Business context and reporting period
Flanigan’s Enterprises, Inc. filed this unaudited Form 10-Q for the 13 weeks ended December 31, 2011, its fiscal 2012 first quarter. The company operates restaurants and package liquor stores, manages affiliated limited-partnership restaurants, and franchises locations. At quarter-end it reported 24 operating units (excluding one owned club it does not operate) and five franchised units.
Financial performance and position
Amounts are in millions unless otherwise indicated.
| Metric | Q1 2012 | Comparable period | Change |
|---|---|---|---|
| Total revenue | $18.952 | $17.788 | +6.5% |
| Income from operations | $0.660 | $0.668 | -1.2% |
| Income before taxes | $0.503 | $0.572 | -12.1% |
| Net income | $0.359 | $0.419 | -14.3% |
| Net income attributable to stockholders | $0.336 | $0.350 | -4.0% |
| Basic and diluted EPS | $0.18 | $0.19 | Down $0.01 |
| Operating cash flow | $2.461 | $1.265 | +$1.196 |
- Restaurant food and bar gross margin was 65.48%, versus 65.65%. Package-store gross margin fell to 29.30% from 34.14%, which management attributed mainly to reduced availability of close-out and inventory-reduction merchandise.
- Operating costs and expenses rose 6.85% to $18.292 million; management reported these at 96.52% of sales, versus 96.24%. Net income attributable to stockholders was 1.77% of sales, versus 1.97%.
- Cash and cash equivalents were $5.603 million at December 31, up $1.339 million from October 1. Investing cash flow was negative $0.481 million and financing cash flow negative $0.641 million.
- Current assets were $10.154 million and current liabilities $8.874 million, leaving working capital of $1.280 million, down from $1.820 million at October 1. Long-term debt, including current maturities, totaled $14.965 million, versus $8.757 million at October 1.
- Property and equipment increased to $32.212 million from $26.182 million. Capital expenditures reported for the quarter were $6.603 million, including $6.100 million financed through debt; cash purchases of property and equipment were $0.488 million.
Material changes, outlook and risks
- Revenue growth reflected higher restaurant food and bar sales and menu price increases introduced in fiscal 2011’s fourth quarter. Comparable weekly food sales increased 7.04% and bar sales 8.49%; same-store package sales increased 2.11%.
- Restaurant segment operating income rose to $1.122 million from $0.741 million, while package-store segment operating income declined to $0.214 million from $0.383 million. Higher corporate expenses and interest expense contributed to lower consolidated operating and pretax income.
- During the quarter, a wholly owned subsidiary acquired a Miami shopping center for $6.140 million, including property used by an affiliated restaurant and space leased to 12 unrelated tenants. Financing included a $4.5 million mortgage and a $1.6 million term loan. Interest-rate swaps fixed rates on $3.75 million of the mortgage at 4.51% and on the term loan at 3.43%; the mortgage’s remaining $0.75 million was variable-rate.
- Management expects food costs, including rib costs, payroll and other expenses to pressure results. It anticipates moderately lower restaurant food-and-bar gross profit and continued decline in package-store margins; it expects package-store sales to remain stable. The company committed to purchase approximately $3.1 million of baby-back ribs during calendar 2012 at a fixed cost.
- A limited partnership acquired assets and a leasehold interest in another Miami restaurant for $150,000 on January 27, 2012. Management expects development and pre-opening costs to adversely affect operating income during the rest of fiscal 2012. Management stated cash on hand and expected operating cash flow should fund operations and capital expenditures for at least 12 months, while noting uncertainty from unexpected expenses or revenue declines.
- Remaining lease guarantees for franchisees and previously sold locations were approximately $245,000; no liability was accrued because management did not consider performance probable. The company also described ordinary-course litigation, none of which it said had materially affected it. It reported no off-balance-sheet arrangements.
- No cash dividend was declared in the quarter; a 10-cent-per-share dividend was declared in the comparable prior-year quarter. The company repurchased 800 shares for $6,200.
- Management reported disclosure controls and internal control over financial reporting were effective at quarter-end. It cautioned that forward-looking results depend on customer demand, competition, food and labor costs, and other risks.
Important facts for investors to verify
- Whether operating cash generation can support the increased debt burden, upcoming debt payments and planned capital spending while working capital is lower.
- Actual food, rib and labor cost trends, and whether the fixed-price rib agreement and menu pricing preserve restaurant margins.
- Package-store margin performance given management’s expectation that reduced access to close-out inventory will continue.
- The Miami property’s rental contribution, financing terms and interest-rate exposure, along with costs and timing for the new restaurant opening.
- Any changes in the likelihood or financial impact of lease guarantees, litigation or other contingencies.