NATH

Business Context and Reporting Period

Company: Nathan's Famous, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 29, 2003 (Thirteen weeks)
Business Overview: The Company operates and franchises Nathan's, Miami Subs, and Kenny Rogers Roasters restaurant concepts. It also licenses its brand for supermarket sales and operates a Branded Product Program. As of June 29, 2003, the system included 349 franchised/licensed units, 9 company-owned units, and over 2,500 branded product points of sale.

Key Financial Metrics

Note: The prior year Net Loss of $(11,992) was significantly impacted by a one-time cumulative effect of a change in accounting principle (SFAS No. 142) totaling $(12,338) net of tax.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 6.7% to $9.018 million. Company-owned restaurant sales dropped 24.9% to $4.088 million due to the closure/franchising of five stores and unseasonable weather in the Northeast. Conversely, the Branded Product Program sales increased 34.9% to $2.247 million.
• Profitability Improvement: Income from continuing operations increased 154.8% to $744,000, driven by reduced operating costs and the absence of the prior year's goodwill impairment charge.
• Expense Reduction: General and administrative expenses decreased 8.7% ($183,000) due to lower personnel costs and bad debt expenses. Restaurant operating expenses fell 19.5% primarily due to fewer company-owned locations.
• Asset Sales: The Company sold two company-owned restaurants for $713,000 and recognized a net gain of $94,000 on the sale of a restaurant to a franchisee.

Outlook, Risks, and Management Commentary

• Strategic Shift: Management continues to reduce company-owned restaurant exposure, having franchised four restaurants and sold one during the quarter. The focus remains on franchising and the Branded Product Program.
• Liquidity: The Company maintains $1.858 million in cash and $5.229 million in marketable securities. It has a $7.5 million uncommitted bank line of credit, which remains undrawn. Management believes internal funds are sufficient for operations for the next 12 months.
• Stock Repurchases: The Company repurchased 57,600 shares for $211,000 during the quarter. To date, it has repurchased 1.75 million shares for approximately $6.375 million.
• Risks and Contingencies:
  • Commodity Costs: Hot dog commodity costs rose due to supply shortages. A 10% fluctuation in food/paper costs would impact cost of sales by approximately $287,000.
  • Lease Obligations: The Company remains contingently liable for 32 properties leased to franchisees and 3 vacant properties. It also guarantees loans for certain franchisees totaling $818,000.
  • Legal: A slip-and-fall lawsuit is pending against a Miami Subs franchisee; the franchisee's insurer has agreed to defend the Company.

Investor Verification Checklist

• Revenue Mix: Verify the sustainability of the 34.9% growth in the Branded Product Program versus the 24.9% decline in company-owned restaurant sales.
• Comparable Store Sales: Confirm the 8.9% decline in comparable restaurant sales was solely due to weather and not broader brand issues.
• Franchisee Health: Review the increase in "unrealizable" royalties (44 locations vs. 39 in the prior year), particularly in the South Florida Miami Subs market.
• Debt and Guarantees: Assess the risk exposure of the $818,000 in loan guarantees for franchisees and the $25 million in operating lease obligations.
• Capital Allocation: Evaluate the impact of continued stock repurchases ($211,000 in the quarter) on liquidity given the reduction in company-owned store count.