Flanigan’s Enterprises, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended April 1, 2023; comparisons are to the periods ended April 2, 2022. Dollar amounts below are in millions unless stated otherwise. Financial statements are unaudited.
Business context
Flanigan’s operates restaurants and package liquor stores primarily in South Florida. At quarter-end, it reported 32 owned or operated units and five franchised units. During the quarter it opened a Miramar package store; its Miramar restaurant opened after quarter-end.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | First half FY2023 | First half FY2022 |
|---|---|---|---|---|
| Total revenue | $43.803 | $40.330 | $85.664 | $77.733 |
| Operating income | $2.711 | $1.850 | $3.908 | $2.615 |
| Net income | $2.178 | $1.343 | $3.052 | $5.281 |
| Net income attributable to Flanigan’s shareholders | $1.897 | $1.660 | $2.521 | $3.224 |
| Basic and diluted EPS | $1.02 | $0.89 | $1.36 | $1.73 |
| Operating cash flow | Not separately reported | Not separately reported | $4.194 | $7.190 |
Q2 revenue increased 8.6%; operating income rose to $2.711 million from $1.850 million. Net income attributable to shareholders increased 14.3%. First-half revenue rose 10.2%, but shareholder-attributable net income fell 21.8%, primarily because the prior-year period included a $3.488 million gain from PPP loan forgiveness.
Q2 restaurant food and bar gross margin was 67.41%, up from 63.83%; package-store gross margin was 28.26%, up from 27.97%. First-half restaurant food and bar gross margin was 66.72%, versus 63.61%; package-store margin was 26.94%, versus 26.71%. Operating costs and expenses were 93.81% of Q2 revenue and 95.44% of first-half revenue, compared with 95.41% and 96.64%, respectively, in the prior-year periods.
Liquidity, debt and cash flow
At April 1, 2023, cash and cash equivalents were $37.764 million, down $4.374 million from October 1, 2022. Working capital was $26.033 million, versus $28.717 million. First-half operating cash flow was $4.194 million; investing cash outflow was $5.273 million and financing cash outflow was $3.295 million. Capital expenditures and construction-in-progress purchases were substantial contributors to investing outflow.
Total debt was $23.732 million, compared with $25.389 million at fiscal year-end. The company paid off the remaining $367,000 balance on a separate term loan during the first quarter. Lease liabilities totaled $29.429 million, including current and non-current obligations. Management stated that available cash, operating cash flow and borrowing capacity should fund operations and planned capital spending for at least the next 12 months.
Changes, outlook and risks
- Sales and costs: Management attributed revenue growth to higher restaurant and package-store sales, price increases, new and recently reopened locations, and less adverse COVID-19 effects. Payroll rose 17.8% in Q2 and 14.6% for the first half, reflecting added locations and wage competition. Management expects operating costs to continue increasing during FY2023.
- Outlook: Management expects restaurant food and bar sales to rise during the remainder of FY2023, including from the Miramar restaurant opening, and expects package-store sales to benefit from new stores and traffic. It anticipates package-store gross margin may decline due to higher costs and more competitive pricing. These are forward-looking expectations, not guarantees.
- Debt covenant: The company disclosed noncompliance, as of December 31, 2022, with a fixed-charge covenant in six institutional loans. The lender waived the breach and certain remedies, including acceleration. The covenant minimum is 1.15:1.00; the filing reports the trailing-twelve-month ratio as 1.25:1.00 in a note and 1.35:1.00 in MD&A. Management projected future compliance.
- Capital commitments and subsequent events: The company has construction contracts for restaurant rebuilding and renovations. It also committed to purchase approximately $6.8 million of ribs during calendar 2023. After quarter-end, it closed on two property acquisitions for $3.2 million and $8.5 million, paid in cash.
- Operational risks: Management cited inflation in food, beverage, fuel and labor, supply-chain and labor availability, and potential continuing COVID-19 effects. The filing notes ordinary-course legal claims and no current dram-shop claims; management does not expect the other disclosed claims to materially affect results.
- Controls: Management concluded disclosure controls were ineffective because of a material weakness involving insufficient trained accounting personnel, including errors in recording transactions and calculating debt covenants. The company engaged accounting consultants to assist with remediation; it cautioned that remediation is not assured.
Important facts for investors to verify
- Reconcile the reported covenant ratio: 1.25:1.00 in the debt note versus 1.35:1.00 in MD&A, and monitor compliance with the 1.15:1.00 minimum.
- Track remediation of the material weakness and whether future filings report effective controls.
- Assess cash needs and debt capacity after the $11.7 million of post-quarter property purchases, planned construction and ongoing capital expenditures.
- Compare sales growth with labor, food and package-store costs, and evaluate the anticipated package-store margin pressure.
- Distinguish recurring earnings from the prior-year PPP forgiveness gain when comparing first-half results.