Nathan’s Famous, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended March 31, 2013, comprising 53 weeks; the comparable fiscal 2012 period comprised 52 weeks. The filing also reports unaudited fourth-quarter results. Figures below are in millions unless stated otherwise.
Business context
Nathan’s markets its brand through company-operated restaurants, franchising, Branded Menu and Branded Product programs, and product licensing. At year-end, its system included 303 franchised or Branded Menu units and five company-owned units; Branded Product locations are not included in that unit count. Foodservice product sales and royalties are major revenue sources.
Financial performance
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Total revenue | $71.543 | $66.222 | +8.0% |
| Gross profit | $11.782 | $10.263 | +14.8% |
| Gross margin on sales | 20.8% | 19.6% | +1.2 percentage points |
| Pretax income | $12.139 | $10.007 | +21.3% |
| Net income | $7.468 | $6.158 | +21.3% |
| Diluted EPS | $1.63 | $1.22 | +33.6% |
| Cash from operations | $9.494 | $9.612 | −1.2% |
Sales were $56.656 million, up 8.2%; Branded Product and Branded Menu foodservice sales rose 12.2% to $43.214 million. License royalties increased to $8.631 million from $7.586 million, while franchise fees and royalties grew to $5.782 million from $5.586 million. The extra fiscal week contributed an estimated $828,000 to sales and approximately $48,000 in franchise royalties. Share repurchases reduced weighted-average basic shares to 4.400 million from 4.906 million.
In the fourth quarter, revenue was $14.976 million versus $14.407 million; gross profit was $1.623 million versus $1.624 million; net income was $1.555 million versus $1.082 million; and diluted EPS was $0.34 versus $0.23.
Liquidity, debt and capital
At March 31, 2013, cash and cash equivalents were $13.403 million, marketable securities $12.307 million, working capital $27.525 million, total assets $49.662 million and stockholders’ equity $34.148 million. The company reported no outstanding debt. Restricted cash of $5.874 million secured the SMG litigation judgment and should not be treated as freely available liquidity. Management said cash, securities and operating cash flow were expected to fund operations and planned stock repurchases for at least 12 months. Capital expenditures were $0.998 million; the company repurchased 88,077 shares for $3.085 million. No cash dividends were anticipated in the foreseeable future.
Changes, outlook and material risks
- Growth and margins: Higher foodservice volume and price increases lifted gross margin despite higher Branded Product hot-dog costs. Comparable domestic franchise sales declined 1.8%; traditional franchise royalties rose modestly. Results include an additional week, so reported growth is not wholly comparable.
- Hurricane Sandy: The storm closed all company-owned restaurants temporarily and disrupted 78 franchised locations. Nathan’s recorded approximately $1.197 million of losses through year-end; the flagship Coney Island restaurant reopened May 20, 2013. The company received about $3.4 million net from an insurance settlement in the first quarter of FY2014. It estimated another $100,000–$200,000 of storm-related costs after year-end.
- Supplier transition and concentration: The SMG retail license was scheduled to expire March 1, 2014. John Morrell & Co. is to become the primary licensee/supplier from March 2, 2014 under an 18-year agreement, with packaged-product royalties of 10.8% of net sales and a first-year minimum guarantee of at least $10 million, increasing annually. Management saw potential for improved results but gave no assurance; transition, product quality and supply continuity are key risks. One licensee generated about 64% of FY2013 licensing revenue, and eight accounts represented about 70% of Branded Product Program business.
- SMG litigation: Courts ruled against Nathan’s on claims involving proprietary seasonings and its attempted termination of the SMG agreement, assessing approximately $4.91 million plus post-judgment interest. The Illinois appellate court affirmed in January 2013; rehearing was denied. Nathan’s filed for leave to appeal to the Illinois Supreme Court in April 2013, staying enforcement while the petition was pending. The company accrued $5.874 million and placed that amount in restricted cash.
- Operating risks: Management cited beef and commodity-price volatility, the Midwest drought and elevated corn prices, labor and healthcare costs, weather and seasonal dependence, competition, and food-safety and franchisee risks. New York minimum-wage increases and healthcare requirements were expected to raise costs. No formal earnings guidance was provided; management planned continued brand, franchise and product-distribution expansion and selective investment.
Most important facts for investors to verify
- Whether the John Morrell transition delivered the contracted minimum royalties and maintained product quality, supply and customer relationships.
- The outcome and cash consequences of the SMG appeal, including access to the restricted funds and continuing interest accrual.
- Actual insurance recoveries and total costs associated with Sandy, Coney Island reconstruction and the Yonkers redevelopment.
- Whether sales and earnings growth persist after adjusting for the 53rd week, and whether comparable franchise sales recover.
- Exposure to concentrated licensees and Branded Product accounts, commodity inflation, and labor and healthcare cost increases.