Nathan’s Famous, Inc. — Form 10-Q Summary
Reporting period: Thirteen and twenty-six weeks ended September 25, 2011, compared with the periods ended September 26, 2010. Fiscal year-end is in March. Amounts below are in millions unless noted.
Business context
Nathan’s markets branded products through foodservice and retail programs, operates and franchises restaurants, and earns licensing royalties. At quarter-end, its system included 282 franchised or Branded Menu outlets and five company-owned restaurants. Management notes that interim results are seasonal and may not indicate full-year performance.
Key financial metrics
| Metric | 13 weeks 2011 | 13 weeks 2010 | 26 weeks 2011 | 26 weeks 2010 |
|---|---|---|---|---|
| Total revenue | $19.12 | $16.28 | $37.02 | $31.91 |
| Sales | $15.86 | $12.96 | $30.17 | $25.31 |
| Income before taxes | $3.74 | $0.13 | $6.33 | $2.65 |
| Net income | $2.27 | $0.15 | $3.87 | $1.81 |
| Diluted EPS | $0.44 | $0.03 | $0.75 | $0.32 |
- Sales growth was driven mainly by Branded Product and Branded Menu foodservice volume, new accounts, and price increases. Total revenue rose about 17% in the quarter and 16% for the half-year.
- Gross profit as a percentage of sales declined to 24.9% from 27.3% in the quarter and to 22.0% from 25.3% year to date, principally because of higher hot-dog costs.
- Operating cash flow was $5.49 million for the 26 weeks, versus $4.47 million a year earlier. Capital expenditures were $0.53 million; cash and cash equivalents increased $6.27 million to $15.21 million.
- At September 25, cash was $15.21 million, marketable securities $16.89 million, and restricted cash $5.20 million. Working capital was $34.29 million. The restricted balance secures the SMG judgment and is not freely available.
- Total liabilities were $13.79 million, including $11.67 million of current liabilities. The company reported no outstanding borrowings.
- The 26-week effective tax rate was 38.9%, versus 31.6% in the prior period. Management estimated a fiscal 2012 annual tax rate of approximately 37.5%–39.5%.
Material changes and management commentary
- Quarterly sales increased 22.4%; Branded Product and Branded Menu foodservice sales rose 44.1%. Company-owned restaurant sales declined, with management citing Tropical Storm Irene, rainy weekends, and a cold Labor Day weekend. The company estimated $172,000 of lost sales from the Irene closure.
- Comparable domestic franchise sales declined 2.3% for the quarter and 1.5% year to date; management attributed weakness partly to the economic environment and lower consumer confidence. The outlet system expanded from 252 to 282 franchise and Branded Menu units year over year.
- Reported earnings comparisons are affected by prior-period litigation expense: the 2010 quarter included a $2.91 million SMG litigation accrual. The 2011 periods include interest expense on the judgment, not a new damages accrual.
- Management said higher beef costs materially pressured branded-product margins. Hot-dog costs were approximately 12% higher year over year; the company warned that margins could be further hurt if costs rise and cannot be passed through or offset.
- Cash from investing included $2.05 million from maturing securities and $0.90 million from the sale of the Miami Subs note receivable. The note sale ended the company’s related 8.5% interest income.
Outlook, risks, and contingencies
- Management expects cash, marketable securities, and operating cash flow to fund operations and planned share repurchases for at least the next 12 months. It expects to continue repurchases and invest in restaurants and branded programs; no earnings or revenue guidance was provided.
- The company had a commitment for up to 2.04 million pounds of hot dogs, with an estimated market value of $4.10 million at agreement date and expected completion between January and March 2012. Final cost was not yet determined.
- The SMG litigation remains a key contingency. A judgment of approximately $4.91 million, including prejudgment interest, was appealed; enforcement was stayed, and $5.20 million was held in restricted cash as security. Post-judgment interest accrues at 9% annually; management expected further interest charges during the appeal. SMG had filed its opposition brief, and Nathan’s planned a reply.
- Other cited risks include volatile beef, food, distribution, and utility costs; possible labor and healthcare cost increases; adverse economic conditions; and tax examinations. The company also had a recorded $0.21 million liability under a lease guaranty.
Important facts for investors to verify
- Progress and outcome of the SMG appeal, potential payment timing, and the amount of restricted cash and continuing interest accruals.
- Whether branded-product pricing or purchasing commitments can offset sustained commodity-cost increases and restore gross margins.
- Durability of foodservice sales growth versus weakness in company-owned and comparable franchise restaurants.
- Availability and maturity profile of marketable securities, and the impact of ongoing share repurchases on cash and shares outstanding.
- Final fiscal-year tax rate and the outcome of pending tax reviews and uncertain tax positions.