Nathan’s Famous, Inc. — Q3 FY2024 Form 10-Q
Reporting period: Thirteen weeks ended December 24, 2023, compared with the thirteen weeks ended December 25, 2022. Year-to-date figures cover 39 weeks. Fiscal 2024 ends March 31, 2024 and has 53 weeks. Unless otherwise noted, dollar amounts below are in millions.
Business context and results
Nathan’s markets branded products through foodservice distribution, product licensing, and company-owned and franchised restaurants. At quarter-end, its restaurant system included 238 franchised locations and four company-owned restaurants. Management identifies the Branded Product and Licensing programs as the largest contributors to revenue and profit.
| Metric | Q3 FY2024 | Q3 FY2023 | 39 weeks FY2024 | 39 weeks FY2023 |
|---|---|---|---|---|
| Revenue | $28.890 | $26.154 | $109.619 | $103.371 |
| Gross profit on sales | $3.477 | $3.415 | $11.979 | $13.045 |
| Gross margin on sales | 16% | 19% | 15% | 18% |
| Operating income | $5.137 | $6.332 | $25.704 | $28.026 |
| Net income | $2.607 | $3.263 | $15.706 | $16.358 |
| Diluted EPS | $0.64 | $0.79 | $3.84 | $3.99 |
| Adjusted EBITDA (non-GAAP) | $5.751 | $6.899 | $27.561 | $29.287 |
Quarterly revenue rose about 10%, but cost of sales increased about 20%, compressing gross margin; operating income fell about 19% and net income about 20%. For the 39-week period, revenue increased about 6%, while operating income declined about 8% and net income about 4%. Adjusted EBITDA is a company-defined non-GAAP measure and should be considered alongside GAAP results.
Revenue drivers and material changes
- Branded Product Program sales increased 18% in the quarter and 10% year to date. Hot dog volume rose 8% in the quarter and 2% year to date; average selling prices rose 9% and 8%, respectively.
- Branded Product Program cost of sales rose 22% in the quarter and 14% year to date, reflecting higher volume and average hot dog costs up 13% and 12%, respectively.
- License royalties declined 4% in the quarter and were essentially flat year to date. Management attributed pressure in part to lower retail hot dog volume under the Smithfield Foods license.
- Company-owned restaurant sales decreased 1% in the quarter and 2% year to date. Management cited reduced Coney Island traffic, including unfavorable summer weather in the year-to-date period.
- Quarterly general and administrative expense increased 33%, primarily reflecting a $0.5 million cash bonus to the Executive Chairman, higher share-based compensation, professional fees, travel, and marketing costs.
Cash, debt and liquidity
- Cash was $16.732 million at December 24, 2023, down from $29.861 million at March 26, 2023. Net working capital was $21.050 million, compared with $30.652 million at fiscal year-end.
- Cash from operations for the 39 weeks was $13.596 million, versus $13.329 million a year earlier. Capital expenditures were $0.243 million; cash used in financing was $26.482 million.
- The company redeemed $20 million of its 6.625% Senior Secured Notes in December 2023, leaving $60 million principal outstanding, due November 2025. The redemption used $20 million of cash principal and resulted in a $0.169 million debt-extinguishment loss. Net debt carrying value was $59.493 million.
- Cash dividends paid during the 39 weeks totaled $6.120 million, or $1.50 per share. A further $0.50-per-share dividend was declared for payment March 1, 2024. Future dividends are subject to Board approval and restrictions under the notes’ indenture.
- Management believes cash on hand and operating cash generation will be sufficient to fund operations, debt service, dividends and planned investments for at least the next 12 months.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management says inflationary pressures may continue through the remainder of fiscal 2024 and expects continued volatility in beef costs.
- Management cites rising labor and commodity costs, including beef and beef trimmings, and warns that pricing actions may not fully offset cost increases because of competition, consumer demand, or implementation delays. No hot dog purchase commitments were outstanding at period-end, and the company does not hedge commodity-price exposure.
- The company’s licensing revenue and overall profitability are substantially dependent on its agreement with Smithfield Foods. Other disclosed risks include labor availability and minimum-wage increases, weather and seasonality, franchisee health, and the ability to pass through higher costs.
- Quarterly results included the $0.169 million debt-extinguishment loss. Litigation is described as routine; management does not currently expect it to have a material adverse effect, while acknowledging unfavorable rulings could be material. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether beef and other input costs stabilize, and whether pricing can preserve margins.
- Sales and royalty trends under the Smithfield license, including retail volumes and the company’s dependence on that agreement.
- Cash generation and liquidity after the $20 million note redemption, dividends, and future capital needs; also monitor the November 2025 maturity.
- Whether Coney Island traffic, franchise growth, and labor-cost pressures affect future restaurant performance.
- The terms of the notes’ indenture and their effect on future dividends, repurchases, and additional debt redemptions.