Nathan's Famous, Inc. - 10-Q Filing Summary
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Nathan's Famous, Inc. for the thirteen and thirty-nine week periods ended December 26, 2004. The Company operates and franchises restaurants under the Nathan's, Miami Subs, and Kenny Rogers Roasters brands, and sells branded products through a Branded Product Program. As of the reporting date, the system included 352 franchised/licensed units, six Company-owned units, and over 4,800 branded product points of sale.
Key Financial Metrics
For the Thirteen Weeks Ended Dec 26, 2004 (vs. Dec 28, 2003):
- Total Revenues: $7.30 million (up 16.1% from $6.29 million).
- Net Income: $0.48 million (up 100.8% from $0.24 million).
- Diluted EPS: $0.08 (up from $0.04).
- Operating Cash Flow: Not explicitly stated for the quarter, but YTD operating cash flow was $2.37 million.
For the Thirty-Nine Weeks Ended Dec 26, 2004 (vs. Dec 28, 2003):
- Total Revenues: $26.46 million (up 12.5% from $23.52 million).
- Net Income: $2.52 million (up 36.9% from $1.84 million).
- Diluted EPS: $0.42 (up from $0.33).
- Operating Cash Flow: $2.37 million (down from $3.84 million).
- Cash and Cash Equivalents: $3.01 million (down from $3.45 million at prior year-end).
- Debt: Total notes payable and capital lease obligations were $0.91 million ($0.17 million current, $0.74 million long-term).
- Working Capital: $12.74 million (up from $9.19 million).
Material Changes vs. Prior Period
- Revenue Growth: Driven primarily by a 48.6% increase in Branded Product Program sales ($2.54 million) due to volume growth and price increases offsetting commodity costs. Franchise royalties increased 7.3% due to improved collections and higher domestic franchise sales.
- Cost of Sales: Increased 25.7% for the quarter and 17.6% YTD, largely due to the growth in the Branded Product Program and rising beef commodity costs (hot dog costs up 3.6% QoQ, 7.8% YTD).
- Company-Owned Restaurants: Sales were flat for the quarter (+1.0%) but decreased 7.0% YTD due to the closure/franchising of five Company-owned units. However, comparable unit sales increased.
- Discontinued Operations: The Company ceased operations of one restaurant in September 2004. Results are now classified as discontinued operations, eliminating a prior period loss of $11,000 for the quarter and $14,000 YTD.
- Impairment Charges: No impairment charges on notes receivable were recorded in 2004, compared to $44,000 (quarter) and $100,000 (YTD) in the prior year.
Guidance, Outlook, and Risks
- Outlook: Management expects to fund operations and future investments (including restaurant replacements and Branded Product growth) from operating cash flow. The Company maintains a $7.5 million uncommitted line of credit, which has never been utilized.
- Stock Repurchases: The Company repurchased 39,799 shares for $237,000 during the period. Total treasury stock held is 1.89 million shares.
- Risks and Contingencies:
- Commodity Costs: Continued volatility in beef prices poses margin pressure. A 10% fluctuation in food/paper costs would impact cost of sales by approximately $0.96 million YTD.
- Legal Proceedings: Active litigation includes a slip-and-fall claim against a franchisee (insured), a $1 million age discrimination claim against the Company (insured), and a class-action overtime claim against franchisees.
- Guarantees: The Company guarantees franchisee equipment financing and notes totaling approximately $362,000.
- Accounting Changes: The Company adopted FIN No. 46(R) with no material impact. Future adoption of SFAS No. 123R (Share-Based Payment) in Q2 2005 is expected to impact earnings, though the specific amount is undetermined.
Investor Verification Checklist
- Verify the sustainability of the 48.6% growth in the Branded Product Program given rising beef commodity costs.
- Monitor the status of the $1 million age discrimination lawsuit and the class-action overtime claim to assess potential uninsured liabilities.
- Review the impact of the upcoming adoption of SFAS No. 123R on future net income and EPS.
- Assess the collectibility of franchise royalties, noting that 21 domestic locations were deemed non-performing in the quarter.
- Confirm the Company's ability to maintain liquidity given the net decrease in cash and cash equivalents of $440,000 YTD.