Nathan’s Famous, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first 26 weeks of fiscal 2023, ended September 25, 2022; comparisons are to the corresponding periods ended September 26, 2021. Financial statements are unaudited. Dollar amounts below are in millions unless otherwise stated.
Business context and performance
Nathan’s markets branded food products through its Branded Product Program and licensing agreements, and operates and franchises restaurants, including virtual kitchens. At quarter-end, it had 234 franchised units and four company-owned restaurants; 229 virtual kitchens were also operating. Licensing and Branded Product Programs are major contributors to profits.
| Metric | 13 weeks 2022 | 13 weeks 2021 | 26 weeks 2022 | 26 weeks 2021 |
|---|---|---|---|---|
| Total revenue | $37.497 | $32.878 | $77.217 | $64.197 |
| Operating income | $9.914 | $7.439 | $21.694 | $18.141 |
| Net income | $5.958 | $3.545 | $13.095 | $9.308 |
| Diluted EPS | $1.46 | $0.86 | $3.20 | $2.26 |
| Adjusted EBITDA (non-GAAP) | $10.323 | $7.771 | $22.388 | $18.832 |
In the quarter, revenue rose 14%, operating income 33%, and net income 68% year over year. For the first half, revenue rose 20%, operating income 20%, and net income 41%. Quarter gross profit was $5.403 million, or 20% of sales, versus $3.369 million, or 14%; first-half gross profit was $9.630 million, or 18% of sales, versus $7.329 million, or 17%.
Quarter sales increased 16% to $27.301 million. Branded Product Program sales rose 16% to $22.030 million, with hot dog volume up about 9% and average selling prices up about 4%. Company-owned restaurant sales increased 19% to $5.271 million, primarily on increased Coney Island traffic. License royalties grew 10% to $8.413 million. Franchise fees and royalties increased to $1.199 million from $1.167 million.
Cash flow, liquidity and debt
- Cash and cash equivalents were $53.857 million at September 25, 2022, up $3.794 million from fiscal year-end. Net working capital was $56.588 million, versus $48.988 million at March 27, 2022.
- First-half operating cash flow was $9.772 million, compared with $8.922 million. Investing activities used $0.398 million, primarily for capital expenditures; financing activities used $5.580 million, including $3.688 million of dividends and $1.892 million of share repurchases.
- Long-term debt was $110 million face value, represented by 6.625% senior secured notes due November 2025; carrying value net of issuance costs was $108.437 million. There are no scheduled principal payments before maturity. Management expects available cash and operating cash flow to fund operations, debt service, dividends and repurchases for at least 12 months.
- Operating lease liabilities totaled $7.601 million, including $1.849 million current. Stockholders’ deficit was $47.457 million.
Changes, outlook and risks
- Sales growth reflected higher branded-product volumes and pricing, recovery in restaurant traffic and stronger sales at franchise locations such as airports, travel plazas, malls, theaters and casinos. The company reported Coney Island company-owned restaurant traffic about 27% higher for the first half than the prior-year period.
- Input costs remain a key pressure. The average cost of hot dogs was about 8% higher year over year for the first half, although the quarter’s average cost per pound declined 3% versus the prior-year quarter. Management expects inflationary pressure, particularly for beef, labor and other commodities, to continue through the remainder of fiscal 2023. Price increases on selected products and menu items were implemented in both first-half quarters; management cautioned that competitive and consumer conditions may limit further increases.
- The company recorded a projected $175,000 Advertising Fund seasonal deficit in second-quarter results, which management did not expect to recover fully during the rest of fiscal 2023.
- No formal numeric revenue or earnings guidance was provided. Results are seasonal and interim performance may not indicate full-year results. Management cited continuing uncertainty from COVID-19, supply-chain conditions, labor availability and costs, commodity volatility, and consumer spending. It also identified dependence on John Morrell & Co. as its principal supplier and a significant factor in licensing revenue and profitability.
- The notes’ indenture restricts dividends. The board declared a $0.45-per-share dividend on November 3, 2022, payable December 2, 2022, subject to the applicable terms and board decisions. The company repurchased 35,434 shares for $1.892 million during the first half.
- Management said ordinary-course litigation was not expected to have a material adverse effect; the filing notes that unfavorable rulings remain possible. Disclosure controls were assessed as effective, and no material changes in internal control were reported.
Important facts for investors to verify
- Progress and terms of the John Morrell & Co. licensing and supply relationship, and the company’s ability to secure supply and pass through commodity cost increases.
- Whether expected inflation, labor costs and consumer demand affect margins and franchisee economics during the remainder of fiscal 2023.
- Debt covenants and maturity/refinancing requirements for the $110 million notes due in 2025, including their effect on future dividends and repurchases.
- Seasonal cash flow and the Advertising Fund deficit, along with the sustainability of dividends and management’s stated liquidity expectations.