Nathan’s Famous, Inc. — Form 10-Q Summary
Reporting period: Thirteen weeks ended September 28, 2014 (fiscal Q2 2015); year-to-date figures cover the twenty-six weeks ended that date. Comparisons are with the corresponding periods in 2013. Amounts are in millions of dollars unless stated otherwise.
Business context and results
Nathan’s markets branded food products, operates and franchises restaurants, and licenses its brand. The company had 317 system locations at quarter-end, including 312 franchised and five company-operated units. Its new John Morrell & Co. retail hot-dog license agreement began March 1, 2014; management said future results depend substantially on the success of this agreement.
| Metric | Q2 2015 | Q2 2014 | 26 weeks 2015 | 26 weeks 2014 |
|---|---|---|---|---|
| Total revenue | $28.953 | $23.662 | $56.621 | $47.063 |
| Net income | $3.854 | $2.648 | $7.925 | $6.002 |
| Diluted EPS | $0.84 | $0.57 | $1.73 | $1.30 |
| Gross profit margin on sales | 20.7% | 22.7% | 20.7% | 21.7% |
Q2 total revenue increased 22.4% and net income increased 45.5%. For the first half, revenue rose 20.3% and net income rose 32.0%. Sales increased 14.8% in Q2 and 17.9% year to date. License royalties rose to $4.538 million in Q2 from $2.137 million, and to $10.106 million year to date from $4.394 million, primarily reflecting the higher royalty rate under the John Morrell agreement. Prior-year year-to-date results included a $2.801 million Superstorm Sandy insurance gain; the current period did not.
Cash flow, liquidity and capital
| Metric | September 28, 2014 | March 30, 2014 / prior period |
|---|---|---|
| Cash and cash equivalents | $32.161 | $22.077 |
| Marketable securities | $7.105 | $11.187 |
| Net working capital | $42.171 | $35.378 |
| Total liabilities | $11.152 | $12.238 |
| Stockholders’ equity | $50.396 | $43.897 |
The company reported no outstanding debt. First-half operating cash flow was $8.297 million, versus cash used of $1.751 million a year earlier. Investing activities provided $3.550 million; financing activities used $1.763 million. Cash increased $10.084 million during the first half. The company repurchased 37,661 shares for $1.916 million and reported 251,272 shares remaining under its existing buyback program. Management said available cash, securities and operating cash flow should fund operations and repurchases for at least the next 12 months.
Material changes, outlook and risks
- Company-operated restaurant sales benefited from the Coney Island and Yonkers locations being open during the current period, whereas they were closed for part or all of the comparable prior period. Q2 sales at the two Coney Island restaurants increased about 12.5% in customer counts.
- Comparable domestic franchise sales declined 3.0% in Q2 and 2.3% year to date. Management attributed franchise sales and royalty pressure in part to restaurant closures.
- Margins narrowed as hot-dog costs rose: the market price was about 18.7% higher year over year in Q2 and 15.8% higher for the first half. The company had no current hot-dog purchase commitments. It had raised selling prices but cautioned it might not be able to offset further cost increases.
- Management estimated a fiscal 2015 annual tax rate of approximately 39.5%–41.5%. It said uncertain tax benefits could decline by up to $64,000 within a year; the MD&A also cited a possible reduction of up to $124,000 including related interest and penalties.
- The company expected approximately $1.3 million in capital spending for the planned Oceanside restaurant relocation. It expected to close the existing restaurant in January 2015 and open the replacement in March 2015; construction contracts of about $700,000 had been entered into in October 2014.
- Key risks cited include volatile beef, distribution and utility costs; reliance on John Morrell as principal hot-dog supplier; labor, minimum-wage and health-care costs; and franchisee performance. The filing discussed a National Labor Relations Board ruling that, if upheld and applied to Nathan’s, could increase potential liability for franchisee labor violations. Management believed routine litigation would not materially affect the company; no legal proceedings were listed in Part II.
No specific revenue or earnings guidance was provided. Management noted results are seasonal and interim results may not indicate full-year performance.
Important facts for investors to verify
- Whether the higher John Morrell royalty rate and associated sales growth are sustainable, given the company’s stated dependence on the agreement.
- Whether pricing can offset further beef-cost increases and restore gross margins.
- Franchise sales trends, restaurant closures, and the effect of reopened company restaurants on year-over-year comparisons.
- The timing and final cost of the Oceanside relocation, along with future capital spending and share repurchases.
- The eventual outcome and financial effect, if any, of uncertain tax positions and the potential franchise-related labor liability.