Nathan’s Famous, Inc. — Form 10-Q Summary
Reporting period: Thirteen and twenty-six weeks ended September 23, 2012, corresponding to fiscal 2013’s second quarter and first half. The comparable periods ended September 25, 2011. The filing was signed November 2, 2012. Figures below are in millions of dollars except per-share amounts.
Business context
Nathan’s generates revenue from branded food sales, company-operated and franchised restaurants, and product licensing. At September 23, 2012, its system included 304 franchised outlets and five company-owned restaurants. Its primary hot-dog licensee and supplier, SMG, remained central to the business and subject to ongoing litigation.
Financial performance
| Metric | 13 weeks 2012 | 13 weeks 2011 | 26 weeks 2012 | 26 weeks 2011 |
|---|---|---|---|---|
| Total revenue | $21.36 | $19.12 | $41.54 | $37.02 |
| Net income | $2.85 | $2.27 | $4.85 | $3.87 |
| Basic EPS | $0.65 | $0.45 | $1.11 | $0.77 |
| Diluted EPS | $0.62 | $0.44 | $1.06 | $0.75 |
| Gross profit margin on sales | 26.7% | 24.9% | 23.9% | 22.0% |
- Quarter revenue rose 11.7%; first-half revenue rose 12.2%. Sales increased 11.0% and 12.7%, respectively, while license royalties increased 24.4% for the quarter and 18.5% for the half.
- Quarter net income increased 25.4%; first-half net income increased 25.5%. The first-half effective tax rate was 39.6%, versus 38.9%.
- Quarter gross margin improvement reflected sales price increases intended to offset higher hot-dog costs. First-half foodservice branded-product sales grew 12.5%, supported by higher volume and pricing.
- Comparable domestic franchise sales declined 4.1% in the quarter and 3.5% for the first half. Franchise restaurant sales were approximately flat in the quarter and declined 1.3% in the first half.
Cash flow, liquidity and debt
- First-half operating cash flow was $4.87 million, compared with $5.49 million in the prior-year period. Investing activities provided $1.00 million and financing activities provided $0.47 million. Cash and cash equivalents rose $6.35 million to $12.38 million.
- At September 23, 2012, marketable securities were $12.55 million, restricted cash was $5.64 million, working capital was $27.39 million, and total current assets and liabilities were $39.67 million and $12.28 million, respectively.
- The company reported no outstanding borrowings. It had $5.64 million restricted to secure the SMG judgment, with a corresponding $5.64 million litigation accrual. Management said available cash, marketable securities and operating cash flow should fund operations and planned repurchases for at least 12 months.
- Capital expenditures were $0.27 million; the company also made a $0.50 million investment in preferred stock of a private company. No shares were repurchased during the first half.
Changes, outlook and risks
- Higher sales at the relocated and expanded Coney Island Boardwalk restaurant, favorable weather compared with the prior-year period, price increases and higher licensee sales contributed to growth. The prior-year quarter had been affected by Tropical Storm Irene and rainy, cool weather.
- Management warned that record-high corn prices and volatile beef costs could pressure margins if price increases or purchase commitments do not offset them. It also cited volatility in utilities, distribution and insurance costs. A 10% food-and-paper commodity cost change would have affected first-half cost of sales by approximately $2.19 million.
- The SMG litigation concerns the license agreement and proprietary seasoning sales. A judgment of approximately $4.9 million, plus post-judgment interest at 9%, had been accrued and secured with restricted cash. Oral argument on Nathan’s appeal was scheduled for November 13, 2012. The SMG agreement was scheduled to expire February 28, 2014; management cited the future supply agreement and its terms as a risk.
- After quarter-end, Hurricane Sandy caused extensive damage and temporary closure of the Coney Island restaurant. Insurance was expected to defray much, but possibly not all, repair costs and lost revenue; impacts on other northeastern restaurants and franchise locations were still being assessed.
- No numerical sales or earnings guidance was provided. Management estimated a fiscal-year tax rate of approximately 38.5%–40.0% and anticipated lower investment income as securities mature or are called and may be reinvested at lower yields.
- Subsequent to quarter-end, the executive chairman’s employment agreement was extended through December 31, 2017, with annual compensation of $600,000 and a 50,000-share restricted-stock award.
Key facts for investors to verify
- Outcome of the SMG appeal, potential payment timing and any effect on the license and hot-dog supply relationship.
- Extent of Hurricane Sandy’s damage, restaurant reopening timing, insurance recovery and any uncovered losses.
- Whether commodity inflation can be offset through pricing, sourcing or purchase commitments without weakening sales or margins.
- Whether franchise comparable-sales weakness continues and whether branded-product and licensing growth persists.
- Changes in unrestricted liquidity after considering the restricted litigation deposit and contractual commitments.