Business context and reporting period
Flanigan’s Enterprises, Inc. operates South Florida restaurants and package liquor stores under the Flanigan’s Seafood Bar and Grill and Big Daddy’s Liquors brands. As of October 1, 2016, it operated or controlled 25 units, owned but did not operate one Atlanta club, and franchised five units. The fiscal year ended October 1, 2016 comprised 52 weeks; the prior year ended October 3, 2015 comprised 53 weeks, limiting direct year-over-year comparisons.
Financial performance and liquidity
- Revenue: $103.6 million, up 4.5% from $99.1 million. Restaurant food sales were $65.0 million, beverage sales $20.5 million, and package goods sales $15.7 million. Management attributed growth mainly to menu price increases and, to a lesser extent, higher traffic. Comparable weekly restaurant food sales rose 6.2%; bar sales rose 9.1%.
- Profit: Operating income was $6.8 million, down from $7.4 million. Consolidated net income was $5.0 million versus $5.2 million; net income attributable to company stockholders was $3.0 million, or $1.64 per diluted share, versus $3.5 million, or $1.86. Stockholder-attributable net margin declined to 2.93% from 3.49%.
- Margins and costs: Restaurant food-and-beverage gross margin improved to 65.16% from 64.39%; package-store gross margin declined to 28.44% from 29.05%. Operating costs and expenses rose 5.56%, faster than revenue, with payroll, occupancy, and SG&A increasing. Payroll was 30.98% of sales, compared with 30.44%.
- Cash flow and investment: Operating cash flow was $8.8 million, down from $11.1 million. Investing activities used $3.4 million and financing activities used $4.5 million. Cash increased $0.9 million to $10.2 million. Capital expenditures were approximately $3.4 million.
- Debt and liquidity: Debt totaled $10.3 million, down from $11.4 million; current liabilities were $11.5 million and working capital was $3.9 million, up from $3.1 million. The company reported compliance with all loan covenants. Management said cash on hand and expected operating cash flow should fund operations and capital expenditures for at least 12 months.
- Shareholder distributions: The company paid an annual cash dividend of $0.18 per share, versus $0.15 in fiscal 2015. No shares were repurchased during fiscal 2016.
Material changes versus the prior year
- Revenue increased despite the prior year having an additional week; 2016 comparable weekly restaurant and package-store sales also increased.
- Stockholder-attributable earnings fell 12.2%, primarily due to higher food costs and overall expenses, a $201,000 write-off related to a demolished residence at the Hallandale location, and the prior year’s extra week. Higher revenue and menu price increases partly offset these factors.
- Debt declined by $1.1 million and cash rose by $0.9 million, while operating cash flow fell by $2.4 million.
Outlook, risks, contingencies, and unusual items
- Management expects higher food costs to reduce restaurant food-and-beverage gross profit in fiscal 2017; it also anticipates higher operating and SG&A costs. Package-store sales and gross margin were expected to remain stable. The company planned continued advertising and budgeted $900,000 for refurbishments.
- A North Miami relocation and restaurant renovation was estimated to cost about $2.5 million, with part potentially financed; timing and completion were uncertain. No new Flanigan’s restaurant was in development, and management was considering—but had no agreement to pursue—another Whale’s Rib location.
- After year-end, the company agreed to purchase approximately $5.779 million of ribs at a fixed cost during calendar 2017. It said alternative suppliers were available.
- Key exposures include food and labor-cost inflation, competition and discretionary consumer spending, minimum-wage increases, South Florida hurricane and windstorm risk, insurance availability and coverage limits, lease renewals, alcohol licensing, and food-safety, employment, and cybersecurity matters. The company disclosed four dram-shop claims it was defending; it also reported that ordinary-course litigation had not materially affected it.
- General liability coverage was described as up to $7 million per occurrence and in the aggregate, with self-insured retentions; claims above coverage could materially affect results. The company was discussing renewal of property and liability policies after the then-current coverage expired.
- Eight limited-partnership restaurants are consolidated although the company owns less than a majority of their equity interests. Several franchisees and limited-partnership investors are affiliated with directors, officers, or their families; related-party arrangements and noncontrolling interests affect reported earnings attributable to company shareholders.
Important facts for investors to verify
- Review the audited financial statements and notes for debt maturities, lease commitments, insurance limits, and the effect of consolidated limited partnerships and noncontrolling interests.
- Assess whether restaurant sales growth and menu pricing can offset food, labor, occupancy, and SG&A inflation without weakening traffic or margins.
- Track the cost, financing, timing, and expected returns of the North Miami project and planned refurbishment spending.
- Check developments in the four dram-shop claims, other litigation, and renewal of property and liability insurance.
- Confirm the treatment and funding of the $5.779 million 2017 rib-purchase commitment and the company’s ability to maintain cash generation, reduce debt, and support dividends.