Business Context and Reporting Period
Company: Nathan's Famous, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: March 25, 2007
Business Overview: The Company operates and franchises fast food units under the Nathan's Famous, Kenny Rogers Roasters, and Arthur Treacher's brands. Revenue is generated through company-owned restaurants, the Branded Product Program (selling proprietary products to foodservice operators), franchise royalties, and retail licensing agreements. The Company owns the Arthur Treacher's brand and co-brands it within its restaurant system.
Key Financial Metrics
| Metric | Fiscal 2007 | Fiscal 2006 |
|---|---|---|
| Total Revenues | $45,730,000 | $41,249,000 |
| Net Income | $5,543,000 | $5,677,000 |
| Diluted EPS | $0.87 | $0.87 |
| Gross Profit Margin | 28.0% | 25.4% |
| Operating Cash Flow | $8,191,000 | $4,061,000 |
| Cash and Cash Equivalents | $6,932,000 | $3,009,000 |
| Marketable Securities | $22,785,000 | $16,882,000 |
| Working Capital | $27,375,000 | $19,075,000 |
| Long-Term Debt | $0 | $31,000 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 10.9% to $45.7 million, driven by a 13.9% increase in Branded Product Program sales and a 3.9% increase in company-owned restaurant sales.
- Margin Expansion: Gross profit margin improved to 28.0% from 25.4%, primarily due to a 10.0% decrease in hot dog costs compared to the prior year.
- Discontinued Operations: Fiscal 2006 included a significant one-time gain of $2.9 million from the sale of a vacant property in Brooklyn, NY. Fiscal 2007 included a smaller gain of $400,000 from the collection of proceeds related to that sale.
- Franchise Count: The total system decreased slightly to 357 franchised units (from 362), with 19 new units opened and 26 closed during the year.
- Accounting Changes: The Company adopted SFAS No. 123R (Share-Based Payment), resulting in a new expense of $295,000 recorded in General and Administrative expenses.
Guidance, Outlook, and Risks
- Strategic Divestiture: On June 7, 2007, the Company completed the sale of its wholly-owned subsidiary, Miami Subs Corporation, for $3.25 million ($850,000 cash and a $2.4 million promissory note). The Company retains co-branding rights for Nathan's and Arthur Treacher's products within the Miami Subs system.
- Expansion Plans: Management plans to continue expanding the Branded Product Program, open new franchised units in captive markets, and pursue international master franchising agreements.
- Key Risks:
- Supplier Concentration: The Company relies on a single supplier for the vast majority of its hot dogs, which represents approximately 85% of food costs. This supplier has only one manufacturing facility and may be experiencing financial difficulties.
- Commodity Costs: Beef prices are volatile. While costs softened in 2007, the Company notes that increases in food and paper products could harm profitability if not passed to customers.
- Competition: The quick-service restaurant industry is highly competitive, with pressure on pricing and margins.
- Liquidity: The Company maintains a strong balance sheet with no long-term debt and a $7.5 million uncommitted line of credit. Management believes cash and marketable securities are sufficient to fund operations for at least the next twelve months.
Investor Verification Checklist
- Miami Subs Sale: Verify the terms and timing of the Miami Subs Corporation sale and the collectibility of the $2.4 million promissory note.
- Supplier Dependency: Assess the financial health and operational stability of the primary hot dog supplier (Specialty Food Group, Inc.) given the single-facility risk.
- Beef Cost Trends: Monitor beef commodity prices to evaluate the sustainability of the improved gross margins reported in 2007.
- Franchisee Performance: Review the number of non-performing franchise units (16 in 2007 vs. 21 in 2006) and the impact on royalty collectibility.
- Discontinued Operations: Confirm the final accounting treatment and tax implications of the Brooklyn property sale and the Fort Lauderdale lease termination.