BDL

Business Context and Reporting Period

Company: Flanigan's Enterprises, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: January 2, 2010 (Thirteen Weeks)
Business Overview: The Company operates restaurants, package liquor stores, and combination units under the "Flanigan's Seafood Bar and Grill" and "Big Daddy's Liquors" service marks. As of January 2, 2010, the Company operated 24 units (excluding one adult entertainment club) and franchised five additional units. A significant operational change during the period was the conversion of a formerly franchised restaurant in Boca Raton, Florida, to a Company-owned unit on October 18, 2009.

Key Financial Metrics

Margins: Operating margin improved to approximately 3.44% ($591k/$17,164k) from 1.78% in the prior year. Net income margin for stockholders was 1.68% compared to 1.06% in the prior year.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 5.61% ($911,000). This was primarily driven by the inclusion of the newly acquired Boca Raton restaurant ($630,000) and a seasonal increase in package store sales due to New Year's Eve falling in Q1 2010 ($205,000).
• Profitability: Net income attributable to stockholders increased 67.44% ($116,000). This improvement was aided by the new restaurant's contribution and a decrease in operating expenses as a percentage of sales (96.56% vs. 98.22% in Q1 2009).
• Same-Store Sales: Comparable weekly restaurant food sales decreased 0.38% due to the financial crisis and customers shifting to lower-priced menu items. However, comparable weekly bar sales increased 2.16%, driven by a new evening promotion.
• Capital Expenditures: Capital expenditures rose significantly to $1,675,000 from $587,000, largely due to the purchase of real property in Hollywood, Florida ($1,350,000 total, $850,000 financed) and renovations.

Outlook, Risks, and Management Commentary

• Guidance: Management expects aggregate restaurant sales to increase due to the Boca Raton unit and bar promotions, but anticipates a decline in same-store food sales due to the economic climate. Package store sales are expected to remain stable after a Q1 spike.
• Cost Pressures: The Company anticipates higher food costs (specifically ribs and poultry) and overall expenses, which may adversely affect net income. Menu price increases were implemented in late 2009 and early 2010 to offset these costs.
• Liquidity: The Company maintains a $2.5 million line of credit with $914,000 available as of January 2, 2010. The maturity date was extended to April 7, 2010. Management believes cash from operations and credit availability are sufficient for the next 12 months.
• Risks and Contingencies:
  • Lease Guarantees: The Company guarantees leases for franchisees totaling approximately $1.52 million in remaining commitments.
  • Litigation: The Company is involved in a dispute regarding parking rights at its corporate office, where it was ordered to pay $109,000 in attorney fees (accrued but unpaid as of filing). A separate lawsuit regarding structural repairs at a Pinecrest location was settled without recovery of costs.
  • Supply Chain: The Company has a purchase commitment for $3.2 million of baby back ribs for calendar year 2010.

Investor Verification Checklist

• Debt Maturity: Verify the status of the line of credit extension beyond April 7, 2010, and the terms of the new mortgage on the Hollywood property (8.5% interest, 8-year balloon).
• Same-Store Trends: Monitor the trajectory of same-store food sales, which are currently declining due to economic factors, versus the growth in bar sales.
• Cost Inflation: Track the impact of rising food costs (ribs, poultry) on gross margins, particularly given the fixed-price rib purchase commitment.
• Litigation Exposure: Confirm the resolution of the $109,000 attorney fee award and the status of the malicious prosecution suit filed by the seller of the corporate office building.
• Capital Allocation: Review future capital expenditure plans, as the Company is currently seeking new locations that do not require extensive renovation.