Nathan’s Famous, Inc. — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2019, the thirteen weeks ended December 23, 2018; year-to-date results cover the thirty-nine weeks ended that date. Comparatives are the corresponding periods ended December 24, 2017. Financial amounts below are in U.S. dollars; millions unless otherwise noted.
Business context
Nathan’s markets branded food products through its Branded Product Program, product licensing, and company-operated and franchised restaurants. At period-end, its system included 261 franchised units and five company-operated units; one company-owned restaurant was subsequently closed and surrendered to its purchaser in January 2019.
Financial performance and liquidity
| Metric | Quarter ended Dec. 23, 2018 | Quarter ended Dec. 24, 2017 | 39 weeks ended Dec. 23, 2018 | 39 weeks ended Dec. 24, 2017 |
|---|---|---|---|---|
| Revenue | $20.222 | $22.021 | $79.720 | $84.295 |
| Income from operations | $4.896 | $5.370 | $22.463 | $22.554 |
| Net income (loss) | $9.722 | $(3.779) | $19.001 | $2.263 |
| Diluted earnings (loss) per share | $2.30 | $(0.90) | $4.50 | $0.54 |
| Operating cash flow | Not separately presented for the quarter | $7.373 | $7.795 |
- Reported quarterly revenue declined 8.2%; sales declined 13.8%, while license royalties increased. The 2018 figures include advertising-fund revenue and expense under newly adopted ASC 606; prior-year results were not recast, so reported revenue comparisons are not fully like-for-like.
- Quarterly gross profit was $3.744 million, or 26.0% of sales, compared with $4.168 million, or 24.9%. Lower beef costs supported the margin improvement, partly offset by other food and labor costs. Operating income nevertheless declined.
- Quarterly net income included a $10.821 million gain on the Bay Ridge restaurant sale. For the 39-week period, gains on the Bay Ridge and Florida office sales totaled $11.177 million. These disposals materially boosted reported pretax income and net income.
- Quarterly interest expense fell to $2.650 million from $3.650 million, reflecting the refinancing of higher-coupon debt. The prior-year periods included an $8.872 million debt-extinguishment loss.
- Cash and cash equivalents were $72.832 million at December 23, up $15.493 million from fiscal year-end; working capital was $70.673 million. Year-to-date operating cash flow was $7.373 million, and investing cash flow included $12.775 million of property-sale proceeds.
- Long-term notes had $150.0 million principal outstanding, bearing 6.625% interest and due November 2025; the balance-sheet carrying amount, net of issuance costs, was $145.276 million. The notes have no scheduled principal amortization before maturity. The company reported compliance with note covenants.
- Total liabilities were $162.786 million and stockholders’ deficit was $71.617 million. The company paid $3.139 million in regular dividends and repurchased $1.0 million of stock during the 39-week period.
Changes versus the prior comparable period
- Branded Product Program sales declined 15.1% in the quarter and 12.7% year to date. Management attributed the declines to lower selling prices and volumes, as well as comparison with temporary distributor purchases in the prior year. Excluding estimated distributor effects, management said customer shipments increased 2.1% in the quarter and 1.5% year to date.
- Quarterly company-operated restaurant sales fell to $1.951 million from $2.031 million. Year-to-date sales were affected by unfavorable Northeastern weather, particularly at Coney Island.
- Year-to-date license royalties rose to $18.160 million from $17.393 million, while franchise fees and royalties declined to $3.254 million from $3.575 million. The franchise system had 261 outlets versus 280 a year earlier.
- ASC 606 adoption changed franchise-fee recognition: upfront fees are generally recognized over the agreement term rather than when a restaurant opens. Adoption reduced opening accumulated equity by $2.004 million, net of tax. Advertising-fund revenue and expenses are now consolidated and generally offset one another.
Outlook, risks, and other notable items
- Management estimated a fiscal 2019 annual tax rate of approximately 27%–29%, excluding discrete items and excess stock-compensation tax benefits. It stated available cash and operating cash flow should be sufficient for operations, debt service, dividends, and potential repurchases for at least the next 12 months.
- The Board established a regular dividend of $0.25 per share per quarter and declared a further $0.25 dividend payable in March 2019. Future dividends and repurchases remain subject to board decisions, earnings, financial needs, and note-indenture restrictions.
- Management highlighted exposure to beef and other commodity prices, labor and minimum-wage increases, weather, distribution costs, and the collectibility of receivables. The business depends substantially on John Morrell & Co. for licensed-product revenue and supply. The company had no open hot-dog purchase commitments at quarter-end.
- Operating leases carried $10.043 million of future minimum payments not yet recognized on the balance sheet. The company expects the new lease standard, effective for it in fiscal 2020, to materially affect the balance sheet and disclosures, but not materially affect earnings or cash flows.
- The filing describes ordinary-course litigation; management did not expect the matters to have a material adverse effect, while noting litigation uncertainty. A subsidiary also has a Brooklyn lease guaranty, with a recorded $204,000 liability and additional potential costs that were not reasonably determinable. A related party to the Executive Chairman received approximately $72,000 in brokerage commissions on the Florida office sale.
- Disclosure controls were reported effective, and the filing reported no material changes in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How much of reported earnings and cash generation reflects recurring operations versus the $11.177 million of property-sale gains?
- Whether underlying Branded Product Program shipments continued to grow after adjusting for distributor inventory movements, and how pricing and beef costs affect margins.
- The continuing performance and terms of the John Morrell & Co. relationship, including the reduced royalty rate for certain foodservice sales.
- The company’s capacity to service $150.0 million of 2025 Notes while maintaining dividends, repurchases, and operating investment.
- The actual balance-sheet effect of lease accounting adoption and the impact of New York labor-cost increases, commodity volatility, and weather on restaurant profitability.