Nathan’s Famous, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 29, 2015 (52 weeks), compared with the 52 weeks ended March 30, 2014. Although the request identifies 2014 Q4, this filing is an annual report for fiscal 2015; fourth-quarter figures are separately noted below. Amounts are in U.S. dollars.
Business context
Nathan’s operates and franchises restaurants and sells branded products through foodservice and retail licensing channels. Its principal revenue sources are Branded Product Program sales, license royalties, company-owned restaurants, and franchise fees and royalties. At year-end, the system included five company-owned and 296 franchised or Branded Menu locations; packaged products were sold in approximately 39,000 retail locations.
Financial performance
| Metric | FY2015 | FY2014 | Change / context |
|---|---|---|---|
| Total revenue | $99.1 million | $79.8 million | Up 24.3% |
| Sales | $75.5 million | $65.5 million | Up 15.3% |
| License royalties | $18.0 million | $8.5 million | More than doubled, principally reflecting the new John Morrell agreement |
| Franchise fees and royalties | $5.6 million | $5.7 million | Down 2.4% |
| Gross profit on sales | $13.6 million | $12.4 million | Gross margin 18.0%, down from 19.0% |
| Operating income | $20.0 million | $10.9 million | Up 82.7% |
| Net income | $11.7 million | $8.3 million | Up 40.5% |
| Diluted EPS | $2.55 | $1.81 | Up 40.9% |
| Operating cash flow | $13.3 million | $2.9 million | Higher year over year |
| Adjusted EBITDA | $22.5 million | $13.4 million | Non-GAAP measure as defined by the company |
Branded Product Program sales rose 13.6% to $58.9 million, driven primarily by higher average selling prices. Company-owned restaurant sales rose 20.0% to $15.9 million as Coney Island and Yonkers operated for more of the year than in FY2014; Oceanside’s temporary closure reduced sales by an estimated $260,000. Franchise restaurant sales fell to $80.1 million from $85.9 million, and comparable domestic franchise sales declined 2.8%. The company opened 36 franchised locations but closed 64, reducing system units from 324 to 296.
Fourth quarter: Revenue was $20.4 million versus $17.3 million; gross profit was $2.0 million versus $2.0 million; and net income was $1.5 million versus $1.2 million.
Liquidity, cash flow and debt
- Cash and cash equivalents were $51.4 million at year-end, up from $22.1 million; marketable securities were $7.1 million, down from $11.2 million.
- Working capital was $61.6 million, compared with $35.4 million. Current assets were $73.6 million and current liabilities were $12.0 million.
- Operating cash flow was $13.3 million; investing activities provided $2.2 million; financing activities provided $13.8 million. Capital expenditures were $1.5 million.
- On March 10, 2015, the company issued $135 million of 10.0% senior secured notes due 2020. Carrying value, net of unamortized discounts and issuance costs, was $129.1 million. Annual cash interest is approximately $13.5 million, with about $13.8 million of interest payments expected in FY2016.
- The company used note proceeds to fund a $25-per-share special dividend totaling approximately $116.1 million. Stockholders’ equity consequently moved from $43.9 million to a deficit of $59.9 million. Management stated that cash, securities and expected operating cash flow should fund operations and debt service for at least 12 months.
Material changes, outlook and risks
- The new 18-year retail licensing agreement with John Morrell began in March 2014. It provides a 10.8% royalty on net retail sales, subject to escalating annual minimum guarantees. John Morrell generated $14.4 million of royalties in FY2015; management cautioned that the higher level of royalties and expected cost savings may not continue or be achieved.
- Hot dog market costs rose approximately 17.1% year over year, while Branded Product Program average hot dog costs increased approximately 17.7%. This pressured gross margin despite selling-price increases. Management expected continued beef-cost volatility and said future price increases may not fully offset costs.
- Management plans to expand branded product and menu programs, retail licensing, domestic franchising and international development, while selectively considering company-owned restaurant growth. No specific financial guidance was provided.
- Key risks include dependence on John Morrell and a small number of licensing and Branded Product customers, concentrated supplier exposure, beef and other input-cost volatility, franchise closures and weak comparable franchise sales, competition and discounting, weather and seasonality, food safety and regulatory risks, and the substantial 10% debt burden and restrictive indenture covenants.
- Fourth-quarter results are seasonally weaker, and management attributed restaurant pressure in both FY2015 and FY2014 to harsh winter weather. The business is particularly exposed to weather in the Northeast and at its Coney Island restaurants.
- The FY2014 comparison included a $2.8 million insurance gain related to Superstorm Sandy and a $0.4 million impairment charge on a long-term investment; neither recurred in FY2015. Coney Island and Yonkers closures and reopenings also affect comparability.
- Routine litigation was not expected by management to have a material adverse effect, though outcomes remain uncertain. The company reported effective disclosure controls and internal control over financial reporting, and the auditor issued unqualified opinions.
Important facts for investors to verify
- Whether John Morrell meets its minimum royalty commitments, maintains product quality and supply, and delivers the anticipated cost savings and retail marketing support.
- Whether price increases can offset continued beef-cost inflation without reducing demand or Branded Product Program margins.
- Why franchise closures exceeded openings, and whether comparable domestic franchise sales and royalty revenue stabilize.
- The company’s capacity to service the $135 million notes and fund operations after the special dividend, including the impact of full-year interest expense.
- Whether the stated liquidity outlook remains supported by operating cash generation, customer collections and supplier continuity.