NATH

Business Context and Reporting Period

Company: Nathan's Famous, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 27, 2009 (13 and 26 weeks)
Business Overview: The Company operates and franchises quick-service restaurants, licenses the "Nathan's Famous" brand for retail and foodservice products, and sells proprietary spices. As of September 27, 2009, the system included 280 franchised/licensed units and 7 company-owned units.

Key Financial Metrics

Note: The 26-week 2008 Net Income includes $2,467,000 from discontinued operations (sale of NF Roasters Corp.). The 2009 period has no discontinued operations.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 2.6% for the 13-week period and 2.0% for the 26-week period compared to the prior year. Sales from the Branded Product Program increased due to higher average selling prices, partially offset by lower volume.
• Profitability: Net income for the 13-week period increased 16.4% ($2.16M vs $1.86M). However, 26-week net income decreased 34.4% ($3.73M vs $5.68M), primarily due to the absence of the $2.47M gain from discontinued operations recorded in the prior year.
• Cost of Sales: Cost of sales decreased 5.9% (13 weeks) and 4.3% (26 weeks). Gross profit margins improved significantly, rising from 24.7% to 31.2% for the 13-week period, driven by lower hot dog commodity costs and price increases.
• Franchise Performance: Comparable domestic franchise sales decreased 7.3% (13 weeks) and 7.0% (26 weeks), attributed to the economic recession impacting travel and entertainment venues.
• Stock Repurchases: The Company repurchased 390,496 shares for $5.02 million during the 26-week period. Total treasury stock holdings reached 3,084,302 shares.

Guidance, Outlook, Risks, and Contingencies

• Outlook: Management expects available cash and marketable securities to provide sufficient capital for operations and stock repurchases for at least the next 12 months. Capital expenditures of approximately $1 million are expected for the relocation of the corporate office.
• Commodity Risks: The Company faces volatility in beef and beef trimming costs. While market prices for hot dogs were lower in the current period, purchase commitments resulted in costs slightly higher than prevailing market rates. Future price volatility is expected.
• Legal Proceedings:
  • SMG, Inc. Dispute: Ongoing litigation regarding the termination of a license agreement for the manufacture and distribution of frankfurters. A stipulation was reached to delay termination until adjudication.
  • Class Action (NJ): Served with a complaint alleging violations of the New Jersey Consumer Fraud Act regarding processed meat products. Plaintiffs seek trebled damages of $2,700. Management believes the impact will not be material.
  • Copyright Infringement: Served with a complaint seeking $10.5 million in damages regarding artwork used in advertising. The Company denies claims and is seeking insurance coverage.
• Tax Contingencies: The Company has $490,000 in unrecognized tax benefits. It is reasonably possible that $50,000 to $175,000 of these benefits could be reduced in the current fiscal year, favorably impacting the effective tax rate.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the exclusion of the $2.47M gain from the prior year's 26-week results to accurately assess core operating performance trends.
• Franchise Sales Decline: Monitor the 7% decline in comparable franchise sales and its correlation with the broader economic recession.
• Commodity Hedging Effectiveness: Review the impact of fixed-price purchase commitments on margins if beef prices rise significantly in the coming quarters.
• Legal Exposure: Track the status of the $10.5M copyright infringement claim and the SMG license dispute for potential material liabilities.
• Cash Utilization: Confirm the execution of the remaining $4.2M stock repurchase plan and the $1M capital expenditure for the new corporate office.