Business context and reporting period
Flanigan’s Enterprises, Inc. operates restaurants and package liquor stores, with franchise and limited-partnership operations. This unaudited Form 10-Q covers the 13 and 26 weeks ended April 2, 2016, compared with the corresponding periods ended March 28, 2015. At quarter-end, the company reported 26 company-owned/operated units (including one club it owns but does not operate) and five franchised units.
Financial results and liquidity
| Metric | 13 weeks ended April 2, 2016 | 13 weeks ended March 28, 2015 | 26 weeks ended April 2, 2016 | 26 weeks ended March 28, 2015 |
|---|---|---|---|---|
| Total revenue | $26.974 million | $25.894 million | $52.252 million | $49.214 million |
| Operating income | $1.978 million | $2.357 million | $3.329 million | $3.679 million |
| Net income | $1.419 million | $1.712 million | $2.370 million | $2.571 million |
| Net income attributable to stockholders | $874,000 | $1.124 million | $1.498 million | $1.831 million |
| Basic and diluted EPS | $0.47 | $0.60 | $0.81 | $0.99 |
| Operating costs and expenses as % of sales | 92.67% | 90.90% | 93.62% | 92.52% |
| Net income as % of sales | 5.26% | 6.61% | 4.54% | 5.22% |
Restaurant food and bar gross margin was 65.03% for the quarter and 64.96% for the half-year, versus 64.69% and 64.49%, respectively, in the comparable periods. Package-store gross margin was 28.97% for the quarter and 28.80% for the half-year, compared with 29.15% and 29.07%.
For the 26 weeks, operating cash flow was $5.340 million, investing cash use was $2.310 million, and financing cash use was $2.437 million, producing a $593,000 increase in cash. Cash was $9.860 million at April 2, 2016. Current assets were $14.918 million and current liabilities $12.278 million, for working capital of $2.640 million. Total debt was $11.240 million, comprising $1.450 million current and $9.790 million long-term; the company said it was compliant with loan covenants. Separately, insurance-premium financing had an aggregate principal balance of $731,000.
Material changes versus comparable periods
- Quarter revenue rose 4.17% and half-year revenue rose 6.17%, primarily due to menu price increases and, to a lesser extent, restaurant traffic.
- Quarter net income fell 17.11%; half-year net income fell 7.82%. Stockholder-attributable income declined 22.24% for the quarter and 18.19% for the half-year, reflecting higher food costs and operating expenses, partly offset by pricing and sales growth.
- Restaurant food and bar sales increased. Comparable weekly food sales grew 4.42% in the quarter and 5.71% for the half-year; comparable weekly bar sales increased 10.76% and 10.80%, respectively. Package-store sales declined 3.46% on a same-store weekly basis in the quarter, partly reflecting the different timing of New Year’s Eve and New Year’s Day, but increased 2.88% for the half-year.
- Payroll, occupancy, and selling, general and administrative expenses increased. Half-year payroll rose 8.94%, occupancy costs 11.22%, and SG&A 9.86%. Half-year debt was lower than the $13.400 million reported at March 28, 2015.
- Cash increased from $9.267 million at October 3, 2015. The company attributed the increase partly to $900,000 received for renovations at a franchisee location and The Whale’s Rib; those funds were recorded as due to franchisees.
Outlook, risks, and notable items
- Management expected operating expenses to continue increasing through fiscal 2016, citing food costs and increases across expense categories. It expected restaurant food and bar margins to remain stable, with menu-price increases offset by higher food costs, and package-store sales and margins to remain stable.
- Bar and food menu prices were increased in February 2016, targeting annual revenue increases of approximately 3.0% and 3.7%, respectively. Management planned continued advertising and said it intended to limit further price increases where possible.
- Management stated cash on hand and expected operating cash flow should fund operations and capital expenditures for at least 12 months. A possible relocation/expansion of the North Miami package store and restaurant was estimated at $2.0–$2.5 million, partly expected to be financed; timing and execution were uncertain.
- The company bought two adjacent Oakland Park properties for $922,500, intending to use them for warehouse and storage purposes. A 2016 rib-supply agreement commits the company to approximately $5.076 million of purchases at a fixed cost.
- Risks cited include customer demand and competition, food, beverage and labor inflation, minimum-wage increases, and interest-rate fluctuations. Four interest-rate swaps manage variable-rate debt exposure. Ordinary-course litigation includes premises, accessibility, employment, and food-related claims; management said none had materially affected the company. No subsequent events requiring disclosure were reported.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether price increases and traffic gains can offset food, labor, occupancy, and SG&A cost growth and stabilize margins.
- Cash-flow sustainability, debt maturities and terms, covenant compliance, and the treatment and repayment of insurance financing.
- Funding, timing, and expected returns for the proposed $2.0–$2.5 million North Miami project and other capital spending.
- Execution and pricing implications of the rib-supply commitment, along with exposure to food, labor, and interest-rate costs.
- The effect of limited-partnership noncontrolling interests on earnings attributable to Flanigan’s stockholders.