Business Context and Reporting Period
This Form 10-Q covers Nathan's Famous, Inc. for the thirteen and thirty-nine week periods ended December 29, 1996. The Company operates a chain of hot dog restaurants and franchises its brand. As of the reporting date, the Company owned 26 units and franchised 180 units.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Dec 29, 1996 | 39 Weeks Ended Dec 29, 1996 |
|---|---|---|
| Total Revenues | $6,599 | $20,933 |
| Net Earnings | $186 | $1,061 |
| Earnings Per Share | $0.04 | $0.22 |
| Operating Cash Flow | N/A | $1,803 |
| Cash and Equivalents | $1,899 | $1,899 |
| Marketable Securities | $6,483 | $6,483 |
| Long-Term Debt | $23 | $23 |
| Working Capital | $5,256 | $5,256 |
Note: Operating cash flow is reported for the 39-week period. Working capital is calculated as Current Assets ($11,130) minus Current Liabilities ($5,874).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 1.1% for the quarter ($6.6M vs $6.5M) and 1.2% for the 39-week period ($20.9M vs $20.7M). Company-owned restaurant sales rose 3.9% in both periods.
- Profitability Surge: Net earnings for the quarter jumped from $6,000 to $186,000. For the 39-week period, net earnings more than doubled from $474,000 to $1,061,000.
- Expense Reductions: Depreciation and amortization dropped significantly (35.9% for the quarter, 38.6% for 39 weeks) due to the implementation of FASB Statement No. 121. General and administrative expenses decreased 12.2% year-to-date due to staff reductions.
- License Royalties: License royalties declined 18.1% (quarter) and 21.1% (39 weeks) because the amortization of a deferred fee from SMG, Inc. concluded in February 1996.
- Unit Mix: The Company closed two unprofitable restaurants in the first quarter of fiscal 1997, improving operating expense margins.
Outlook, Risks, and Management Commentary
- Strategy: Management is focusing on aggressive local store marketing and value pricing to counter competitive discount strategies. Renovations of larger units are planned to modernize the appearance.
- Liquidity: The Company holds $1.9M in cash and $6.5M in marketable securities. It maintains an uncommitted $5.0M bank line of credit, which remains undrawn. Management believes internal funds are sufficient for operations through fiscal 1997.
- Legal Contingency: The Company is named as a "generator defendant" in CSX Transportation v. Nathan's et al. regarding alleged illegal solid waste dumping at a Staten Island site in 1988. The Company denies involvement and liability, asserting legal defenses and cross-claims for contribution.
Investor Verification Checklist
- Verify the sustainability of the profit margin expansion given the one-time impact of FASB Statement No. 121 on depreciation.
- Monitor the outcome of the CSX Transportation litigation regarding environmental liability.
- Assess the effectiveness of the new value pricing strategy in reversing the decline in comparable unit sales (down 0.4% year-to-date).
- Confirm the timeline and capital requirements for the planned renovations of Company-owned units.