Nathan’s Famous, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended March 30, 2014 (52 weeks), compared primarily with the 53 weeks ended March 31, 2013. The filing also reports fourth-quarter results. Unless noted, dollar amounts below are in millions.
Business context
Nathan’s markets its brand through Branded Product sales, Company-owned restaurants, franchising and product licensing. At year-end, the system had 324 franchised units and five Company-owned units. Branded products were distributed nationwide and packaged products were sold in approximately 33,000 supermarkets and club stores.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Total revenue | $82.927 | $71.543 |
| Sales | $65.521 | $56.656 |
| Gross profit; margin on sales | $12.449; 19.0% | $11.782; 20.8% |
| Pre-tax income | $13.561 | $12.139 |
| Net income | $8.327 | $7.468 |
| Diluted EPS | $1.81 | $1.63 |
| Cash from operations | $2.876 | $9.494 |
- Sales increased 15.6%, led by Branded Product Program sales, up 20.0% to $51.877, reflecting higher volume, pricing and product mix. Company-owned restaurant sales declined 1.3% to $13.231.
- Gross margin fell to 19.0%, mainly from higher hot-dog costs and reopening costs at Coney Island and Yonkers. The market price of hot dogs rose approximately 7.5% year over year.
- FY2014 revenue included a $2.774 insurance gain related to Superstorm Sandy. The company received approximately $3.4 million net for property damage and, in April 2014, $718,000 net for business interruption.
- Cash and cash equivalents were $22.077 and marketable securities were $11.187 at year-end; working capital was $35.378. The company reported no outstanding debt. Capital expenditures were $4.339, primarily for restaurant rebuilding and renovations.
- Operating cash flow declined substantially, affected by the $6.009 SMG litigation payment and working-capital changes. The company repurchased 30,463 shares for $1.486 during the year.
- Fourth-quarter revenue was $17.331 versus $14.976; net income was $1.218 versus $1.555. Management cited harsh winter weather as a significant adverse factor for restaurant sales.
Material changes, outlook and risks
- Effective March 2, 2014, John Morrell & Co. replaced SMG as the primary licensee and supplier under an 18-year agreement. The retail packaged-products royalty is 10.8% of net sales, with minimum annual guaranteed royalties of at least $10 million in the first year, increasing annually. Nathan’s reported $548,000 in royalties from the new agreement during its initial period.
- Management believes the new agreement may improve future operating results relative to the SMG terms, but provides no assurance. Key risks include a successful supplier transition, product quality and consistency, adequate supply, and effective retail marketing.
- Management expects to pursue growth in branded products, menu programs, franchising and retail licensing, including international expansion. It also expects continued volatility in beef costs and possible labor, insurance, utility and distribution cost pressures; no specific earnings or revenue guidance is provided.
- Other notable risks include reliance on a small number of licensees and Branded Product accounts; concentration of hot-dog supply; food-safety and reputational exposure; competitive pricing; weather and seasonality; and labor-cost increases. Approximately 76% of Branded Product Program business came from seven accounts.
- The $6.009 million SMG judgment was paid in full in July 2013, resolving that matter. Management said ordinary and routine litigation was not expected to materially affect the company, while noting litigation outcomes are uncertain.
Most important facts for investors to verify
- Whether John Morrell meets the new agreement’s minimum royalty commitments and maintains product quality, supply continuity and retail sales momentum.
- How much reported growth and profit depended on the Sandy insurance gain, and whether operating cash flow improves after the unusual litigation payment and working-capital outflows.
- Whether pricing can offset further beef-cost inflation without weakening Branded Product sales or margins.
- Whether franchise comparable sales recover from the 2.8% decline and whether new openings outpace closures.
- The financial exposure from key-account and supplier concentration, receivable collectability and labor-cost changes.