Flanigan’s Enterprises, Inc. — Q2 FY2014 Form 10-Q
Reporting period: 13 and 26 weeks ended March 29, 2014; comparisons are to periods ended March 30, 2013. Financial statement amounts are in thousands of dollars except per-share data. The company operates restaurants and package liquor stores, including consolidated limited partnerships, and franchises additional locations.
Financial performance
| Metric | 13 weeks ended Mar. 29, 2014 | 13 weeks ended Mar. 30, 2013 | 26 weeks ended Mar. 29, 2014 | 26 weeks ended Mar. 30, 2013 |
|---|---|---|---|---|
| Total revenue | $23,771 | $22,255 | $45,246 | $41,868 |
| Operating income | $2,076 | $1,405 | $3,292 | $2,041 |
| Net income | $1,552 | $1,043 | $2,361 | $1,332 |
| Net income attributable to stockholders | $907 | $750 | $1,445 | $1,096 |
| Basic and diluted EPS | $0.49 | $0.40 | $0.78 | $0.59 |
- Quarterly revenue rose 6.8%; first-half revenue rose 8.1%. Restaurant food and bar sales drove growth. First-half revenue included $1.8 million from a limited-partnership restaurant opened in December 2012, versus $960,000 in the prior-year period.
- Quarterly operating margin was approximately 8.7%, versus 6.3%; first-half operating margin was approximately 7.3%, versus 4.9%. Operating costs and expenses declined as a share of sales, to 91.3% for the quarter and 92.7% for the half-year.
- Restaurant food-and-bar gross margin improved to 66.2% for the quarter and 65.6% for the half-year. Package-store gross margin was 30.2% and 29.8%, respectively.
- Stockholder-attributable net income increased 20.9% for the quarter and 31.8% for the half-year. Consolidated net income includes earnings attributable to noncontrolling interests; those interests were $645,000 for the quarter and $916,000 for the half-year.
Cash, liquidity and debt
- Cash was $8.155 million at March 29, 2014, up $1.097 million from fiscal year-end. First-half operating cash flow was $4.403 million, investing cash outflow $1.393 million, and financing cash outflow $1.913 million. Prior-year comparable amounts were $3.582 million, $2.483 million outflow, and $1.875 million outflow.
- Working capital was $2.778 million, compared with $2.383 million at September 28, 2013. Current assets were $13.312 million and current liabilities $10.534 million.
- Total long-term debt, including current maturities, was $15.093 million, versus $13.546 million at September 28, 2013. The company reported compliance with all lender covenants. Management said cash on hand and expected operating cash flow should fund operations and capital expenditures for at least 12 months.
- First-half capital expenditures were $2.474 million, including $1.052 million financed. The company expected approximately $875,000 of fiscal 2014 refurbishment costs, of which $419,000 had been spent by quarter-end.
Changes, outlook and risks
- Management attributed higher sales to comparable restaurant growth and the newer restaurant. Second-quarter comparable weekly restaurant food sales increased 6.6% and bar sales 12.7%; same-store package-store sales rose 2.1%. For the first half, comparable weekly food and bar sales increased 6.4% and 10.4%, respectively; same-store package-store sales rose 2.9%.
- Management expected restaurant food and bar sales to increase, but anticipated pressure on restaurant gross profit from higher food costs, partly offset by lower rib costs. It expected package-store sales and margins to remain stable. It also expected higher insurance, health-insurance, food, and other expenses to weigh on net income, with SG&A expected to rise. The company planned to continue advertising and limit menu-price increases where possible, while noting that competitive conditions may require price increases.
- The company had no restaurant in development but continued searching for locations, likely using its limited-partnership model. It was not actively seeking package-store locations but would consider suitable opportunities. Management cautioned that interim results may not indicate full-year results.
- A purchase agreement fixed the price for approximately $4.26 million of baby back ribs during calendar 2014. Management said alternative suppliers were available if needed.
- During the quarter, the company acquired for $1.25 million the property used by a franchised restaurant; $900,000 was seller-financed at 7.5%. The filing notes a relationship between the franchise’s general partner and the company’s leadership. It also extended a package-store lease through April 2019, expanded the leased area, and agreed to annual 3% rent increases.
- After quarter-end, the company satisfied or modified several mortgages held by related parties, including partial principal prepayments and revised 5% interest terms on certain loans. Some modified loans have balloon payments due in April 2021.
- Ordinary-course litigation includes personal injury, accessibility, employment, and food-quality claims; the company said none had materially affected it to date. It reported effective disclosure controls and internal control over financial reporting, with no material control changes during the period.
Important facts for investors to verify
- Whether comparable-sales growth and improved operating margins persist as food, labor, insurance, and other costs rise.
- Debt maturities, balloon-payment obligations, borrowing terms, and the effect of the post-quarter mortgage modifications on cash and interest expense.
- The economics and related-party aspects of the property acquisition and franchise/limited-partnership arrangements, including the allocation of noncontrolling interests.
- Actual rib-purchase volumes and costs under the 2014 supplier agreement, and whether alternative supply is available on comparable terms.
- Whether planned refurbishment spending, future expansion, and working-capital needs remain supportable by operating cash flow.