Nathan’s Famous, Inc. — Form 10-Q Summary
Reporting period: Thirteen and thirty-nine weeks ended December 29, 2013. The filing describes these as the third quarter and year-to-date periods of fiscal 2014; comparisons are with periods ended December 23, 2012. Amounts are in U.S. dollars unless noted.
Business context
Nathan’s markets branded products, operates and franchises restaurants, and earns franchise and licensing royalties. At period-end, its system included 305 franchised outlets and five company-owned restaurants. The Coney Island restaurant reopened in May 2013 after Superstorm Sandy damage; the Yonkers restaurant reopened in November 2013 following redevelopment. These closures and reopenings affect period-to-period comparability.
Financial performance
| Metric | 13 weeks ended Dec. 29, 2013 | 13 weeks ended Dec. 23, 2012 | 39 weeks ended Dec. 29, 2013 | 39 weeks ended Dec. 23, 2012 |
|---|---|---|---|---|
| Total revenues | $18.533 million | $15.025 million | $65.596 million | $56.567 million |
| Net income | $1.107 million | $1.062 million | $7.109 million | $5.913 million |
| Diluted EPS | $0.24 | $0.23 | $1.54 | $1.29 |
| Sales | $15.236 million | $11.862 million | $52.003 million | $45.875 million |
| Gross profit / margin | $2.457 million / 16.1% | $2.044 million / 17.2% | $10.445 million / 20.1% | $10.159 million / 22.1% |
- Quarterly sales increased 28.4%, primarily from higher Branded Product and Branded Menu sales, including increased volume and a December price increase, plus the Coney Island and Yonkers restaurant reopenings. Branded Product and Branded Menu volume rose 19.8% in the quarter.
- Year-to-date sales rose 13.4%; Branded Product and Branded Menu sales increased 20.3%. Company-owned restaurant sales fell 6.8% year to date, affected by restaurant closure periods. Comparable domestic franchise sales declined 1.0% year to date.
- Gross margin declined in both comparisons, mainly because of higher hot-dog costs. The reported year-to-date revenue increase also includes a $2.801 million insurance gain related to Sandy damage.
- Year-to-date operating results included a $400,000 impairment charge on a long-term investment. Year-to-date interest expense was $135,000, versus $333,000 in the prior comparable period; the SMG judgment was paid in July 2013.
Cash flow, liquidity and debt
- At December 29, 2013, cash and cash equivalents were $18.121 million and marketable securities were $11.297 million. Working capital was $34.238 million, up from $27.525 million at March 31, 2013.
- Net cash used in operating activities was $1.458 million for the 39-week period, compared with $7.132 million provided in the prior-year period. The current-period outflow reflected, among other items, the $6.009 million SMG settlement payment and higher receivables.
- Investing activities provided $5.027 million, including insurance proceeds and maturities of securities; capital expenditures were $4.229 million. Financing activities provided $1.149 million, including employee option-related proceeds and tax benefits, partly offset by withholding taxes and $262,000 of share repurchases.
- The company reported no outstanding indebtedness at December 29, 2013. Management said available cash, marketable securities and operating cash generation should fund operations and repurchases for at least the next 12 months.
Outlook, risks and unusual items
- Management estimated a fiscal 2014 annual effective tax rate of approximately 38.5%–40.0%; actual results may vary. It noted that unrecognized tax benefits could decrease by up to $34,000 within the next year.
- The SMG retail license agreement was scheduled to expire, with John Morrell & Co. expected to become Nathan’s exclusive retail licensee for branded hot dogs, sausage and corned beef beginning in March 2014. Management cited transition and supply-agreement execution as risks.
- Beef and beef-trimming costs were volatile and higher year over year; management expected to seek recovery through price increases. Failure to pass through costs could further pressure margins. Weather, supply constraints, labor and insurance costs, utilities, receivable collectibility, consumer demand and franchise development are also cited risks.
- The SMG litigation was fully settled when $6.009 million was withdrawn from restricted funds on July 24, 2013. Sandy-related property damage generated the $2.801 million gain; a $745,000 business-interruption insurance receivable was recorded as probable, while the claim exceeded that amount.
- The company had $2.267 million of unamortized share-based compensation expense expected to be recognized over approximately two years. It had an authorized plan to purchase up to $5 million of stock, subject to market conditions and other terms.
Most important facts for investors to verify
- Whether the John Morrell transition proceeded as planned and its effect on retail royalties, product supply and margins.
- Whether price increases offset continued commodity-cost inflation without materially weakening branded-product volume or demand.
- Collection and timing of the business-interruption insurance claim, and whether the recorded receivable is ultimately recovered.
- Underlying earnings and cash generation excluding the one-time insurance gain, investment impairment, litigation settlement cash outflow and restaurant closure/reopening effects.
- Actual fiscal-year tax rate, capital spending, share repurchases and liquidity relative to management’s stated outlook.