Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 28, 1997, for Nathan's Famous, Inc., a Delaware corporation operating company-owned and franchised hot dog restaurants and a branded product program. The filing includes unaudited consolidated financial statements for the thirteen and twenty-six weeks ended September 28, 1997, compared to the same periods in 1996.
Key Financial Metrics
Revenue and Profitability (Thirteen Weeks Ended Sept 28, 1997)
- Total Revenues: $8,098,000 (up from $7,362,000 in prior year).
- Net Earnings: $609,000 (up from $480,000 in prior year).
- Earnings Per Share (EPS): $0.13 (up from $0.10 in prior year).
- Cost of Sales: $3,893,000 (57.5% of restaurant sales).
- Restaurant Operating Expenses: $1,680,000 (27.5% of restaurant sales).
Revenue and Profitability (Twenty-Six Weeks Ended Sept 28, 1997)
- Total Revenues: $15,460,000 (up from $14,334,000 in prior year).
- Net Earnings: $1,083,000 (up from $875,000 in prior year).
- Earnings Per Share (EPS): $0.23 (up from $0.19 in prior year).
- Cost of Sales: $7,396,000 (58.2% of restaurant sales).
Liquidity and Capital Resources
- Cash and Cash Equivalents: $577,000 (decreased $70,000 from beginning of period).
- Marketable Investment Securities: $8,099,000.
- Net Working Capital: $5,473,000 (increased from $4,802,000).
- Debt: Current maturities of long-term debt are $12,000; long-term debt is $21,000. The company maintains a $5,000,000 uncommitted bank line of credit with no borrowings.
- Cash Flow from Operations: $1,116,000 for the twenty-six week period.
Material Changes vs. Prior Period
- Sales Growth: Total sales increased 10.7% in the quarter and 6.6% year-to-date, driven by a 4.4% increase in comparable unit sales and the launch of the Branded Product Program (contributing $483,000 in the quarter).
- Franchise Decline: Franchise fees and royalties decreased 8.9% in the quarter and 13.0% year-to-date. This is primarily due to the closure of 53 Caldor units in the prior year, which previously generated significant royalties.
- License Royalties Surge: License royalties increased 76.6% in the quarter and 68.8% year-to-date, largely due to a license arrangement with SMG, Inc. for supermarket frankfurter sales.
- Expense Management: Restaurant operating expenses decreased as a percentage of sales (27.5% vs. 29.9% in the quarter) due to the closure of two unprofitable company-owned restaurants.
- Investment Income: Investment income increased due to higher marketable securities balances, though other income decreased due to the reversal of an accrual for closing costs in the prior year.
Outlook, Risks, and Management Commentary
- Expansion: The company opened its eighth company-owned Home Depot restaurant in Staten Island in August 1997 and completed a renovation of its Yonkers, NY unit into a co-branded location. Plans are underway to modernize other units.
- Liquidity Outlook: Management believes available cash, marketable securities, and internally generated funds are sufficient for operations and expansion through fiscal 1998.
- Risks and Contingencies:
- Margin Pressure: The company faces margin erosion due to a value-conscious marketplace and recent minimum wage increases.
- Legal Proceedings: A legal action against Bay Plaza Famous, Inc. and others was settled in the summer of 1997 for nominal consideration.
- Accounting Changes: The company noted the upcoming adoption of SFAS No. 128 (Earnings Per Share) but does not expect a material impact.
Key Facts for Investor Verification
- Verify the sustainability of the Branded Product Program revenue stream, which contributed significantly to sales growth but also increased cost of sales.
- Monitor the impact of the Caldor unit closures on long-term franchise royalty trends versus the growth from new franchise openings (7 new units in the quarter).
- Assess the effectiveness of cost control measures in offsetting minimum wage increases and maintaining operating margins.
- Confirm the status of the $5,000,000 uncommitted line of credit and whether it remains available given the company's current liquidity position.
- Review the renovation plans for existing units to ensure capital expenditures align with projected returns.