Flanigan’s Enterprises, Inc. — Q1 FY2021 Form 10-Q
Business and period: The unaudited quarter covered 13 weeks ended January 2, 2021; comparisons are with the 13 weeks ended December 28, 2019. Flanigan’s operated 27 company-owned or company-operated units and franchised five additional units. It reports restaurant and package-store segments. Amounts below are in U.S. dollars; financial statement figures are in thousands unless noted.
Financial performance and position
| Metric | Q1 FY2021 | Comparable period |
|---|---|---|
| Total revenue | $31.380 million | $30.941 million |
| Income from operations | $1.270 million | $1.231 million |
| Income before taxes | $1.028 million | $1.039 million |
| Net income | $1.032 million | $0.921 million |
| Net income attributable to Flanigan’s shareholders | $0.780 million | $0.494 million |
| Basic and diluted EPS | $0.42 | $0.27 |
| Operating cash flow | $3.770 million | $3.428 million |
| Capital expenditures, as presented in MD&A | $1.105 million | $0.933 million |
- Revenue rose 1.42%. Restaurant food sales were $18.328 million, bar sales $4.443 million, package-store sales $8.011 million, and franchise-related revenue $0.386 million.
- Operating costs and expenses were $30.110 million, or 95.95% of total sales, versus $29.710 million, or 96.02%. Restaurant food-and-bar gross margin improved to 66.97% from 65.80%; package-store gross margin eased to 26.96% from 27.48%.
- Net income was 3.29% of sales versus 2.98%; shareholder-attributable income was 2.49% versus 1.60%. The filing attributes the improvement in attributable income partly to package-store sales, menu pricing, and a more favorable tax result.
- At January 2, 2021, cash was $31.028 million, current assets $38.023 million, current liabilities $28.217 million, and working capital $9.806 million. Total assets were $114.007 million and total liabilities $67.661 million.
- Long-term debt, including current maturities, was $26.904 million. Finance-lease liabilities were $4.778 million current; operating-lease liabilities were $21.806 million in total. The company reported compliance with loan covenants.
- Cash increased $1.106 million during the quarter: operating activities provided $3.770 million, investing activities used $1.568 million, and financing activities used $1.096 million.
Material changes and operating drivers
- Package-store sales increased $2.304 million, or about 40% on the company’s same-store weekly-sales measure, which management associated with pandemic-related demand and the timing of New Year’s Day.
- Restaurant food sales declined about 2.2% on a comparable weekly basis, while comparable bar sales declined 24.5%. Management cited COVID-19 effects on restaurant traffic and bar sales, partly offset by menu price increases.
- Management implemented food and bar price increases effective December 6 and November 29, 2020, respectively, targeting annual revenue increases of approximately 2.45% for food and 1.83% for bar offerings.
- Interest expense rose to $279,000 from $204,000, reflecting prior-period borrowing, PPP-related debt and finance-lease interest. The company also recorded a $25,000 gain on sale of property and equipment and a $4,000 income-tax benefit, compared with $118,000 of tax expense in the comparable quarter.
- The company paid $1.2 million cash to acquire the North Lauderdale property it had leased. It exercised an option to purchase the Sunrise property and expected to close in Q2 FY2021, intending to finance that acquisition with third-party borrowing.
Outlook, risks, and contingencies
- Management said COVID-19 would likely continue to adversely affect restaurant operations, results, liquidity, and financial condition through the remainder of FY2021; the extent could not be accurately predicted. Restaurants offered indoor and outdoor service with distancing and mask precautions.
- Management expected operating costs to continue rising, SG&A to increase during the rest of FY2021, and occupancy costs to remain stable. It anticipated approximately $950,000 of refurbishment spending during FY2021, excluding the Store #19 rebuild and Sunrise development.
- The company stated that cash on hand, positive operating cash flow, and borrowings were expected to fund operations and planned capital expenditures for at least the next 12 months, while noting uncertainty from unanticipated expenses or revenue declines. No specific earnings or revenue guidance was provided.
- Borrowers across the company, limited partnerships, franchisees, and a managed store received approximately $13.1 million in PPP loans; $5.9 million was loaned to the company and $4.1 million to consolidated limited partnerships. After quarter-end, borrowers began applying for forgiveness. Forgiveness is uncertain; unforgiven amounts remain repayable under loan terms.
- The company committed to purchase approximately $6.420 million of baby back ribs during calendar 2021 at a fixed cost. Construction and development commitments included the Store #19 rebuild and Sunrise location; two planned Miramar locations remained contingent on delivery of the shopping-center premises.
- COVID-19, customer demand, food and labor costs, minimum-wage increases, interest-rate fluctuations, and lease and construction obligations are relevant risks. The company reported no current dram-shop claims; other ordinary-course claims were not expected by management to have a material adverse effect.
- Management concluded disclosure controls were not effective at quarter-end because of a material weakness in distinguishing operating leases from finance leases under ASC 842. It reported no identified material misstatements in previously issued financial statements and described remediation steps, including training, documentation, and management review.
Key facts for investors to verify
- Progress and outcomes of PPP forgiveness applications, and repayment obligations for any unforgiven amounts.
- Whether restaurant traffic and bar sales recover, and whether package-store demand remains elevated after pandemic-related effects and calendar timing.
- Execution, financing, costs, and opening schedules for the Sunrise, Miramar, and Store #19 projects, including remaining construction commitments.
- Remediation and auditor or management updates on the ASC 842 material weakness and disclosure-control effectiveness.
- Debt maturities, interest costs, covenant compliance, and the effect of the planned Sunrise property financing on liquidity.