Nathan’s Famous, Inc. — Q3 FY2023 Form 10-Q
Business context and reporting period. The filing covers the 13 and 39 weeks ended December 25, 2022, compared with the corresponding periods ended December 26, 2021. Nathan’s markets its brand through the Branded Product Program, product licensing, and company-owned and franchised restaurants. At quarter-end, its system included 233 franchised units, four company-owned restaurants, and 226 virtual kitchens. Amounts below are in millions unless otherwise stated.
Key financial results
| Metric | 13 weeks ended Dec. 25, 2022 | 13 weeks ended Dec. 26, 2021 | 39 weeks ended Dec. 25, 2022 | 39 weeks ended Dec. 26, 2021 |
|---|---|---|---|---|
| Total revenue | $26.154 | $25.913 | $103.371 | $90.110 |
| Gross profit / margin | $3.415 / 19% | $2.597 / 14% | $13.045 / 18% | $9.926 / 16% |
| Operating income | $6.332 | $5.613 | $28.026 | $23.754 |
| Net income | $3.263 | $2.130 | $16.358 | $11.438 |
| Diluted EPS | $0.79 | $0.52 | $3.99 | $2.78 |
| Operating cash flow | Not separately reported for the quarter | $13.329 | $9.896 |
Quarterly revenue rose 1%, operating income 13%, and net income 53% year over year. For the 39-week period, revenue rose 15%, operating income 18%, and net income 43%. Quarterly cost of sales fell 7%, helping lift gross margin; year-to-date gross margin also improved despite higher costs and sales volume.
Liquidity, debt, and capital returns
- Cash was $55.454 at December 25, 2022, up $5.391 from March 27, 2022. Net working capital was $58.413, versus $48.988 at fiscal year-end.
- Operating cash flow of $13.329 was offset by $0.522 of investing outflows and $7.416 of financing outflows. Financing uses included $5.524 of dividends and $1.892 of stock repurchases.
- Outstanding principal on the 6.625% Senior Secured Notes due November 2025 was $110.000; carrying value, net of issuance costs, was $108.564. No principal amortization is scheduled before maturity. The notes restrict dividend payments.
- The Board increased the quarterly dividend from $0.45 to $0.50 per share on February 2, 2023; the declared $0.50 dividend was payable March 3, 2023. Future dividends and repurchases remain subject to Board decisions, earnings, financial requirements, and debt-indenture restrictions.
- Management said cash and expected operating cash flow should be sufficient for operations, debt service, dividends, and repurchases for at least the next 12 months.
Material changes and management commentary
- Branded products: Quarter sales declined 1% to $16.661, while hot-dog volume increased about 3% and average selling prices decreased about 3%. Year-to-date sales increased 19% to $61.862, reflecting approximately 14% higher volume and 5% higher average selling prices.
- Licensing: Royalties increased 8% in both the quarter and year-to-date period, to $6.337 and $26.064, respectively. The filing highlights dependence of licensing revenue and overall profitability on the Smithfield Foods agreement.
- Restaurants and franchising: Company-owned restaurant sales decreased 3% in the quarter but rose 12% year to date. Franchise restaurant sales increased in both periods, with management citing stronger activity at airports, travel plazas, malls, theaters, and casinos. The franchised unit count declined from 242 a year earlier to 233; virtual kitchens in operation declined from 277 to 226.
- Costs and margins: Beef prices were lower in the quarter than in the unusually high-cost prior-year quarter, reducing Branded Product Program cost per pound by 9%. For the year-to-date period, average hot-dog cost was about 3% higher year over year. Management expects inflationary pressures to continue through the remainder of fiscal 2023 and says further price increases may not fully offset costs.
- Interest and unusual items: Interest expense decreased to $1.944 for the quarter and $5.831 year to date, partly reflecting the January 2022 redemption of $40 million principal of the notes. Quarterly other expense included a reported $101,000 loss on disposal of capitalized software; year-to-date other expense was $4,000 net. The advertising fund included a projected $175,000 seasonal deficit for the year-to-date period.
- Outlook and risks: No formal revenue or earnings guidance is provided. Management cites uncertainty from COVID-19 and variants, supply-chain conditions, beef and other commodity prices, wages and labor availability, consumer spending, and the ability to pass cost increases through to customers. It reported no significant supply-chain disruption to date. It also identifies weather and the seasonality of restaurant sales as factors affecting results.
- Contingencies and controls: The filing reports no legal proceedings in Part II; the notes describe ordinary and routine litigation that management does not expect to have a material adverse effect, while noting litigation uncertainty. Management concluded disclosure controls were effective and reported no material change in internal controls during the quarter.
Important facts for investors to verify
- Progress and terms of the Smithfield Foods licensing and supply relationship, given its importance to royalties and profitability.
- Whether beef, labor, packaging, transportation, and other cost inflation can be offset by pricing without harming volume or franchise economics.
- Cash generation, debt service, and the 2025 notes’ maturity and dividend restrictions, especially alongside the increased dividend and potential buybacks.
- Trends in franchise and virtual-kitchen unit counts, comparable franchise sales, and the performance of company-owned restaurants.
- The continuation of management’s stated liquidity outlook and the impact of seasonality; interim results are not necessarily indicative of full-year results.