales, and franchise-unit trends improve, and whether lower commodity costs persist or can be passed through.
- The contribution and concentration risk of the John Morrell licensing and supply relationship, including the effect of the foodservice royalty reduction.
- Cash-flow conversion and working-capital movements, alongside the company’s ability to sustain dividends, repurchases, and note interest payments.
- Progress and proceeds from the two planned property sales, and any subsequent changes to closing timing or terms.
- Effects of ASC 606 on future franchise-fee timing and comparability; the filing’s prior-period results were not recast.
- Actual tax rate versus the 27%–30% estimate, and exposure to beef costs, New York labor regulations, weather, and debt covenants.