Flanigan’s Enterprises, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first 39 weeks ended June 30, 2018, compared with the 13 and 39 weeks ended July 1, 2017. Financial statements are unaudited; amounts below are in millions unless noted. Results consolidate the company and eight controlled limited partnerships, with partners’ share reported as noncontrolling interest.
Business context
At quarter-end, the company operated 26 units (restaurants, package stores, and combination locations), owned but did not operate one adult entertainment club, and franchised five units. Its two reportable operating segments are restaurants and package stores.
Financial performance
| Metric | 13 weeks ended June 30, 2018 | Prior-year comparable period | 39 weeks ended June 30, 2018 | Prior-year comparable period |
|---|---|---|---|---|
| Total revenue | $28.436 | $26.967 | $86.285 | $80.994 |
| Income from operations | $2.094 | $1.586 | $6.193 | $5.154 |
| Net income | $1.615 | $1.100 | $4.456 | $3.711 |
| Net income attributable to company stockholders | $1.043 | $0.842 | $3.061 | $2.554 |
| Basic and diluted EPS | $0.56 | $0.45 | $1.65 | $1.37 |
- Quarterly revenue grew 5.45%; stockholder-attributable net income rose 23.87%. For the 39-week period, revenue increased 6.53% and attributable net income increased 19.85%.
- Quarterly operating margin was approximately 7.4% versus 5.9% a year earlier; net margin was 5.68% versus 4.08%. For the 39 weeks, operating margin was approximately 7.2% versus 6.4%, and net margin was 5.16% versus 4.58%.
- Quarterly restaurant food and bar gross margin was reported as 65.46% versus 63.29%. The MD&A contains a date typo for these figures; the reported percentages align with the corresponding gross profit and sales amounts. Package-store gross margin was 28.57% versus 28.28%. For the 39 weeks, restaurant food and bar gross margin was 65.34% versus 64.25%, while package-store margin was 28.06% versus 28.39%.
- Operating cash flow for the 39 weeks was $7.487, compared with $6.303. Investing activities used $3.455, versus $6.050; financing activities used $0.017, versus $0.540. Cash increased by $4.015 to $13.900.
- At June 30, cash was $13.900 and working capital was $7.219 (current assets $19.753; current liabilities $12.534). Working capital increased from $3.629 at September 30, 2017, partly because of additional borrowing.
- Total long-term debt, including current maturities, was $15.321, versus $12.398 at September 30, 2017. The company attributed the increase primarily to $3.5 million borrowed before the credit line converted to a term loan and financed insurance premiums. It reported compliance with loan covenants.
Changes, outlook, and notable items
- Management attributed sales growth primarily to menu-price increases effective September 2017 and, to a lesser extent, increased restaurant traffic. Quarterly comparable weekly sales increased 3.94% for restaurant food, 8.51% for restaurant bar, and 8.95% for package stores. For the 39 weeks, the respective increases were 5.31%, 7.85%, and 10.54%.
- Operating costs rose 3.79% in the quarter and 5.61% year to date, but declined as a share of revenue. Payroll costs increased, reflecting higher sales and pay rates; management also cited higher food costs. Interest expense increased due to the additional borrowing.
- Management expected package-store sales to continue increasing, restaurant food and bar margins to benefit from pricing increases partly offset by higher food costs, and package-store margins to decline due to competitive pricing. It anticipated continued increases in operating and selling, general and administrative costs. It believed available cash, operating cash flow, and borrowing capacity would fund operations and planned capital expenditures for at least 12 months, while noting this was not assured.
- Planned and ongoing work included North Miami restaurant renovations and a patio, and design work for a new building and renovation at the Hollywood combination location. The company also reported subsequent governmental approval to operate a package store in space initially considered for a restaurant concept. A fixed-price agreement called for approximately $6.208 million of rib purchases during calendar 2018.
- The company paid a $0.25-per-share dividend during the period, compared with $0.20 a year earlier; future dividends are at the board’s discretion. It reported no material effect from ordinary-course litigation and no subsequent event requiring disclosure.
- The Tax Cuts and Jobs Act reduced the corporate tax rate to 21%; the company recorded a $0.268 million reduction to its deferred tax asset. Adoption of the lease standard was expected to materially increase reported assets and liabilities; management said it was still evaluating the impact.
Key facts for investors to verify
- Whether same-store sales and pricing-driven growth continue, and whether traffic supports the reported gains.
- Food, labor, and package-store pricing trends and their effect on gross margins and expenses.
- Debt repayment, interest costs, loan covenant compliance, and liquidity after planned construction and capital spending.
- Completion costs and timing for the North Miami and Hollywood projects, plus the status and economics of the newly approved package-store operation.
- The effect of lease-accounting adoption on balance-sheet liabilities and whether future dividends are maintained.
Management cautioned that interim results may not indicate full-year performance and that actual results could differ because of customer demand, competition, costs, and other risks.