Flanigan’s Enterprises, Inc. — FY2018 Form 10-K
Business context and reporting period. The filing covers the 52-week fiscal year ended September 29, 2018; the “2018 Q4” quarterly figures are for the quarter ended that date. Flanigan’s operates South Florida restaurants and package liquor stores, including restaurants managed through affiliated limited partnerships, and has five franchised units. The financial statements were audited, and the auditor issued an unqualified opinion.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $113.497 million | $106.822 million |
| Income from operations | $7.444 million | $6.258 million |
| Net income | $5.390 million | $4.390 million |
| Net income attributable to shareholders | $3.677 million; $1.98 per share | $3.020 million; $1.63 per share |
| Net margin attributable to shareholders | 3.24% | 2.83% |
| Operating cash flow | $9.959 million | $8.254 million |
| Capital expenditures | $5.511 million | $7.220 million |
| Cash and cash equivalents | $13.414 million | $9.885 million |
| Working capital | $5.715 million | $3.629 million |
| Debt, net of unamortized loan costs | $14.576 million, including $1.963 million current | $12.398 million |
Margins and costs. Restaurant food and bar gross margin rose to 65.19% from 63.83%, primarily reflecting 2017 menu price increases. Package liquor gross margin fell to 27.91% from 28.55%. Operating costs and expenses were $106.053 million, or 93.44% of sales, versus $100.564 million, or 94.14%. Interest expense increased to $753,000 from $600,000.
FY2018 fourth quarter. Revenue was $27.212 million, operating income $1.251 million, and net income attributable to shareholders $616,000, or $0.34 per share. The filing does not provide quarterly consolidated net income in the quarterly summary.
Liquidity and cash flow. Cash increased by $3.529 million during FY2018. Cash flow from operations funded much of the year’s $5.511 million of capital spending; financing cash flows included $3.5 million of additional borrowing, $2.5 million of debt repayments, $465,000 of dividends and $1.757 million of distributions to noncontrolling interests. Management said cash on hand, operating cash flow and available borrowing were expected to fund operations, debt reduction and planned capital spending for at least the next 12 months.
Material changes versus FY2017
- Revenue increased 6.25%. Restaurant food sales rose to $70.545 million and bar sales to $21.760 million; package store sales rose 10.19% to $18.559 million.
- Comparable weekly restaurant food sales increased 5.44% and comparable weekly bar sales increased 6.36%. Same-store package liquor sales averaged $357,000 weekly, compared with $324,000.
- Shareholder-attributable net income increased 21.75%, while net margin attributable to shareholders rose from 2.83% to 3.24%.
- Debt rose from $12.398 million to $14.576 million, primarily following the additional $3.5 million draw on the credit line, which converted to a term loan in December 2017.
- The company paid a $0.25-per-share dividend, up from $0.20 per share in FY2017. No shares were repurchased during either year.
Outlook, risks and unusual items
- Store #19 fire after year-end: The Hollywood combination restaurant and liquor store was damaged by fire after September 29, 2018 and is expected to remain closed throughout FY2019 while demolished and rebuilt. FY2018 revenue at the location was $5.333 million. Management expects FY2019 total revenue to decline, with the closure partly offset by traffic growth elsewhere. The company says insurance, including business interruption coverage, applies; the filing does not quantify expected recoveries or rebuilding costs.
- Operating outlook: Management expected restaurant and bar sales and gross profit to be broadly stable, excluding Store #19, if demand remained similar; package store sales were expected to increase, while liquor gross margin was expected to decline due to competitive pricing. Management anticipated higher food costs and higher SG&A, with occupancy costs expected to remain stable.
- Expansion and investment: No new restaurant was under development at year-end, and the company said it continued searching for locations. A new package liquor store was expected to open in FY2019. Planned work includes completing the North Miami restaurant renovation and rebuilding Store #19. FY2019 restaurant refurbishing was budgeted at approximately $450,000.
- Debt and commitments: The $5.5 million credit line converted to a five-year term loan; $4.675 million was outstanding at year-end, with a fixed-rate swap. The company reported compliance with loan covenants. Debt includes mortgage maturities and balloon payments, including a $2.981 million mortgage due in November 2019. A November 2018 agreement commits the company to purchase approximately $5.888 million of ribs during calendar 2019 at a fixed cost.
- Unusual closures and costs: The Atlanta adult entertainment club was permanently closed on September 20, 2018 after a court upheld local legislation; the company will no longer receive related management revenue. The company recorded a $336,000 deferred-tax-asset reduction related to the federal corporate tax rate change. Rent for the Pinecrest limited-partnership restaurant increased approximately 20% effective February 2018, with later annual base-rent increases.
- Principal risks: Competition, food and labor cost inflation, minimum-wage increases, weather and hurricane exposure, lease renewals, liquor licensing, food-safety or reputational events, cybersecurity and dependence on key executives. The company had two dram-shop claims under active defense and is generally uninsured for liability above $7 million per occurrence and in aggregate. It was discussing renewal of its liability and property insurance policies expiring December 30, 2018.
- Accounting and controls: Adoption of the new lease standard was expected to materially increase reported assets and liabilities. Management reported effective disclosure controls and internal control over financial reporting; the auditor was not engaged to attest to internal-control effectiveness.
Investor facts to verify
- Confirm Store #19 rebuilding schedule, business-interruption coverage, recoveries and the actual FY2019 sales and earnings impact.
- Review debt maturities, refinancing needs and the effect of the November 2019 mortgage maturity; assess liquidity after planned capital projects and dividends.
- Track comparable sales, food and labor costs, and package-liquor gross margin against management’s outlook.
- Check status and potential exposure of the two dram-shop claims and renewal terms for insurance coverage.
- Assess related-party franchise and limited-partnership arrangements, lease commitments, and the balance-sheet impact of lease-standard adoption.