Flanigan’s Enterprises, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended June 27, 2015 (13 weeks), with year-to-date results for the 39 weeks ended June 27, 2015. Comparisons are to the periods ended June 28, 2014. Amounts below are in millions unless noted. The company operates restaurants and package stores, including through controlled limited partnerships, and franchises five units.
Financial performance and position
- Third-quarter revenue: $24.796, up 8.7% from $22.817. Restaurant food and bar sales and package-store sales all increased.
- Third-quarter earnings: Operating income was $1.947 versus $1.972; consolidated net income was $1.391 versus $1.390. Net income attributable to Flanigan’s stockholders was $0.842, or $0.45 per share, versus $0.857, or $0.46 per share.
- Year-to-date revenue and earnings: Revenue was $74.010, up 8.7%. Operating income was $5.626 versus $5.264; consolidated net income was $3.962 versus $3.751. Stockholder-attributable net income was $2.673, or $1.44 per share, versus $2.302, or $1.24 per share.
- Margins and costs: Restaurant food-and-bar gross margin was 64.15% in the quarter versus 65.20%; package-store gross margin was 29.17% versus 30.28%. Operating costs and expenses were 92.15% of sales versus 91.36%. Third-quarter net income was 5.61% of sales versus 6.09%; stockholder-attributable net income was 3.40% versus 3.76%.
- Cash flow, 39 weeks: Operating activities provided $9.579 versus $6.245; investing used $3.178 versus $1.961; financing used $4.512 versus $3.907. Cash increased $1.889 to $9.988.
- Liquidity and debt: Working capital was $2.632 versus $2.904 at September 27, 2014. Total long-term debt, including current maturities, was $12.024, down from $13.331 at fiscal year-end. Management stated that it expected cash on hand and operating cash flow to cover operations and capital expenditures for at least 12 months and believed it was in compliance with loan covenants.
- Capital and distributions: Year-to-date capital expenditures were $3.339. The company paid a $0.15-per-share dividend in January 2015, totaling $0.279 in financing cash flows. It reported 1,858,647 common shares outstanding on August 11, 2015.
Material changes and notable items
- Comparable weekly third-quarter restaurant food sales increased 10.00% and bar sales increased 10.01%; same-store package-store sales increased 8.33%. Year-to-date comparable weekly restaurant food and bar sales rose 10.92% and 12.75%, respectively; same-store package-store sales rose 8.73%.
- Revenue growth was partly offset by higher merchandise costs and expenses. Third-quarter payroll costs rose 8.54%, while SG&A rose 7.93%. Management cited higher food costs and increased costs to compensate and staff package-store employees.
- The company acquired adjacent vacant property for $1.5 million to support a planned relocation of the Store #19 package store and expansion of its restaurant. It also purchased Store #95 operating assets from a limited partnership in which the company and related persons held interests; the restaurant became company-owned in September 2014.
- The company cancelled a property insurance policy after its carrier entered administrative supervision, paid off the related financing, and recorded an $82,000 charge in the second quarter. A replacement one-year policy was obtained.
Outlook, risks, and contingencies
- Management expected restaurant food and bar sales to increase, but restaurant gross margins to decline through fiscal 2015 because of higher food costs. It expected package-store sales and margins to remain stable, and operating costs, SG&A, and overall expenses to rise. Management also cited competition, advertising needs, and possible menu-price increases.
- The company planned a Store #20 relocation and restaurant expansion, estimated at $2.0–$2.5 million, with approximately $850,000 potentially financed through a related third-party lender. Timing and completion were uncertain, and management said it might not proceed.
- The company had fixed-price baby-back-rib purchase commitments, including approximately $3.649 million for calendar 2015. It noted alternative suppliers were available.
- Litigation arises in the ordinary course, including injury, accessibility, employment, and food-quality claims; the company said such matters had not had a material effect to date. No subsequent events requiring disclosure were identified. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- Interest-rate exposure remained on variable-rate debt; the company used swaps to convert specified borrowings to fixed rates. It cautioned that rate movements could adversely affect results. Forward-looking statements are subject to customer-demand, competitive, cost, and other risks.
Important facts for investors to verify
- Whether restaurant sales growth can continue while food costs pressure restaurant gross margins and earnings.
- How much of operating cash flow depends on working-capital movements, including changes in payables and amounts due to franchisees.
- The final cost, financing, timing, and expected returns of the planned Store #20 project and Store #19 improvements.
- Debt maturities, covenant headroom, and exposure to variable interest rates, including the status and terms of swap agreements.
- The effects of insurance costs and coverage, rib purchase commitments, and the related-party aspects of the Store #95 transaction.
- The impact of noncontrolling interests: consolidated earnings differ materially from net income attributable to company stockholders.