Nathan’s Famous, Inc. — FY2012 Form 10-K Summary
Business context and reporting period
The filing reports on the 52-week fiscal year ended March 25, 2012, compared with the 52 weeks ended March 27, 2011. Nathan’s markets its brand through foodservice product sales, company-operated restaurants, franchising and product licensing. At year-end, it had five company-owned restaurants and 299 franchised or Branded Menu Program outlets in 27 states and eight foreign countries.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Total revenue | $66.222 million | $57.255 million |
| Net income | $6.158 million | $2.213 million |
| Diluted EPS | $1.22 | $0.40 |
| Cash from operations | $9.612 million | $7.226 million |
| Cash and cash equivalents | $6.029 million | $8.940 million |
| Marketable securities | $14.710 million | $18.906 million |
| Working capital | $21.989 million | $31.454 million |
| Stockholders’ equity | $28.837 million | $38.078 million |
Revenue rose 15.7%. Sales increased 17.3% to $52.369 million, led by Branded Product Program sales, which grew 26.3% to $38.506 million. Franchise fees and royalties were $5.586 million; license royalties were $7.586 million. Gross profit on sales was $10.263 million, or 19.6% of sales, versus $10.067 million, or 22.6%, in FY2011. The filing reports no outstanding debt at March 25, 2012. Cash flow from investing activities was $3.166 million and cash used in financing was $15.689 million, including $15.867 million of share repurchases.
Material changes versus the prior year
- Net income increased, in part because FY2011 included a $4.910 million litigation accrual related to SMG; FY2012 also recorded $477,000 of interest expense related to the judgment appeal.
- Branded Product Program sales grew on higher volume, new and existing accounts, and price increases. Company-owned restaurant sales increased modestly to $13.209 million.
- Domestic comparable franchise sales declined 1.2%; comparable international franchise sales increased about 9.0%. The franchise and Branded Menu system expanded from 264 to 299 outlets.
- Higher hot-dog costs pressured margins: the market price of hot dogs was about 12.9% higher than FY2011, and the company could not pass all cost increases through to customers.
- The company repurchased 736,208 shares for $15.867 million during FY2012, including 598,959 shares through a modified Dutch auction tender offer.
Outlook, commentary and key risks
Management expects to pursue further growth in branded product distribution, Branded Menu locations, domestic and international franchising, licensing and Arthur Treacher’s menu extensions. No quantified earnings or revenue guidance is provided. Management stated that cash, marketable securities and operating cash flow should be sufficient for operations and planned stock repurchases for at least the next 12 months.
- Supplier and litigation exposure: Nathan’s is appealing the approximately $4.9 million judgment in its dispute with primary hot-dog supplier and licensee SMG. The appeal is pending, and $5.419 million was held in restricted cash to secure the judgment and accrued interest. The SMG agreement is scheduled to expire February 28, 2014; a supplier transition could affect product availability, quality, royalties and operations.
- Concentration: SMG accounted for about 59% of FY2012 licensing revenue, and one licensee accounted for about 20% of licensing revenue. Six accounts represented approximately 42% of Branded Product Program business.
- Costs and operating conditions: Beef and other commodity prices, fuel, utilities, labor, healthcare and minimum-wage changes could pressure margins. Weather, seasonality, consumer spending and competition can affect restaurant sales.
- Other matters: The company had $4.9 million of hot-dog purchase commitments outstanding at year-end, expected to be completed between April and June 2012. It also disclosed lease commitments, sublease exposure and a $227,000 recorded liability for a lease guaranty. The QVC agreement was not renewed, effective March 12, 2012, following declining sales.
Important facts for investors to verify
- Developments in the SMG appeal, disposition of restricted cash, and the terms and readiness of any replacement supply arrangement.
- Whether rising commodity costs can be offset through pricing, purchasing commitments or other measures, and the effect on Branded Product Program margins.
- Revenue and royalty concentration, customer receivable collectibility, and retention of major licensees and Branded Product accounts.
- Franchise openings, closures and comparable sales, including whether expansion plans translate into recurring royalties and sustainable growth.
- Cash and marketable securities available for operations after restricted cash, capital spending and share repurchases.