Flanigan’s Enterprises, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Unaudited 13 weeks ended December 29, 2018, compared with the 13 weeks ended December 30, 2017. Unless noted otherwise, financial amounts below are in thousands of dollars.
Business context
The company operates restaurants and package liquor stores in Florida. At quarter-end it reported 26 company-owned or operated units and five franchised units. A company-owned adult entertainment club closed permanently in fiscal 2018. Store #19, a combination restaurant and liquor store, was closed after an October 2018 fire and is expected to remain closed through at least the end of fiscal 2019.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change / context |
|---|---|---|---|
| Total revenue | $27,894 | $28,393 | Down 1.76% |
| Income from operations | $655 | $1,587 | Down about 59% |
| Income before taxes | $1,085 | $1,421 | Includes $602 insurance recovery, net of casualty loss, in FY2019 |
| Net income | $998 | $956 | Up 4.39%; includes the insurance-related gain |
| Net income attributable to stockholders | $743 | $621 | Up 19.65% |
| Basic and diluted EPS | $0.40 | $0.33 | Weighted-average shares were 1,858,647 in both periods |
| Operating cash flow | $2,835 | $3,723 | Down $888 |
| Capital expenditures | $1,641 | $960 | Higher restaurant investment |
Restaurant revenue was $22,151, down from $22,756; package-store revenue was $5,135, up from $5,013. Comparable weekly restaurant food sales rose 2.45% and bar sales rose 0.49%; same-store package liquor sales rose 9.12%. These comparable measures exclude Store #19.
Operating costs and expenses increased 1.62% to $27,239, while revenue declined. Costs were 97.65% of total sales, versus 94.41%. Restaurant food-and-bar gross margin improved slightly to 65.13% from 64.92%; package-store gross margin fell to 26.62% from 27.77%. Payroll and related costs were $8,598, or 30.82% of sales, versus $8,546, or 30.10%. SG&A rose 9.07% to $5,639.
Liquidity, debt and balance sheet
Cash was $14,500 at December 29, 2018, up from $13,414 at September 29, 2018. Working capital was $6,850, compared with $5,715 at fiscal year-end. Management said cash on hand, operating cash flow and borrowings should fund operations and planned capital expenditures for at least 12 months.
Total long-term debt, including current maturities, was $15,220, compared with $14,576 at September 29, 2018 and $16,617 at December 30, 2017. The company reported compliance with loan covenants. During the quarter it borrowed $250 under a related-party mortgage loan at 4.00% and financed $1,041 of insurance premiums. The new mortgage is secured by property and amortizes over eight years, with the balance due in 2026.
Cash increased by $1,086 during the quarter: operating activities provided $2,835, investing activities used $910, and financing activities used $839. The prior-year cash increase was $5,537, including $3,500 of long-term debt proceeds. No cash dividends were paid in either quarter.
Changes, outlook and material matters
- Store #19 fire: The fire caused the closure of the Hollywood location. The company recorded a $602 net insurance-related gain, comprising a business-interruption gain offset by a casualty loss. It reported aggregate insurance coverage of $1,975 and said the loss was substantially covered; the rebuild cost remained undetermined. Management expected no further insurance recovery and lower revenue and earnings through at least fiscal year-end due to the closure.
- Management outlook: No numerical earnings guidance was provided. Management expected total revenue and restaurant food and bar revenue to decline for the rest of fiscal 2019 because of Store #19’s closure, partly offset by increased traffic. It anticipated higher operating costs, higher food costs, lower package-store margins from competitive pricing, and increased SG&A. Package-store sales excluding Store #19 were expected to continue increasing.
- Commitments and projects: A calendar-year 2019 fixed-price agreement commits the company to approximately $5,888 of baby back ribs. Store #20 renovation contracts were amended, with significant amounts already paid. Subsequent to quarter-end, the company cancelled a Store #19 renovation contract following the fire and terminated a $356 design contract for a planned Store #31 redevelopment after parking constraints emerged. It planned a new package liquor store for the third quarter of fiscal 2019.
- Controls and cybersecurity: After quarter-end, the company sent a wire transfer to an incorrect recipient based on a fraudulent email, recovered the funds and incurred no loss. Management identified a material weakness in wire-transfer controls and introduced additional verification and approval procedures. The filing also added cybersecurity as a risk factor.
- Accounting and other risks: Adoption of revenue-recognition guidance did not materially affect results. The company expected lease-accounting adoption in fiscal 2020 to materially increase balance-sheet assets and liabilities. Risks discussed include customer demand, competition, food and labor inflation, interest-rate exposure, litigation and cyber threats.
Important facts for investors to verify
- Progress, timing, total rebuild cost and final insurance proceeds for Store #19, including whether and when it reopens.
- Underlying earnings and margins excluding the $602 insurance-related gain, and the effect of the store closure on future periods.
- Execution and effectiveness of the new wire-transfer controls following the disclosed material weakness.
- Capital-spending commitments, the rib-purchase agreement and the financial consequences of cancelled development plans.
- Debt maturities, covenant compliance and the eventual balance-sheet impact of lease-accounting adoption.