Business Context and Reporting Period
Company: Nathan's Famous, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: March 27, 2005
Business Overview: The Company operates and franchises fast food units under the Nathan's Famous, Miami Subs, and Kenny Rogers Roasters brands. It also operates a Branded Product Program selling proprietary items to foodservice retailers and holds licensing agreements for retail products. As of March 27, 2005, the system included 355 franchised units, 6 company-owned units (all Nathan's), and over 5,900 branded product points of sale across 46 states and 13 foreign countries.
Key Financial Metrics
| Metric (in thousands) | Fiscal 2005 | Fiscal 2004 |
|---|---|---|
| Total Revenues | $34,112 | $29,762 |
| Net Income | $2,737 | $1,894 |
| Diluted EPS | $0.45 | $0.33 |
| Cash from Operations | $3,308 | $5,276 |
| Working Capital | $14,009 | $9,185 |
| Total Assets | $31,269 | $27,584 |
| Long-Term Debt | $692 | $866 |
| Stockholders' Equity | $21,356 | $17,352 |
Revenue Composition: Sales were $23.3 million (up 17.4%), Franchise fees and royalties were $6.8 million (up 7.8%), and License royalties were $3.3 million (up 12.2%).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 14.6% to $34.1 million. The Branded Product Program saw significant growth, with sales rising 41.7% to $10.8 million, driven by a 44.7% volume increase and price hikes.
- Company-Owned Operations: Company-owned restaurant sales decreased 6.2% to $11.1 million due to the operation of five fewer stores (franchised or converted to management agreements in the prior year). However, comparable restaurant sales increased 4.7%.
- Profitability: Net income increased 44.5% to $2.7 million. This was driven by higher revenues and lower impairment charges (none in 2005 vs. $208,000 in 2004 for notes receivable).
- Cost Pressures: Cost of sales increased 21.6% primarily due to the growth in the Branded Product Program and a 7.1% increase in beef product costs. The Company implemented price increases to offset these margins.
- Franchise Expansion: The system grew from 338 to 355 franchised units. 28 new domestic units and 11 international units opened during the fiscal year.
Outlook, Risks, and Management Commentary
- Guidance & Strategy: Management plans to continue expanding the Branded Product Program, open new franchised units (including co-branded concepts), and develop international master franchising. They may selectively open new company-owned Nathan's units.
- Commodity Risks: Beef costs have risen dramatically due to supply constraints (BSE concerns, drought, import restrictions). The Company expects to further increase selling prices in fiscal 2006 to offset margin pressure from beef and gasoline costs.
- Legal Contingencies: The Company is involved in routine litigation, including an age discrimination claim ($1M sought) and an EEOC charge regarding sex discrimination and retaliation. Management intends to defend these vigorously and expects insurance coverage for the latter.
- Seasonality: Earnings are historically highest in the first two fiscal quarters due to weather conditions in the New York metropolitan area, with the fourth quarter being the slowest.
- Stock Repurchase: The Company has repurchased 1.89 million shares to date under its programs and expects to continue purchasing shares from operating cash flow.
Investor Verification Checklist
- Beef Cost Sensitivity: Verify the impact of continued high beef prices on margins and the success of price pass-through to consumers.
- Franchisee Compliance: Monitor the number of non-performing franchise units (25 in 2005 vs. 35 in 2004) and the collectibility of royalties.
- Branded Product Growth: Assess the sustainability of the 41.7% sales growth in the Branded Product Program and the expansion into new retail channels (e.g., QVC, convenience stores).
- Legal Exposure: Track the resolution of the EEOC sex discrimination charge and the age discrimination lawsuit.
- Debt and Liquidity: Confirm the utilization of the $7.5 million uncommitted line of credit and the repayment schedule for the $866,000 outstanding debt.