Business context and reporting period
Flanigan’s Enterprises, Inc. operates restaurants and package liquor stores, franchises additional locations, and manages restaurants owned by affiliated limited partnerships. This unaudited Form 10-Q covers the 13 weeks ended June 30, 2012 (third quarter) and the 39 weeks ended June 30, 2012, compared with periods ended July 2, 2011. Amounts below are in thousands of dollars unless stated otherwise.
At June 30, 2012, the company reported 24 operated units, one owned but non-operated adult entertainment club, and five franchised units. Restaurant results include consolidated limited partnerships, with a portion of earnings attributable to noncontrolling interests.
Financial performance and position
| Metric | 13 weeks ended June 30, 2012 | Prior-year 13 weeks | 39 weeks ended June 30, 2012 | Prior-year 39 weeks |
|---|---|---|---|---|
| Total revenue | $19,382 | $18,120 | $58,915 | $55,072 |
| Income from operations | $969 | $822 | $2,742 | $2,697 |
| Income before taxes and noncontrolling interests | $787 | $693 | $2,195 | $2,575 |
| Net income attributable to stockholders | $236 | $345 | $1,081 | $1,430 |
| Basic and diluted EPS | $0.13 | $0.19 | $0.58 | $0.77 |
| Net cash provided by operating activities | — | $4,587 | $3,579 |
Third-quarter revenue increased 7.0%; operating income increased 17.9%, while stockholder-attributable net income declined 31.6%. For the 39-week period, revenue rose 7.0%, operating income rose 1.7%, and stockholder-attributable net income fell 24.4%. Prior-year year-to-date results included a $231 gain on sale of a guaranteed leasehold interest, partly offset by $69 of related income tax.
Restaurant food and bar sales grew, and comparable weekly food sales rose 6.67% in the quarter while comparable weekly bar sales rose 16.29%. Company-owned and affiliated limited partnership restaurants both reported comparable sales growth. Package-store sales declined 2.1% on a same-store weekly basis in the quarter; for the 39 weeks, same-store sales increased 0.75%.
Restaurant food-and-bar gross margin was 63.59% in the quarter versus 65.36% a year earlier, and 64.55% year to date versus 65.76%. Package-store gross margin was 32.13% versus 32.85% in the quarter and 30.29% versus 33.91% year to date. Management cited higher food costs, including ribs and poultry, and reduced access to wholesale closeout inventory. Operating costs and expenses were 95.00% of total revenue in the quarter versus 95.46%; year to date they were 95.35% versus 95.10%.
At June 30, cash was $6,982, current assets $11,317, current liabilities $8,098, and working capital $3,219. Long-term debt was $13,985, including $1,900 classified as current. Total assets were $46,759 and total equity was $26,425. Cash increased $2,718 from October 1, 2011. Operating cash flow was $4,587; investing cash outflow was $1,491 and financing cash outflow was $378. Property and equipment acquired during the 39 weeks totaled approximately $7,501, including $6,100 financed through debt; reported cash purchases of property and equipment were $1,371.
Material changes, outlook, and risks
- Revenue growth reflected restaurant sales, menu and bar price increases, and $333 of rental income from the Miami shopping center acquired in fiscal 2012. The quarter’s rental income was $140.
- Interest expense rose to $208 for the quarter from $160 and to $602 year to date from $457, mainly due to loans used to finance the Miami shopping-center purchase. The company reported four variable-rate debt instruments and related swaps intended to fix borrowing rates.
- Management expected food-and-bar gross profit to decline moderately during the next 12 months because of food-cost increases, despite price increases. It expected package-store sales and margins to remain stable, while higher food, labor, and other expenses could pressure net income. Further menu or bar price increases may be considered where competitive conditions permit.
- A limited partnership’s new Miami restaurant was in development and was expected to open in the first quarter of fiscal 2013. The partnership raised $1,895 through a private offering; the company reported $52 of pre-opening rent and a $68 pre-opening loss for the 39 weeks.
- Management stated that cash on hand and expected operating cash flow should fund operations and capital expenditures for at least 12 months. It anticipated approximately $600 of fiscal 2012 refurbishment spending, of which $316 had been spent by June 30.
- The company agreed to buy approximately $3,100 of baby back ribs during calendar 2012 at a fixed cost. It cited competition, customer demand, food and labor inflation, and interest-rate changes as risks. Lease guarantees for previously sold locations carried approximately $72 of remaining commitments; management considered a payment probable neither and recorded no liability. Ordinary-course litigation had not had a material effect, according to the filing.
- No cash dividend was paid in the 39 weeks ended June 30, 2012. Management 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 restaurant sales growth and recent menu and bar price increases can offset food, labor, and other cost inflation without further margin deterioration.
- The status, opening timing, funding, and expected operating contribution of the new Miami restaurant, and the economics of the shopping-center investment.
- Debt balances, repayment requirements, interest-rate swap terms, and the effect of borrowing costs on earnings and liquidity.
- Whether package-store margins stabilize after reduced access to closeout inventory and whether the rib purchase commitment delivers the expected supply and cost protection.
- The distinction between consolidated net income and income attributable to stockholders, including the impact of noncontrolling interests and the prior-year leasehold-sale gain.