Business Context and Reporting Period
Company: Nathan's Famous, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 26, 2005 (Thirteen weeks)
Business Overview: The Company operates and franchises Nathan's, Miami Subs, and Kenny Rogers Roasters restaurant concepts. Revenue is generated through company-owned restaurants, the Branded Product Program (selling proprietary items to foodservice operators), franchising fees, and licensing agreements.
Key Financial Metrics
| Metric (in thousands) | Q1 2006 (Ended June 26, 2005) | Q1 2005 (Ended June 27, 2004) |
|---|---|---|
| Total Revenues | $11,355 | $9,265 |
| Net Income | $1,169 | $950 |
| Diluted EPS | $0.18 | $0.16 |
| Operating Cash Flow | $953 | $(235) |
| Cash and Cash Equivalents | $4,831 | $3,641 |
| Working Capital | $15,416 | $14,009 |
| Total Debt (Notes Payable & Capital Leases) | $823 | $866 |
Note: Debt figures represent total notes payable and capital lease obligations (current and non-current).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 22.6% to $11.355 million. Sales from the Branded Product Program surged 69.0% to $4.305 million, driven by volume and a 1.0% price increase. Company-owned restaurant sales rose 3.5%.
- Profitability: Net income increased 23.1% to $1.169 million. Income from continuing operations before taxes rose to $1.897 million.
- Cost Pressures: Cost of sales increased 36.3% to $6.295 million. Commodity costs for hot dogs were approximately 14.0% higher year-over-year. Management implemented price increases in June 2005 to mitigate margin pressure.
- Cash Flow: Operating cash flow improved significantly from a use of $235,000 in the prior year to a provision of $953,000, driven by net income and increased accounts payable, partially offset by higher receivables.
- Franchise Expansion: The system grew to 363 franchised/licensed units (up from 345), with 11 new units opened in the quarter, including international locations in Japan, Kuwait, and the UAE.
Outlook, Risks, and Contingencies
- Guidance: Management expects to fund future investments in the Branded Product Program and restaurant expansions from operating cash flow. No specific numerical guidance for the full year was provided in this text.
- Commodity Risk: The Company is exposed to fluctuations in beef and paper product prices. A 10% change in food/paper costs would impact cost of sales by approximately $489,000.
- Legal Proceedings:
- Age Discrimination: A former employee sued for $1,000,000; the Company denies liability and expects insurance to cover defense costs.
- EEOC Charge: An EEOC charge regarding sex discrimination and retaliation was filed. The EEOC found reasonable cause for pay discrimination and retaliation regarding shift changes. Conciliation efforts are ongoing.
- Landlord Claim: A landlord claims $150,000 in construction costs for a Miami Subs location; the Company intends to dispute liability.
- Subsequent Events: On July 13, 2005, the Company sold a vacant real estate parcel in Brooklyn for $3.1 million.
Investor Verification Checklist
- Commodity Hedging: Verify if the Company has implemented hedging strategies for beef prices, as they currently do not hedge and rely on passing costs to customers.
- Franchisee Performance: Review the number of non-performing franchise units (22 in Q1 2006 vs. 30 in Q1 2005) and the collectibility of associated royalties.
- Legal Exposure: Monitor the status of the EEOC conciliation and the $1 million age discrimination lawsuit to assess potential financial impact beyond insurance deductibles.
- Real Estate Strategy: Confirm the impact of the recent $3.1 million property sale on future rental income and sublease obligations.
- Stock Repurchases: Note that while the Company has a repurchase program, no shares were bought back in this quarter; verify future buyback activity against cash flow projections.