Flanigan’s Enterprises, Inc. — Q1 FY2020 Form 10-Q
Reporting period: Thirteen weeks ended December 28, 2019; comparisons are with the thirteen weeks ended December 29, 2018. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted.
Business context
The company operates restaurants and package liquor stores, primarily in South Florida. At quarter-end it operated or controlled 27 units and franchised five. A new Kendall package liquor store opened during the quarter. Store #19, a restaurant and package store damaged by fire in October 2018, remained closed.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Total revenue | $30.941 | $27.894 | +10.9% |
| Income from operations | $1.231 | $0.655 | +$0.576 |
| Income before taxes | $1.039 | $1.085 | −$0.046 |
| Net income | $0.921 | $0.998 | −7.7% |
| Net income attributable to Flanigan’s stockholders | $0.494 | $0.743 | −33.5% |
| Basic and diluted EPS | $0.27 | $0.40 | −$0.13 |
Restaurant food sales rose 11.4% to $18.742 million, bar sales rose 10.7% to $5.891 million, and package store sales rose 11.1% to $5.707 million. Management attributed growth primarily to higher restaurant traffic, menu price increases implemented in June 2019, and the new Kendall store. Comparable weekly restaurant food and bar sales increased 10.58% and 10.49%, respectively; same-store package sales increased 5.31%.
Operating costs and expenses increased 9.1% to $29.710 million, slower than revenue growth. Reported restaurant food-and-bar gross margin improved to 65.80% from 65.13%; package-store gross margin was 27.48% versus 26.62%. Net income margin was 2.98% versus 3.58%, while income attributable to company stockholders was 1.60% versus 2.66%. Payroll costs rose 10.7%; occupancy costs rose 23.0%, primarily reflecting lease accounting adoption and other occupancy costs.
Cash flow, liquidity and debt
- Operating cash flow was $3.428 million, compared with $2.835 million; investing cash outflow was $1.296 million, compared with $0.910 million.
- Financing provided $3.318 million, versus an $0.839 million outflow in the prior-year quarter. Cash increased $5.450 million to $19.122 million.
- Working capital was $9.470 million, versus $6.464 million at September 28, 2019. Current assets were $26.709 million and current liabilities $17.239 million.
- Long-term debt, including current maturities, was $18.120 million. During the quarter, a subsidiary refinanced a mortgage, increasing principal from $2.72 million to $7.21 million at a fixed 3.86% rate; approximately $4.4 million of excess proceeds was intended for working capital. The company reported compliance with loan covenants.
- Adoption of ASC 842 added approximately $27.8 million of operating lease assets and liabilities. At quarter-end, lease liabilities totaled approximately $27.4 million, including $1.810 million current. This accounting change substantially increased reported assets and liabilities and contributed to occupancy expense.
Material changes, outlook and risks
Operating income improved, but pretax income and net income declined. The prior-year quarter included a $0.602 million insurance recovery, net of casualty loss, which was absent this quarter; higher food costs, other expenses, and lease accounting effects also weighed on earnings. The larger share of net income attributable to noncontrolling interests further reduced income attributable to company stockholders.
Management expected revenue to increase during the balance of FY2020, citing restaurant traffic, the 2019 price increases, and the Kendall store. It expected operating expenses to rise, restaurant and bar gross profit to benefit from pricing partly offset by higher food costs, and package-store gross margin to decrease due to higher costs and more competitive pricing. Management believed cash, operating cash flow, and borrowing capacity would fund operations and planned capital expenditures for at least twelve months; this is forward-looking and not a guarantee.
Planned development includes rebuilding Store #19 and a Sunrise restaurant in development; a Miramar restaurant and adjacent package store were also planned. The company reported $0.933 million of property and construction spending in the quarter and anticipated about $0.750 million in FY2020 refurbishment costs, excluding the major development projects. It also committed to purchase approximately $5.314 million of ribs in calendar 2020 at a fixed cost. Management cited food, beverage, labor, minimum-wage and interest-rate exposure. Store #19’s closure and ordinary-course legal claims are additional considerations; the company reported no current dram-shop claims and said other claims were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether sales and traffic growth persist, and how much reflects pricing versus customer volume.
- Whether food, labor, occupancy and insurance costs pressure margins, including the effect of ASC 842.
- Progress, timing, total costs and funding for the Store #19 rebuild and Sunrise and Miramar developments.
- Debt repayment capacity and the impact of the mortgage refinancing, insurance-premium financing and variable-rate borrowings.
- Whether management’s revenue and liquidity expectations are achieved; interim results may not indicate full-year performance.