Nathan’s Famous, Inc. — Form 10-Q Summary
Reporting period: Thirteen weeks ended June 24, 2012, the first quarter of fiscal 2013; compared with the thirteen weeks ended June 26, 2011. Amounts below are in millions unless stated otherwise. The company markets Nathan’s Famous products through branded foodservice programs, company-operated and franchised restaurants, and product licensing.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Total revenues | $20.182 | $17.897 | +12.8% |
| Sales | $16.405 | $14.316 | +14.6% |
| Gross profit / gross margin | $3.420 / 20.8% | $2.680 / 18.7% | Margin +2.1 percentage points |
| Earnings before taxes | $3.311 | $2.591 | +27.8% |
| Net income | $2.006 | $1.596 | +25.7% |
| Basic / diluted EPS | $0.46 / $0.44 | $0.31 / $0.31 | Higher; share count also declined |
| Cash from operations | $0.585 | $1.198 | Down $0.613 |
Revenue growth reflected higher branded-program foodservice sales, including increased volume and price increases; higher sales at the relocated and expanded Coney Island Boardwalk restaurant; and higher retail hot-dog license royalties. Traditional franchise royalties declined as comparable franchise sales weakened. The improved gross margin primarily reflected price increases intended to offset higher hot-dog costs. Net margin was approximately 9.9%, versus 8.9% in the prior period.
Liquidity, cash flow and debt
- At June 24, 2012, cash and cash equivalents were $8.634 million, marketable securities were $12.629 million, and restricted cash was $5.531 million. Net working capital was $24.597 million.
- Cash increased $2.605 million during the quarter. Investing activities provided $1.796 million, including $2.000 million from marketable-security maturities; financing activities provided $0.224 million. Operating cash flow was lower year over year, principally because receivables and inventories increased and payables and accrued liabilities declined.
- The company reported no outstanding borrowings. Total liabilities were $15.462 million, including a $5.531 million litigation accrual matched by restricted cash. Management said available cash, marketable securities and operating cash flow should fund operations and planned stock repurchases for at least 12 months.
Material changes and operating developments
- Branded Product and Branded Menu foodservice sales rose 16.4% to $11.806 million, with volume up 10.5% and price increases contributing. Company-owned restaurant sales increased $0.576 million to $4.588 million, mainly due to the expanded Boardwalk location.
- Comparable domestic traditional franchise sales declined 4.3%; franchise restaurant sales fell to $23.377 million from $24.074 million. The system had 307 franchised outlets, including 127 Branded Menu units, compared with 269 outlets a year earlier. Thirteen outlets opened in the quarter.
- License royalties increased to $2.229 million from $1.967 million, led by royalties from SMG. Interest income fell to $0.100 million from $0.178 million, and the company noted that investment income may decline as securities mature and are reinvested.
- The company spent $0.092 million on capital expenditures and made no share repurchases during the quarter. It had authorization to repurchase up to 407,473 additional shares, subject to management’s discretion and market conditions.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management estimated a fiscal 2013 effective tax rate of approximately 38.5%–40.0%; actual results may vary. Up to $0.134 million of unrecognized tax benefits and associated interest and penalties could be reduced during the year, with no assurance.
- Beef and hot-dog costs remain volatile. The filing cites record-high beef and beef-trimming costs during the first half of calendar 2012 and warns that drought-related high corn prices could increase costs further. Price increases or purchase commitments may not fully offset cost inflation; a 10% short-term change in food and paper costs would affect quarterly cost of sales by approximately $1.114 million.
- The SMG litigation remains a significant uncertainty. A judgment of approximately $4.9 million, plus post-judgment interest at 9%, has been accrued and secured with restricted cash; Nathan’s appealed. The appeal outcome may affect cash, operations and the company’s supply and licensing arrangements. The SMG agreement is scheduled to expire February 28, 2014, and the company stated that a successor arrangement’s terms are uncertain.
- At quarter-end, approximately $1.085 million remained under a hot-dog purchase commitment, which the company expected to complete by August 2012. Other disclosed exposures include lease guarantees and contingent obligations on leased properties sublet to franchisees or others.
- Management noted possible pressure from labor, healthcare, utility, distribution and commodity costs, as well as the risk that weaker consumer spending could affect results. The company characterized its business as seasonal and cautioned that interim results may not indicate full-year performance.
Important facts for investors to verify
- Developments and potential cash consequences of the SMG appeal, including the restricted deposit, accrued judgment and supplier/licensee relationship.
- Whether pricing, sourcing arrangements and purchase commitments can protect margins against further beef and hot-dog cost increases.
- Trends in comparable franchise sales, traditional franchise royalties, and growth and profitability of Branded Menu and Branded Product channels.
- Operating cash conversion and receivables collection, given the increase in receivables and lower quarterly operating cash flow.
- Investment income as municipal bonds mature, along with the final annual tax rate and any resolution of uncertain tax positions.