Flanigan’s Enterprises, Inc. — Q1 FY2017 Form 10-Q
Reporting period: The unaudited quarter comprised 13 weeks ended December 31, 2016; comparisons are with the 13 weeks ended January 2, 2016. Amounts below are in millions unless stated otherwise. The company operates restaurants and package liquor stores and consolidates eight limited partnerships in which it is general partner and has a controlling interest.
Financial performance
| Metric | Q1 FY2017 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $26.594 | $25.278 | +5.2% |
| Income from operations | $1.473 | $1.351 | +9.0% |
| Net income | $1.101 | $0.951 | +15.8% |
| Net income attributable to company stockholders | $0.664 | $0.624 | +6.4% |
| Basic and diluted EPS | $0.36 | $0.34 | +$0.02 |
| Operating cash flow | $2.735 | $2.118 | +$0.617 |
- Restaurant food sales were $16.224 million, bar sales $5.061 million, and package-store sales $4.678 million. Management attributed higher revenue primarily to menu price increases and, to a lesser extent, increased restaurant traffic; package-store growth was attributed primarily to traffic.
- Operating margin was approximately 5.5% of revenue. Restaurant food-and-bar gross margin was 64.94%, nearly unchanged from 64.89%; package-store gross margin was 28.30%, down from 28.64%.
- Costs and expenses rose 5.0% to $25.121 million. Payroll costs rose 5.5% to $8.145 million; merchandise costs rose amid higher food costs. Operating costs and expenses were 94.46% of total sales versus 94.66% a year earlier.
- Cash and equivalents were $12.119 million at December 31, 2016, up from $10.174 million at October 1, 2016. Working capital was $5.708 million, versus $3.875 million at October 1, 2016. Investing cash outflow was $0.766 million and financing cash outflow was $0.024 million.
- Total long-term debt, including current maturities, was $11.808 million at quarter-end, compared with $10.255 million at October 1, 2016, per MD&A. The filing says the company was in compliance with loan covenants. It reported no dividends paid in either comparable quarter.
Material changes and outlook
- Same-store weekly sales increased 5.49% for restaurant food, 3.18% for restaurant bar, and 7.46% for package stores. The company had 25 operated units, one owned but non-operated club, and five franchised units at quarter-end; the filing’s unit-count discussion also includes a restaurant operated for a franchisee.
- Management expected food costs and operating expenses to continue increasing during FY2017. It anticipated lower restaurant food-and-bar gross profit due to higher food costs, stable package-store sales and gross margin, and stable occupancy costs. It expected restaurant and bar sales to benefit from prior menu price increases and planned continued increased advertising.
- Management said cash on hand, operating cash flow, and available credit were expected to fund operations and planned capital expenditures for at least the next 12 months, while acknowledging unanticipated expenses or revenue declines could affect that outlook. The company was not actively developing a new Flanigan’s restaurant, but continued seeking locations and was exploring, without an agreement or understanding, a possible Miami location using The Whale’s Rib concept.
Debt, commitments, and risks
- During the quarter, the company refinanced its corporate-office mortgage with an $840,000 loan at a fixed 4.65% rate and borrowed $822,500 against its office and warehouse properties at 4.65%. It also established a secured revolving credit line of up to $5.5 million. The line was undrawn during the quarter; as of February 14, 2017, the full amount remained available. Outstanding balances were to bear floating interest until conversion to a five-year amortizing term loan in December 2017. A subsequent interest-rate swap fixes the term-loan rate at 4.65%.
- The company financed approximately $1.199 million of insurance premiums, secured by the related insurance policies and premium rights. It had a $1.061 million construction contract for a new building near its North Miami location; $456,000 had been paid by quarter-end. It also agreed to buy approximately $5.779 million of baby back ribs during calendar 2017 at a fixed cost.
- Management identified food, beverage, and labor costs, minimum-wage increases, competition, customer demand, and interest-rate fluctuations as risks. The filing describes ordinary-course litigation, including injury, accessibility, employment, and food-related claims, and says none had materially affected the company to date.
- After quarter-end, the company terminated a prior interest-rate swap tied to its refinanced corporate-office mortgage and paid an $8,500 prepayment penalty. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Verify that revenue growth and comparable-store sales gains are sustained and distinguish price-driven growth from traffic growth.
- Monitor food, labor, and other cost inflation against management’s expectations for lower restaurant gross profit and rising expenses.
- Review debt maturities, credit-line availability and terms, collateral, covenant compliance, and the effects of the new rate swap.
- Track the North Miami construction project, the 2017 rib-purchase commitment, and planned refurbishment spending; the filing estimated approximately $900,000 of FY2017 refurbishment costs.
- Assess the effects of limited-partnership noncontrolling interests: quarterly net income was $1.101 million, of which $0.437 million was attributable to noncontrolling interests.