Flanigan’s Enterprises, Inc. — Q2 FY2018 Form 10-Q
Reporting period: Quarter ended March 31, 2018 (13 weeks), with year-to-date comparisons for the 26 weeks ended March 31, 2018. All financial amounts below are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise. The statements are unaudited and consolidate the Company and controlled limited partnerships.
Business context
The Company operates restaurants and package liquor stores, earns franchise and rental-related revenue, and owns but does not operate an adult entertainment club. At quarter-end, it reported 26 operated units, one club it owned but did not operate, and five franchised units. Its two reportable segments are restaurants and package stores.
Financial results and liquidity
| Metric | Q2 FY2018 | Q2 FY2017 | 26 weeks FY2018 | 26 weeks FY2017 |
|---|---|---|---|---|
| Total revenue | $29.456 million | $27.433 million | $57.849 million | $54.027 million |
| Operating income | $2.512 million | $2.095 million | $4.099 million | $3.568 million |
| Net income | $1.885 million | $1.509 million | $2.841 million | $2.611 million |
| Net income attributable to stockholders | $1.397 million | $1.047 million | $2.018 million | $1.712 million |
| Basic and diluted EPS | $0.75 | $0.56 | $1.09 | $0.92 |
- Q2 revenue increased 7.4% year over year; operating income rose from $2.095 million to $2.512 million. Net income attributable to stockholders increased 33.4%. For the 26 weeks, revenue grew 7.1% and stockholder-attributable net income rose 17.9%.
- Management reported Q2 restaurant food-and-bar gross margin of 65.62%, up from 64.54%; package-store gross margin was 27.91%, down from 28.59%. Operating costs and expenses were 91.47% of revenue in Q2 versus 92.36% a year earlier. Net income margin was 6.40% versus 5.50% for Q2, and 4.91% versus 4.83% year to date.
- For the 26 weeks, operating cash flow was $6.392 million (prior year $4.553 million); investing cash outflow was $1.985 million (prior year $4.570 million); financing cash inflow was $1.205 million (prior year $0.464 million). Cash increased $5.612 million to $15.497 million.
- At March 31, cash was $15.497 million, current assets $21.411 million, current liabilities $14.217 million, and working capital $7.194 million. Long-term debt, including current maturities, totaled $15.982 million, versus $12.398 million at September 30, 2017. The Company said it was in compliance with loan covenants.
- Cash growth included $3.5 million borrowed shortly before the credit line converted to a term loan. The Company paid a $0.25-per-share dividend in the period, compared with $0.20 per share in the prior-year period.
Material changes and management commentary
- Management attributed sales growth mainly to menu-price increases effective in September 2017 and, to a lesser extent, increased restaurant traffic. Comparable weekly restaurant food sales rose 5.57% and bar sales 6.37% in Q2. Same-store package-store sales rose 16.15% in Q2.
- Restaurant food-and-bar gross margin improved with pricing, but management cited higher food costs. Payroll, occupancy, and selling, general and administrative costs also increased in dollars. Management expected operating costs and SG&A to continue rising during the balance of FY2018.
- Management expected restaurant food-and-bar gross margin to improve through the remainder of FY2018, partly offset by higher food costs. It expected package-store sales to continue increasing, but package-store margin to decrease because of competitive price reductions. Occupancy costs were expected to remain stable.
- The Tax Cuts and Jobs Act reduced the corporate tax rate to 21%; the Company recorded a $268,000 reduction in its net deferred tax asset and corresponding tax expense. Management identified this as a factor weighing on year-to-date net income.
- The $5.5 million revolving credit line converted to a five-year term loan on December 28, 2017, with monthly principal-and-interest payments and a stated loan rate of 4.65%; a related swap fixed the rate at 4.61%. The filing also describes other variable-rate borrowings with interest-rate swaps. Cash earns variable interest, and management cautioned that rate changes could affect returns or borrowing costs.
- Capital projects included renovation work at the North Miami restaurant and design work for planned construction and renovation in Hollywood. A separate fixed-price agreement calls for approximately $6.208 million of rib purchases during calendar 2018. A Pinecrest restaurant lease was extended through July 2026, with rent increasing approximately 20% from February 2018 and 3% annual base-rent increases beginning February 2021.
Outlook, risks, and contingencies
Management said cash on hand, operating cash flow, and borrowed funds were expected to support operations and planned capital expenditures for at least the next 12 months, while noting there can be no assurance. It identified customer demand, competition, food and labor costs, minimum-wage increases, and unanticipated expenses or revenue declines as risks. Management continued to search for restaurant locations; a planned expansion of The Whale’s Rib concept was abandoned after necessary governmental approvals could not be obtained, and the Company was seeking approval for a package liquor store at the proposed site.
Ordinary-course litigation includes personal injury, dram-shop, accessibility, employment, and food-quality claims; the Company reported no material effect to date. The filing states that subsequent events required no disclosure. Disclosure controls were deemed effective as of March 31, 2018, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Reconcile the Store #20 renovation disclosures: the notes cite a revised contract price of $1.080 million and payments of $562,000, while MD&A cites $1.087 million and payments of $504,000; separately, the patio project is reported at $912,000.
- Confirm the term loan’s effective interest terms: the filing cites a 4.65% loan rate and a 4.61% swap fixed rate.
- Assess the approximately $6.208 million 2018 rib-purchase commitment, remaining construction spending, and the effects of food, labor, and package-store pricing pressures on margins.
- Consider that interim results may not indicate full-year performance; management’s expectations are forward-looking and subject to demand, competition, cost, and other risks.