Nathan’s Famous, Inc. — Form 10-Q Summary
Reporting period: Thirteen weeks ended June 26, 2011, compared with the thirteen weeks ended June 27, 2010. The company markets Nathan’s Famous products through branded-product sales, restaurants, franchising and licensing. Results are seasonal and an interim period is not necessarily indicative of full-year results.
Key financial results
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 2011 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenues | $17.897 | $15.626 | +14.5% |
| Sales | $14.316 | $12.350 | +15.9% |
| Earnings before taxes | $2.591 | $2.517 | +2.9% |
| Net income | $1.596 | $1.660 | -3.9% |
| Diluted EPS | $0.31 | $0.29 | Up $0.02 |
| Operating cash flow | $1.198 | $1.204 | Down $0.006 |
- Gross profit was $2.680 million, or 18.7% of sales, versus $2.862 million, or 23.2%, a margin contraction primarily attributed to higher hot-dog costs.
- Cash and cash equivalents were $9.686 million; marketable securities were $18.954 million. Current assets were $46.585 million and current liabilities $13.895 million; reported working capital was $32.690 million.
- No indebtedness was outstanding. Restricted cash of $5.084 million secured the SMG judgment and accrued post-judgment interest.
- Cash increased $0.746 million during the quarter. Investing activities provided $0.121 million; financing activities used $0.573 million for share repurchases. Capital expenditures were $0.238 million.
Material changes and operating trends
- Branded Product and Branded Menu foodservice sales rose 29.2% to $10.140 million, reflecting 21.3% higher product volume and price increases. Total company-owned restaurant sales declined slightly to $4.012 million; management cited unfavorable weather and lower customer counts.
- Franchise fees and royalties increased to $1.435 million. Franchise restaurant sales rose to $24.074 million, primarily with more outlets, while comparable domestic franchise sales declined 0.8% and comparable international sales fell 14.2%.
- License royalties increased to $1.967 million, primarily on higher volume, including a seasonal foodservice account. Sales to the television retailer were about $0.309 million lower, with fewer product appearances.
- Hot-dog market prices were approximately 12% higher year over year. Branded Product Program hot-dog costs also reflected a reported 13.7% increase; approximately 91% of product was bought at prevailing market prices, compared with 77.3% in the prior-year quarter.
- The effective tax rate rose to 38.4% from 34.0%. The prior-year rate benefited from a $79,000 tax-position resolution; excluding specified tax effects, management reported rates of 40.7% and 40.0%, respectively.
- The company repurchased 31,569 shares for $0.573 million and had 513,153 shares remaining under its repurchase plans.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expects cash, marketable securities and operating cash flow to fund operations and repurchases for at least the next 12 months. It expects to continue repurchases, restaurant investment and support for branded programs.
- Management estimated a fiscal-year tax rate of approximately 37.5%–39.0%, subject to actual results and other variables. It said uncertain tax benefits and related interest and penalties could decrease by up to $60,000, with a favorable tax-rate effect, but gave no assurance.
- SMG litigation remains a major contingency. A judgment of approximately $4.910 million, including pre-judgment interest, was accrued after the court ruled against Nathan’s on claims involving the license agreement and proprietary seasonings. The company appealed; enforcement was stayed and $5.084 million was held in a blocked account, with interest accruing at 9% annually. The appellate record was being assembled, and the filing does not establish the appeal’s outcome.
- Commodity-cost volatility is a key margin risk. Management warned that further beef-cost increases may not be offset by pricing or purchase commitments. It also cited potential supply disruption or increased costs connected with SMG litigation, weaker discretionary spending, and volatility in distribution and utility costs.
- Remaining hot-dog purchase commitments were approximately 126,000 pounds, costing $0.253 million. The company also disclosed $19.295 million of gross contractual obligations, mainly operating leases, partly offset by $0.530 million of sublease income.
- The company completed the sale of its Miami Subs note receivable for $0.900 million on June 29, 2011, after quarter-end; it will no longer earn interest on that note.
Important facts for investors to verify
- Developments and potential cash effects of the SMG appeal, including the restricted deposit and continuing 9% interest accrual.
- Whether pricing, sourcing commitments or other actions can offset elevated beef and hot-dog costs and restore gross margins.
- Durability of branded-program growth alongside trends in comparable domestic and international franchise sales.
- Cash generation and liquidity after working-capital needs, share repurchases and the completed note sale.
- Tax audit outcomes and whether uncertain tax benefits and the estimated annual tax rate change.