Business Context and Reporting Period
This Form 10-Q covers the thirteen-week period ended June 24, 2007 for Nathan's Famous, Inc., a Delaware corporation. The company operates and franchises restaurants (Nathan's, Arthur Treacher's, Kenny Rogers) and licenses branded products. As of the period end, the combined system included 298 franchised/licensed units and six company-owned units. A significant event during the period was the sale of the wholly-owned subsidiary, Miami Subs Corporation, on June 7, 2007.
Key Financial Metrics
| Metric | Q2 2007 (13 weeks) | Q2 2006 (13 weeks) |
|---|---|---|
| Total Revenues | $12,779,000 | $11,598,000 |
| Net Income | $3,152,000 | $1,396,000 |
| Income from Continuing Ops | $1,424,000 | $1,222,000 |
| Income from Discontinued Ops | $1,728,000 | $174,000 |
| Diluted EPS (Net) | $0.48 | $0.22 |
| Cash and Equivalents | $7,786,000 | $3,648,000 |
| Marketable Securities | $23,601,000 | $22,785,000 |
| Net Working Capital | $31,239,000 | $27,375,000 |
| Operating Cash Flow | $593,000 | $518,000 |
Debt and Liquidity: The company reported no outstanding borrowings. It maintains a $7,500,000 uncommitted bank line of credit, of which $0 has been utilized. Total liabilities were $9,847,000.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 10.2% year-over-year. Sales from the Branded Product Program rose 16.8%, and company-owned restaurant sales increased 11.6%.
- Discontinued Operations: Net income was significantly boosted by discontinued operations ($1.728M vs $0.174M prior year). This includes a $2.489M pre-tax gain from the sale of Miami Subs and leasehold interests.
- Margin Compression: Gross profit margin on continuing operations declined to 24.4% from 27.8% in the prior year. Management attributed this to a 12.3% increase in hot dog costs due to rising beef prices.
- Expense Increases: General and administrative expenses rose 5.4% due to higher incentive compensation, business development costs, and share-based compensation.
Guidance, Outlook, and Risks
- Commodity Costs: Management notes uncertainty regarding future beef costs. While prices peaked in May 2007, they remain higher than the prior year. Price increases for branded products are expected to offset some costs starting in the second quarter of fiscal 2008.
- Supplier Risk: The company relies on a single supplier for the vast majority of its hot dogs. On July 31, 2007, the company notified this supplier/licensee (SMG Inc.) of a termination of the license agreement effective July 31, 2008, due to a breach regarding a change in control. The company is seeking alternative sources.
- Legal Proceedings: A personal injury lawsuit exists regarding a leased property in Huntington, NY, where the company may have indemnification obligations. Additionally, the company commenced an action against SMG Inc. in August 2007 regarding the license termination.
- Capital Allocation: The company has a stock repurchase plan with 108,900 shares remaining available for purchase. No repurchases were made in this quarter.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings by excluding the $2.489M one-time gain from the sale of Miami Subs and leasehold interests.
- Beef Cost Exposure: Monitor the effectiveness of recent price increases in offsetting the 12.3% rise in hot dog commodity costs.
- Supplier Transition: Assess the risk and cost implications of terminating the license agreement with the primary hot dog supplier (SMG Inc.) and the timeline for securing a replacement.
- Receivables Quality: Review the $1.1M increase in accounts receivable, which management attributes to seasonal fluctuations and higher royalties from retail licensees.
- Legal Contingencies: Track the status of the SMG Inc. litigation and the Huntington, NY personal injury claim for potential indemnification liabilities.