Business Context and Reporting Period
Company: Nathan's Famous, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 28, 2008 (Thirteen and Thirty-Nine Weeks)
Business Overview: The Company operates and franchises Nathan's Famous restaurants, licenses the sale of branded products (primarily hot dogs) to retailers and foodservice operators, and operates a Branded Product Program. As of December 28, 2008, the system included 244 franchised/licensed outlets and six Company-owned outlets.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | 13 Weeks Ended Dec 28, 2008 |
39 Weeks Ended Dec 28, 2008 |
|---|---|---|
| Total Revenues | $10,620 | $39,187 |
| Net Income | $857 | $6,538 |
| Income from Continuing Ops | $857 | $4,071 |
| Income from Discontinued Ops | $0 | $2,467 |
| Diluted EPS (Net Income) | $0.14 | $1.04 |
| Cash and Cash Equivalents | $7,535 | $7,535 (Ending Balance) |
| Marketable Securities | $27,003 | $27,003 (Ending Balance) |
| Net Working Capital | $35,070 | $35,070 (Ending Balance) |
| Long-Term Debt | $0 | $0 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 3.7% for the 13-week period and 5.9% for the 39-week period compared to the prior year. Sales from the Branded Product Program grew 9.4% (13 weeks) and 14.0% (39 weeks), driven by price increases and volume.
- Restaurant Sales Decline: Company-owned restaurant sales declined 6.5% (13 weeks) and 1.6% (39 weeks) due to the slowing economy and reduced consumer confidence. Comparable franchised restaurant sales declined 8.3% (13 weeks) and 5.0% (39 weeks).
- Margin Compression: Gross profit margin for sales decreased from 24.3% to 20.8% (13 weeks) and from 26.2% to 23.5% (39 weeks). This was primarily due to a 21.5% increase in product costs for the Branded Product Program, specifically beef and beef trimmings.
- Discontinued Operations: The 39-week period included a significant gain of $3.9 million from the sale of NF Roasters Corp. and a $250,000 gain recognition from the prior sale of Miami Subs Corporation. No discontinued operations income was recorded in the 13-week period.
- Stock Repurchases: The Company repurchased 589,793 shares of common stock for approximately $8.4 million during the 39-week period, completing its third repurchase plan and initiating the fourth.
Guidance, Outlook, and Risks
- Economic Outlook: Management attributes sales declines to the severe recession, rising unemployment, and credit market upheaval. They anticipate continued volatility in beef prices and potential further declines in consumer spending on discretionary fast food.
- Commodity Costs: Beef costs remain volatile. While costs declined 25% from summer highs, they increased 10% in January 2009 compared to December 2008. The Company entered a new commitment in January 2009 to purchase 2.7 million pounds of hot dogs to mitigate future price spikes.
- Liquidity: The Company holds significant cash ($7.5 million) and marketable securities ($27.0 million). It decided not to extend its $7.5 million uncommitted bank line of credit in October 2008 as it had never borrowed against it.
- Legal Contingencies:
- SMG Litigation: Ongoing dispute with primary frankfurter supplier SMG, Inc. regarding termination of a license agreement. A stipulation was reached to delay termination until litigation is adjudicated.
- Personal Injury: A "trip and fall" lawsuit at a leased property in Huntington, NY, where the Company may have indemnification obligations.
- Operational Risks: Reliance on single suppliers for frankfurters and frozen French fries creates supply disruption risks. The closure of Astroland Amusement Park in Coney Island may negatively impact traffic at the flagship location.
Investor Verification Checklist
- Beef Cost Volatility: Verify the impact of the 10% beef cost increase in January 2009 on future margins and the effectiveness of the new purchase commitment.
- SMG Litigation Outcome: Monitor the resolution of the dispute with SMG, Inc., as a loss could disrupt the primary supply chain for the Branded Product Program and restaurants.
- Franchisee Financial Health: Assess the risk of further franchisee bankruptcies or funding issues given the reported 8.3% decline in comparable franchise sales and the credit crisis.
- Discontinued Operations: Confirm that the gains from the sale of NF Roasters and Miami Subs are non-recurring and do not reflect core operating performance.
- Stock Repurchase Activity: Track the execution of the fourth stock repurchase plan (410,207 shares remaining) and its impact on cash reserves.