Business context and reporting period
Flanigan’s Enterprises, Inc. filed this unaudited Form 10-Q for the 13 and 39 weeks ended July 1, 2017, compared with periods ended July 2, 2016. The company operates restaurant and package-liquor-store businesses, and consolidates eight limited partnerships it controls. At quarter-end, it reported 27 company-owned or operated units and five franchised units.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | 13 weeks ended July 1, 2017 | 13 weeks ended July 2, 2016 | 39 weeks ended July 1, 2017 | 39 weeks ended July 2, 2016 |
|---|---|---|---|---|
| Revenue | $26.967 | $26.383 | $80.994 | $78.635 |
| Operating income | $1.586 | $2.411 | $5.154 | $5.740 |
| Net income | $1.100 | $1.771 | $3.711 | $4.141 |
| Net income attributable to stockholders | $0.842 | $1.147 | $2.554 | $2.645 |
| EPS, basic and diluted | $0.45 | $0.62 | $1.37 | $1.42 |
- Quarterly revenue rose 2.2%; nine-month revenue rose 3.0%. Quarterly sales growth reflected increased restaurant traffic and package-store traffic. Nine-month growth also reflected prior menu-price increases.
- Quarterly operating margin fell to approximately 5.9% from 9.1%; net margin fell to 4.1% from 6.7%. Nine-month operating margin was approximately 6.4% versus 7.3%, and net margin was 4.6% versus 5.3%.
- Quarterly restaurant food and bar gross margin declined to 63.29% from 65.36%, mainly due to higher food costs. Package-store gross margin was 28.28% versus 28.01%. For the 39 weeks, restaurant food and bar margin was 64.25% versus 65.10%, while package-store margin was 28.39% versus 28.56%.
- Cash from operations was $6.303 million for the 39 weeks, down from $6.775 million. Investing used $6.050 million, versus $2.822 million; financing used $0.540 million, versus $3.484 million. Cash declined $0.287 million to $9.887 million.
- At July 1, cash was $9.887 million, current assets $15.169 million, current liabilities $10.715 million, and working capital $4.454 million. Total assets were $60.376 million and total equity $38.003 million.
- Total long-term debt, including current maturities, was $12.831 million, versus $10.092 million at October 1, 2016. Management reported compliance with loan covenants. Interest expense for the quarter was $0.158 million, up from $0.137 million.
Material changes versus the prior comparable period
- Quarterly operating expenses increased 5.9% to $25.381 million, faster than revenue growth of 2.2%; expenses rose to 94.12% of revenue from 90.86%. Management cited higher food costs and increased overall expenses.
- Quarterly restaurant food sales increased to $17.169 million, while bar sales declined to $5.049 million. Comparable weekly food sales rose 2.40%, but comparable weekly bar sales fell 2.76%; management cited promotional discounts on Joe’s Pale Ale and competition.
- Quarterly package-store sales increased 7.0% to $4.067 million; same-store weekly sales rose 7.19%. Nine-month package-store sales increased to $12.936 million, with same-store weekly sales up 6.41%.
- Nine-month capital expenditures were $6.235 million versus $2.913 million. The company acquired adjacent North Miami property for approximately $2.47 million, funded partly with a $2.0 million credit-line draw, and continued package-store and restaurant redevelopment.
Outlook, risks and unusual items
- No formal earnings guidance was provided. Management expected restaurant food and bar gross margins to decline through the balance of fiscal 2017 because of higher food costs, and operating expenses, SG&A and interest expense to increase. It expected package-store sales and margins to remain stable and occupancy costs to remain stable.
- Management believed cash on hand, operating cash flow and available borrowing capacity would fund operations and planned capital expenditures for at least 12 months, while noting that unexpected expenses or revenue declines could affect liquidity. As of August 15, $3.5 million remained available under the $5.5 million credit line.
- The credit line was variable-rate through December 28, 2017, then scheduled to convert to a five-year amortizing term loan at a hedged fixed rate of 4.65%. The company also had other variable-rate borrowings and interest-rate swaps; rate changes remain a risk.
- A $935,000 construction contract, including subsequent change orders, covered renovation and expansion of the North Miami restaurant; $45,000 had been paid after quarter-end. The company also renewed a Weston restaurant lease for five years beginning October 1, 2017, with two five-year renewal options and an increase in percentage rent.
- The company had a fixed-price 2017 rib-purchase commitment of approximately $5.779 million. Routine litigation includes personal injury, accessibility, employment and food-quality claims; the filing said none had materially affected the company to date. No material subsequent event requiring disclosure was reported.
- Management attributed the earnings decline principally to food costs and other expenses, partly offset by traffic and pricing. Forward-looking statements are subject to demand, competition, cost and other risks; interim results may not indicate full-year performance.
Important facts for investors to verify
- Whether food-cost inflation and other expenses continue to pressure restaurant margins and earnings.
- Whether bar-sales weakness and promotional pricing persist, and whether package-store traffic growth is sustained.
- Progress, total cost and expected benefits of the North Miami property, package-store and restaurant projects, including the renovation contract.
- Credit-line conversion, remaining borrowing availability, debt-service requirements and exposure to interest-rate changes.
- Cash generation, capital spending and dividend capacity; the company paid a $0.20-per-share dividend during the period and future dividends remain at the board’s discretion.