NATH

Business Context and Reporting Period

Company: Nathan's Famous, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 28, 2009 (Thirteen weeks)
Business Overview: The Company operates and franchises quick-service restaurants and markets the "Nathan's Famous" brand through a Branded Product Program (retail/foodservice) and licensing agreements. As of June 28, 2009, the system included 289 franchised or licensed units and five Company-owned units.

Key Financial Metrics

Note: The prior year Net Income included $2,467,000 from discontinued operations (sale of NF Roasters Corp.), which is not present in the current period.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 1.3% to $14.2 million. This was driven by an 11.9% increase in license royalties (due to higher sales by licensees) and a 3.4% increase in foodservice sales (Branded Product/Menu Programs), which offset a 7.7% decline in comparable domestic franchise sales attributed to the economic recession.
• Profitability: Income from continuing operations increased 15.4% to $1.6 million. Gross profit margin improved to 26.4% from 24.4%, aided by price increases in the Branded Product Program that offset higher beef costs.
• Expense Increases: General and administrative expenses rose 7.5% to $2.6 million, primarily due to a $121,000 increase in bad debt provisions and higher tax/audit fees.
• Cash Flow: Operating cash flow turned positive ($15,000) compared to a negligible outflow in the prior year, though it was significantly impacted by a $2.2 million increase in accounts receivable.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management estimates the annual effective tax rate for fiscal 2010 will be between 35.0% and 37.5%. The Company expects to continue stock repurchases and fund operations from existing cash and operating cash flow.
• Stock Repurchases: No shares were repurchased during the quarter. However, on June 30, 2009 (post-period), the Board authorized a fifth repurchase plan for up to 500,000 shares and immediately repurchased 238,129 shares for $3.0 million.
• Commodity Risks: Beef costs were 5.7% higher than the prior year. The Company has a purchase commitment for 1.3 million pounds of hot dogs remaining for July-September 2009. Management notes that future price volatility in beef could impact margins if not passed through to customers.
• Legal Proceedings:
  • SMG, Inc. Dispute: Ongoing litigation regarding the termination of a license agreement for hot dog manufacturing. A stipulation was reached to delay termination until adjudication.
  • Class Action: Served with a complaint in New Jersey alleging violations of the Consumer Fraud Act regarding processed meat products. Management believes liability will not be material.
• Discontinued Operations: The prior year included a significant gain from the sale of NF Roasters Corp., which is not comparable to the current period's continuing operations.

Investor Verification Checklist

• Franchise Performance: Verify the extent of the 7.7% decline in comparable domestic franchise sales and its correlation to the broader economic recession.
• Accounts Receivable: Investigate the $2.2 million increase in receivables, which significantly reduced operating cash flow despite net income growth.
• Commodity Hedging: Assess the impact of the remaining hot dog purchase commitment and the risk of rising beef costs on future margins.
• Legal Exposure: Monitor the status of the SMG license agreement dispute and the New Jersey class action lawsuit for potential financial impact.
• Capital Allocation: Review the execution of the newly authorized fifth stock repurchase plan and its impact on liquidity.