Flanigan’s Enterprises, Inc. — Q2 FY2021 Form 10-Q
Business and period: The unaudited quarter comprised 13 weeks ended April 3, 2021; year-to-date (YTD) covers 26 weeks. Flanigan’s operates restaurants and package liquor stores, including locations consolidated through limited partnerships, and franchises additional units. At quarter-end it reported 27 company-owned or operated units and five franchised units. Comparisons are with the corresponding periods ended March 28, 2020, which were more adversely affected by COVID-19.
Financial performance
| Metric | 13 weeks ended Apr. 3, 2021 | 13 weeks ended Mar. 28, 2020 | 26 weeks ended Apr. 3, 2021 | 26 weeks ended Mar. 28, 2020 |
|---|---|---|---|---|
| Total revenue | $34.357m | $30.128m | $65.737m | $61.069m |
| Operating income | $2.793m | $1.517m | $4.063m | $2.748m |
| Net income | $5.692m | $1.420m | $6.724m | $2.341m |
| Net income attributable to Flanigan’s stockholders | $2.451m | $0.648m | $3.231m | $1.142m |
| Basic and diluted EPS | $1.32 | $0.35 | $1.74 | $0.61 |
- Quarterly revenue rose 14.0%; YTD revenue rose 7.6%. Package-store sales increased 29.9% for the quarter and 35.0% YTD on a same-store weekly-average basis. Restaurant food sales grew, while bar sales fell: comparable weekly bar sales declined 4.9% for the quarter and 15.3% YTD.
- Operating margin was approximately 8.1% for the quarter versus 5.0% a year earlier, and 6.2% YTD versus 4.5%. Operating costs and expenses increased in dollars but fell as a share of revenue. Restaurant food-and-bar gross margin increased to 67.12% for the quarter and 67.05% YTD; package-store gross margin eased to 27.61% and 27.28%, respectively.
- Net income included a $3.653m gain from forgiveness of PPP loans. The reported profit increase therefore reflects a material nonrecurring item as well as stronger sales and comparison against COVID-affected 2020 results. Quarterly and YTD net income attributable to stockholders was $2.451m and $3.231m, respectively.
- YTD operating cash flow was $7.092m, compared with $4.213m. Investing cash outflow was $5.493m, including $7.251m of property, equipment and construction-in-progress additions; financing cash flow was $1.107m. Cash rose by $2.706m to $32.628m.
Balance sheet, debt and liquidity
- At April 3, 2021, current assets were $40.239m and current liabilities were $23.317m, yielding working capital of $16.922m and a current ratio of approximately 1.73.
- Reported long-term debt, including its current portion, was $28.269m, versus $26.323m at October 3, 2020. Cash exceeded reported debt by about $4.4m, before considering lease liabilities. Operating lease liabilities totaled $27.129m. The company reported compliance with its loan covenants.
- Quarter-end debt includes a $2.2m mortgage for the Sunrise property, bearing fixed interest of 3.65%, and borrowing by limited partnerships under second-round PPP loans. Six limited partnerships received approximately $3.35m of those loans; forgiveness had not been assured. The filing says the company expects cash, operating cash flow and borrowing availability to fund operations and planned capital spending for at least the next 12 months.
Changes, outlook and risks
- Management attributed improved revenue to higher package-store and restaurant sales, menu price increases and the less adverse COVID-19 comparison. It also cited COVID-related demand for package-store products. Food and bar menu increases implemented in late 2020 targeted annual revenue increases of approximately 2.45% and 1.83%, respectively.
- Effective April 11, 2021, the company increased food prices, targeting approximately 4.60% annual food-revenue growth to offset higher food costs and other expenses. Management expected operating costs to continue rising during FY2021, while occupancy costs and SG&A were expected to decline over the balance of the year. These are expectations, not guarantees.
- COVID-19 was expected to continue adversely affecting restaurant operations and results, with the duration and financial effects not predictable. Store #19 remained closed after a 2018 fire; management did not expect it to generate revenue in FY2021. Construction contracts and change orders for its rebuilding and adjacent liquor-store project increased the contractor price to $2.107m after quarter-end.
- Other commitments include planned development in Sunrise and Miramar, and a 2021 fixed-price commitment to purchase approximately $6.420m of baby back ribs. Management estimated approximately $950,000 of FY2021 refurbishment spending, excluding Store #19 and the Sunrise development.
- Management reported no current dram-shop claims and said other ordinary-course legal matters were not expected to have a material adverse effect. It identified a material weakness in internal control concerning ASC 842 lease classification; remediation was ongoing. Management nevertheless concluded disclosure controls were effective as of April 3, 2021.
Important facts for investors to verify
- Underlying earnings and operating trends excluding the $3.653m PPP-forgiveness gain, and the status and terms of forgiveness for second-round PPP loans.
- Restaurant recovery, especially bar sales, and whether package-store sales growth persists as COVID-related demand changes.
- Actual food, labor and other cost trends, and the effect of the April 2021 price increase on sales volumes and margins.
- Cash needs, debt and lease obligations, covenant compliance, and spending and completion costs for Store #19, Sunrise and Miramar projects.
- Progress in remediating the ASC 842 internal-control material weakness.