Business Context and Reporting Period
Company: Nathan's Famous, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: March 28, 2004 (Fiscal Year 2004)
Business Overview: The Company operates and franchises fast food units under three primary brands: Nathan's Famous (hot dogs and fries), Miami Subs (sandwiches and ethnic foods), and Kenny Rogers Roasters (rotisserie chicken). The system includes 7 company-owned units, 338 franchised units, and over 3,300 branded product points of sale across 44 states and 12 foreign countries.
Key Financial Metrics
| Metric (in thousands) | Fiscal 2004 | Fiscal 2003 |
|---|---|---|
| Total Revenues | $30,679 | $33,772 |
| Net Income | $1,894 | ($13,968) |
| Income from Continuing Operations | $1,894 | ($1,506) |
| Cash and Cash Equivalents | $3,449 | $1,415 |
| Working Capital | $9,185 | $5,935 |
| Long-Term Debt | $866 | $1,053 |
| Basic EPS (Continuing Ops) | $0.36 | ($0.25) |
Revenue Breakdown (Fiscal 2004): Sales ($20.8M), Franchise fees and royalties ($6.3M), License royalties ($3.0M).
Material Changes vs. Prior Period
- Profitability Turnaround: The Company returned to profitability with Net Income of $1.9M in 2004, compared to a Net Loss of $14.0M in 2003. The 2003 loss was significantly impacted by a $12.3M cumulative effect of a change in accounting principle (SFAS No. 142) regarding goodwill impairment.
- Revenue Decline: Total revenues decreased 9.2% to $30.7M. This was driven by a 30.1% drop in company-owned restaurant sales ($12.8M vs $18.4M) due to the franchising or sale of seven company-owned units.
- Branded Product Growth: Sales from the Branded Product Program increased 20.5% to $7.7M, offsetting some restaurant sales declines.
- Expense Reduction: General and administrative expenses decreased 12.6% to $7.5M due to lower personnel costs and professional fees following the reduction in company-owned operations.
- Impairment Charges: Impairment charges on long-lived assets dropped significantly to $25,000 in 2004 from $1.4M in 2003. Impairment on notes receivable was $208,000 in 2004 versus $1.4M in 2003.
Guidance, Outlook, and Risks
Management Outlook:
- Plans to continue expanding the Branded Product Program and international master franchising.
- Intends to open new franchised units and selectively consider new company-owned Nathan's units.
- Anticipates continued co-branding efforts within the existing restaurant system.
Key Risks and Contingencies:
- Commodity Costs: Beef costs rose dramatically (approx. 14.6% higher than 2003) due to supply constraints and BSE (mad cow disease) concerns. The Company has implemented price increases to offset margin pressure.
- Legal Proceedings: Pending litigation includes an age discrimination claim seeking $1M (covered by insurance), a slip-and-fall claim (indemnified by franchisee), and an overtime wage claim (Company intends to deny liability).
- Lease Obligations: The Company remains contingently liable for lease costs on properties subleased to franchisees and has significant future minimum lease obligations.
- Seasonality: Revenues and profits are historically highest in the first two fiscal quarters due to weather conditions in key markets (New York and Florida).
Investor Verification Checklist
- Beef Cost Sustainability: Verify if the 14.6% increase in beef costs is a temporary anomaly or a structural shift affecting long-term margins.
- Franchisee Collectibility: Review the allowance for doubtful accounts ($328k) and the number of franchised locations deemed unrealizable (35 locations) to assess royalty collection risks.
- Company-Owned Unit Strategy: Confirm the long-term plan for the remaining 7 company-owned units, given the strategic shift toward franchising.
- Legal Exposure: Monitor the status of the age discrimination lawsuit and the franchisee overtime wage claim to ensure insurance coverage remains valid.
- Stock Repurchase Program: Note that the Company has repurchased 1.85M shares to date; verify remaining authorization and future buyback intent.