Nathan’s Famous, Inc. — Form 10-Q Summary
Business context and reporting period. The filing covers the 13 and 26 weeks ended September 23, 2018 (the company’s second quarter and first half of fiscal 2019), compared with periods ended September 24, 2017. Nathan’s markets branded food products, licenses its brand, and operates and franchises restaurants. At quarter-end, its system included 265 franchised units and five company-owned units. The interim statements are unaudited, and management cautions that results are seasonal.
Key financial results
| Metric | 13 weeks ended Sept. 23, 2018 | Prior comparable quarter | 26 weeks ended Sept. 23, 2018 | Prior comparable half-year |
|---|---|---|---|---|
| Total revenue | $29.330 million | $31.471 million | $59.498 million | $62.274 million |
| Operating income | $8.480 million | $8.734 million | $17.567 million | $17.184 million |
| Net income | $4.484 million | $3.120 million | $9.279 million | $6.042 million |
| Diluted EPS | $1.06 | $0.74 | $2.19 | $1.43 |
| Gross profit on sales | $6.413 million; 29.7% of sales | $6.486 million; 26.6% of sales | $11.438 million; 27.2% of sales | $11.306 million; 24.3% of sales |
| Operating cash flow | Not separately presented | Not separately presented | $10.003 million | $5.401 million |
Reported revenue includes advertising-fund revenue of $0.772 million for the quarter and $1.267 million year to date under newly adopted ASC 606, with equal related expenses. This gross-up has no expected net income effect when the fund operates at break-even; it limits direct comparability of reported revenue with prior periods. The new standard also defers franchise fees over the agreement term rather than recognizing them upfront. The company recorded a $2.004 million after-tax cumulative adoption adjustment to opening accumulated deficit.
- Revenue and operations: Sales declined 11.6% in the quarter and 9.8% year to date. Branded Product Program sales fell 15.0% and 11.7%, respectively. License royalties were roughly flat in the quarter and rose 5.2% year to date. Franchise fees and royalties declined in both periods.
- Profit and margins: Quarter operating income decreased 2.9%, while first-half operating income rose 2.2%. Net income increased in both periods, supported by lower interest expense and lower effective tax rates; quarter earnings also included unusual property-sale and extension-fee income. Gross margin on sales improved as beef costs declined, partly offset by higher restaurant labor costs.
- Cash and liquidity: Cash was $66.154 million at September 23, up $8.815 million since March 25. Current assets were $78.542 million and current liabilities $16.253 million, implying working capital of $62.289 million. Operating cash flow was $10.003 million; investing activities provided $1.096 million, primarily from a Florida office sale; financing activities used $2.284 million, principally for dividends.
- Debt: The company had $150 million face value of 6.625% senior secured notes due November 2025, recorded net of issuance costs at $145.104 million. There is no scheduled principal amortization before maturity. The company reported covenant compliance. Cash less face-value debt was approximately $83.8 million of net debt.
Changes, outlook, risks and unusual items
- Management attributed lower branded-product sales largely to lower selling prices reflecting lower beef costs and to a prior-year distributor transition that temporarily increased purchases. Excluding that distributor effect, estimated customer shipments rose 2.8% year to date but fell 2.3% in the quarter.
- Company-owned restaurant sales were affected by unfavorable summer weather in the Northeast. Franchise restaurant sales and outlet count were lower than a year earlier; comparable domestic franchise sales declined 2.6% in the quarter and 0.6% year to date.
- The company sold its Fort Lauderdale office in August for $1.330 million and recorded a $0.323 million gain. The Bay Ridge restaurant sale closed October 23, 2018; the company reported net proceeds of $9.245 million after prior deposits and expenses. The quarter also included a $0.175 million fee for extending that sale’s closing date.
- Management estimated a fiscal 2019 effective tax rate of approximately 27%–30%, excluding discrete items and excess stock-compensation tax benefits. The lower federal rate under the Tax Act contributed to the decline in the reported effective tax rate. Management says cash and operating cash flow should be sufficient for operations, debt service and planned stock repurchases for at least 12 months; this is not earnings guidance.
- The board began a regular dividend of $0.25 per share quarterly in fiscal 2019. Two quarterly dividends totaling $2.094 million had been paid by quarter-end; a further $0.25 dividend was declared November 2, payable December 14, 2018, subject to debt-indenture restrictions and board decisions.
- Key risks include dependence on John Morrell & Co. for licensing and supply, beef and other commodity-price volatility, ability to pass cost increases through to customers, New York minimum-wage and scheduling rules, weather-related restaurant sales, franchisee health, and debt-service obligations. The company had no open hot-dog purchase commitments at quarter-end. It expects the new lease standard to materially increase balance-sheet assets and liabilities; disclosed future operating-lease payments were $10.492 million.
- The company reported ordinary-course litigation but no legal proceedings in Part II; management did not expect pending matters to materially affect results, while noting litigation uncertainty. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of the reported revenue decline reflects underlying sales trends versus ASC 606 presentation and the prior-year distributor inventory comparison.
- Whether lower beef costs persist, and whether pricing and operating efficiencies can offset labor, food, distribution and other cost increases.
- The sustainability of license royalties and the company’s reliance on John Morrell & Co., including the effect of the reduced foodservice royalty rate.
- Cash generation and capacity for dividends, repurchases and debt service under the 2025 notes’ covenants; confirm the effect of the subsequent Bay Ridge sale proceeds.
- The actual fiscal-year tax rate and balance-sheet effect when the lease-accounting standard is adopted.