Flanigan’s Enterprises, Inc. — Q1 FY2018 Form 10-Q
Reporting period: Thirteen weeks ended December 30, 2017; comparisons are to the thirteen weeks ended December 31, 2016. Financial statement amounts below are in thousands of dollars, except per-share data. The interim statements are unaudited.
Business context and results
The company operates restaurant and package-liquor-store businesses, including units owned through consolidated limited partnerships, and franchises additional locations. At quarter-end it reported 26 operating units under its ownership or control, one adult entertainment club it owns but does not operate, and five franchised units.
Total revenue increased 6.8% to $28,393, primarily on menu price increases and, to a lesser extent, higher restaurant traffic. Restaurant food sales rose 6.5% to $17,272; bar sales rose 8.4% to $5,484; and package-store sales rose 7.2% to $5,013. Comparable weekly sales increased 6.49% for restaurant food, 8.48% for restaurant bar, and 7.22% for same-store package liquor sales.
Financial metrics
- Profitability: Operating income increased 7.7% to $1,587; operating margin was approximately 5.6%, versus 5.5%. Consolidated net income decreased 13.2% to $956. Net income attributable to Flanigan’s stockholders fell 6.5% to $621, or $0.33 per diluted share, from $664, or $0.36.
- Costs and margins: Operating costs and expenses increased 6.7% to $26,806. Restaurant food-and-bar gross margin was essentially flat at 64.92%, versus 64.94%; package-store gross margin declined to 27.77% from 28.30%. Payroll costs were 30.10% of sales, versus 30.63%.
- Cash flow: Operating cash flow was $3,723, compared with $2,735. Investing cash outflow was $966, including property, equipment, and construction-in-progress spending. Financing cash inflow was $2,780, including $3,500 of debt proceeds. Cash increased $5,537 to $15,422.
- Liquidity: Working capital was $6,707, compared with $3,629 at September 30, 2017; the current ratio was approximately 1.45. Management said cash, operating cash flow, and borrowings should fund operations and planned capital expenditures for at least the next 12 months.
- Debt: Total current and long-term debt was $16,617, versus $12,398 at September 30, 2017. The $5,500 revolving credit line converted to a five-year term loan on December 28, 2017, with equal monthly principal-and-interest payments at 4.65%; a swap fixed the rate at 4.61%. The company reported compliance with loan covenants.
Changes, outlook, risks, and unusual items
- The Tax Cuts and Jobs Act reduced the corporate tax rate to 21%. The company completed its accounting for the change and recorded an approximately $268 reduction in its deferred tax asset and a corresponding increase in deferred tax expense. Management identified this, higher food costs, and higher overall expenses as factors in lower net income.
- Price increases took effect in September 2017, targeting annual revenue increases of approximately 4.0% for food and 4.9% for bar offerings. Management expected these increases to support restaurant sales and gross profit, partly offset by higher food costs. It anticipated package-store sales would remain stable but package-store gross margin would decline due to more competitive pricing.
- Management expected operating costs and SG&A to continue increasing during FY2018, and interest expense to rise following additional borrowing. It expected occupancy costs to remain stable. These are forward-looking statements subject to demand, competition, cost, and other risks.
- Capital projects include a North Miami restaurant renovation with a revised contract price of $1,080, of which $345 had been paid by quarter-end, and design agreements totaling $301 for planned work at the Hollywood restaurant and package-store site. After quarter-end, the company entered a separate $912 contract for additional renovation and patio work at the North Miami restaurant.
- The company committed to purchase approximately $6,208 of baby back ribs during calendar 2018 at a fixed cost. It said alternative suppliers were available if needed.
- A Pinecrest restaurant lease was extended through July 2026 after quarter-end; rent increases approximately 20% effective February 1, 2018, followed by annual 3% base-rent increases beginning February 1, 2021. The company reported ordinary-course litigation and said none had materially affected it to date.
- Interest-rate exposure is partly hedged through swaps; cash balances earn variable rates. The company disclosed no off-balance-sheet arrangements. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth and comparable-store trends persist after the September price increases, and how much growth reflects pricing versus traffic.
- The ongoing effects of food, labor, occupancy, and SG&A costs on operating and segment margins, particularly the expected package-store margin decline.
- The full cost, timing, and funding of the North Miami and Hollywood projects, including the post-quarter $912 contract, alongside the company’s debt repayment obligations.
- The effect of the 2018 rib purchase commitment and the company’s ability to manage supply costs and any supplier disruption.
- The tax-rate remeasurement’s one-time contribution to the quarter’s lower reported earnings and the company’s tax expense in subsequent periods.