Business Context and Reporting Period
Company: Nathan's Famous, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Thirteen and thirty-nine weeks ended December 23, 2001 (Fiscal Year 2002).
Business Overview: The Company operates and franchises Nathan's, Kenny Rogers Roasters, and Miami Subs restaurant concepts. It also licenses products for sale in supermarkets and foodservice facilities. As of December 23, 2001, the system included 23 company-owned units and 377 franchised/licensed units.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Dec 23, 2001 |
39 Weeks Ended Dec 23, 2001 |
39 Weeks Ended Dec 24, 2000 |
|---|---|---|---|
| Total Revenues | $10,380 | $34,041 | $36,983 |
| Net Income | $263 | $1,879 | $1,823 |
| Diluted EPS | $0.04 | $0.27 | $0.26 |
| Operating Cash Flow | Not provided for 13 weeks | ($3,981) | $3,344 |
| Cash & Equivalents | $1,475 | $1,475 | $4,665 |
| Total Debt (Notes Payable) | $1,830 | $1,830 | $3,132 |
| Working Capital | $7,650 | $7,650 | $5,210 |
Note: Debt figures represent current maturities plus long-term notes payable and capital lease obligations.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 9.1% for the 13-week period and 8.0% for the 39-week period compared to the prior year. This was driven by a 14.0% drop in company-owned restaurant sales (due to closing underperforming units) and a 23.0% drop in franchise royalties (due to fewer operating units and the impact of the September 11, 2001 events on tourist and airport traffic).
- Profitability: Despite lower revenues, Net Income increased 81.4% for the 13-week period ($263k vs $145k) and 3.1% for the 39-week period ($1,879k vs $1,823k). This was aided by cost reductions from closing restaurants and a one-time gain of $850,000 from a successful appeal of a property condemnation.
- Cash Flow: Operating cash flow turned negative ($3.98M used) for the 39-week period, primarily due to increased investments in marketable securities ($3.58M) and a decrease in accounts payable, offsetting net income and non-cash charges.
- Asset Reduction: The Company reduced its company-owned restaurant count from 26 to 23 units during the period as part of a divestiture plan to close underperforming Miami Subs locations.
Outlook, Risks, and Contingencies
- September 11 Impact: Management notes continued lower sales at company-owned restaurants and reduced royalties from franchises in tourist destinations (Las Vegas, South Florida) and airports due to the events of September 11, 2001.
- Legal Proceedings:
- Employment Lawsuit: Named as a defendant in a $17 million lawsuit in New York alleging negligence in hiring/supervising a minor employee who allegedly molested another minor employee. The Company intends to defend vigorously.
- Franchise Disputes: A fraud claim regarding a Miami Subs franchise purchase was settled without monetary payment. A slip-and-fall claim against a franchisee is being defended by the franchisee's insurer.
- Tax Contingency: A tax audit regarding the acquired Miami Subs entity (years 1991-1996) was settled in January 2002. The Company agreed to a tax liability of approximately $135,000 plus interest, retaining significant net operating loss carry-forwards.
- Divestiture Plan: The Company continues to close underperforming Miami Subs units. As of the filing date, 15 of 18 planned closures had leases terminated, with two remaining properties being marketed for sale.
- Stock Repurchase: Authorized to repurchase up to 1 million shares; 35,516 shares repurchased to date for $113,000.
Investor Verification Checklist
- Condemnation Proceeds: Verify the receipt of the additional $850,000 from the State of Florida condemnation appeal, which significantly boosted Q3 income.
- Lease Obligations: Review the remaining future minimum lease obligations ($7.68M) for the 18 underperforming Miami Subs units and the potential for future termination costs.
- Legal Exposure: Monitor the status of the $17 million employment lawsuit and the potential for settlement or judgment.
- Comparable Sales: Confirm the sustainability of the 2.0% increase in comparable restaurant sales amidst the broader economic downturn and post-9/11 travel restrictions.
- Commodity Costs: Assess the impact of fluctuating meat commodity prices on future margins, as the Company noted selective price increases to offset costs.