Flanigan’s Enterprises, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Thirteen weeks ended December 27, 2014; comparisons are with the thirteen weeks ended December 28, 2013, unless noted. Unaudited consolidated financial statements. Dollar amounts below are in millions except per-share data.
Business context and results
The company operates restaurants and package liquor stores, including locations owned through limited partnerships that it controls, and franchises additional units. At quarter-end it reported 25 operating units under its control, one owned but nonoperating adult entertainment club, and five franchised units. It reported two operating segments: restaurants and package stores.
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Total revenue | $23.320 | $21.475 | +8.6% |
| Operating income | $1.322 | $1.216 | +8.7% |
| Income before taxes | $1.176 | $1.039 | +13.2% |
| Net income | $0.859 | $0.809 | +6.2% |
| Net income attributable to company stockholders | $0.707 | $0.538 | +31.4% |
| Basic and diluted EPS | $0.38 | $0.29 | +$0.09 |
| Operating cash flow | $2.167 | $1.876 | +$0.291 |
Revenue, margins and operating performance
- Restaurant food sales were $14.341 million (+7.8%); bar sales were $4.437 million (+10.8%); package store sales were $3.991 million (+9.0%). Comparable weekly food sales rose 8.8%, comparable bar sales 11.3%, and same-store package sales 8.9%.
- Restaurant food-and-bar gross margin declined to 64.27% from 64.92%; package-store gross margin declined to 29.00% from 29.39%. Total operating costs and expenses rose 8.6% to $21.998 million, approximately 94.33% of total revenue, versus 94.34%.
- Operating margin was approximately 5.7% of revenue versus 5.7%; net margin was 3.7% versus 3.8%. Stockholder-attributable net income as a share of revenue rose to 3.0% from 2.5%, partly reflecting lower income allocated to noncontrolling interests.
- Restaurant segment operating income fell to $1.516 million from $1.547 million; package-store segment operating income rose to $0.331 million from $0.245 million. These segment figures precede corporate expenses and other specified items.
Financial position, cash flow and capital
- Cash was $8.215 million at December 27, 2014, versus $8.099 million at September 27, 2014. Current assets were $14.145 million and current liabilities $11.722 million, leaving working capital of $2.423 million and a current ratio of approximately 1.21.
- Total debt was $13.400 million ($2.280 million current and $11.120 million long-term), versus $13.331 million at September 27, 2014 and $14.559 million a year earlier. Interest expense fell to $0.159 million from $0.195 million. The company said it complied with all loan covenants.
- Operating cash flow of $2.167 million was offset by $0.706 million used in investing and $1.345 million used in financing; cash increased $0.116 million. Investing included $0.512 million of property and equipment purchases and $0.204 million of equipment deposits. Financing included $0.559 million of debt payments and $0.786 million of distributions to limited-partnership noncontrolling interests.
- Capital expenditures, including applicable deposits, were reported as $0.614 million. The company estimated approximately $0.600 million of fiscal 2015 refurbishment costs, with $0.134 million spent through quarter-end.
Material developments, outlook and risks
- On September 28, 2014, the company acquired operating assets of a restaurant from a limited partnership for $351,000 plus approximately $100,000 in prorations; the restaurant became company-owned. Certain company officers, directors or family members held 35.1% of the partnership’s remaining interests.
- After quarter-end, the company paid $1.5 million cash for vacant property adjoining its Store #19 site, intending to relocate the package store, expand the restaurant and increase parking.
- The board declared a $0.15-per-share cash dividend payable January 30, 2015 to shareholders of record January 16, 2015; the filing reports $0.279 million of dividends declared. Future dividends are discretionary.
- Management expected restaurant food and bar sales to increase but anticipated lower restaurant gross profit from higher food costs. It expected package-store sales and margins to remain stable, occupancy costs to remain stable, and operating and SG&A costs to rise. Higher food costs, insurance premiums, other expenses and competition could pressure earnings; management said menu price increases might become necessary.
- The company had fixed-price commitments for baby back ribs totaling approximately $4.276 million across purchases during fiscal 2015 and calendar 2015. Management cited alternative suppliers. It reported no off-balance-sheet arrangements and believed cash and operating cash flow would fund operations, debt reduction and planned capital expenditures for at least the next twelve months, while acknowledging risks from unexpected expenses or revenue declines.
- During the quarter, the company paid approximately $193,000 to settle seven self-insured employment lawsuits previously accrued. It also disclosed ordinary-course litigation, including employment, guest injury and accessibility claims; it said such matters had not materially affected the company to date.
- Five variable-rate debt instruments were subject to interest-rate risk; the company used swaps to convert variable rates to fixed rates. Four swaps were described as effective and one as ineffective, with the latter’s fair value stated to be immaterial. Management warned that interest-rate changes could adversely affect operations.
Important facts for investors to verify
- Whether comparable-sales growth is sustained and translates into improved restaurant margins despite food-cost inflation.
- The cash and earnings impact of the post-quarter $1.5 million property purchase, planned relocation and expansion, and remaining refurbishment spending.
- Debt maturities, variable-rate exposure, swap terms and continued compliance with loan covenants.
- Performance and cash distributions of controlled limited partnerships, including the effect of noncontrolling interests on stockholder earnings.
- Execution and cost implications of the rib purchase commitments, and developments in self-insured litigation and other contingencies.