Business context and reporting period
Flanigan’s Enterprises, Inc. operates casual restaurants and package liquor stores, primarily in South Florida, under the Flanigan’s Seafood Bar and Grill and Big Daddy’s Liquors brands. At October 3, 2015, it operated or controlled 25 units, owned but did not operate an Atlanta adult entertainment club, and franchised five units. The fiscal year ended October 3, 2015 was 53 weeks, compared with 52 weeks ended September 27, 2014. The filing also reports fourth-quarter results for the quarter ended October 3, 2015.
Financial performance and position
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenue | $99.1 million | $89.8 million |
| Income from operations | $7.4 million | $6.5 million |
| Net income | $5.2 million | $4.6 million |
| Net income attributable to company stockholders | $3.5 million; $1.86 per share | $2.8 million; $1.49 per share |
| Operating cash flow | $11.1 million | $8.3 million |
| Capital expenditures | $4.1 million | $3.8 million |
| Cash at year-end | $9.3 million | $8.1 million |
| Total debt | $11.4 million | $13.3 million |
| Working capital | $3.1 million | $2.9 million |
Restaurant food and bar sales were $81.5 million; package goods sales were $15.2 million. Reported restaurant food-and-bar gross margin was 64.39% (65.16% in FY 2014), and package liquor gross margin was 29.05% (30.12%). Net income was 5.29% of sales, versus 5.12% in FY 2014. The company reported compliance with loan covenants and said cash and expected operating cash flow should fund operations and capital spending for at least 12 months.
For the fourth quarter, revenue was $25.1 million, operating income $1.8 million, net income attributable to stockholders $788,000, and diluted EPS $0.43. The comparable 2014 quarter reported revenue of $21.7 million, operating income of $1.3 million, stockholder net income of $463,000, and EPS of $0.25.
Changes versus the prior comparable period
- FY 2015 revenue rose 10.38%; management attributed the increase mainly to higher restaurant and liquor-store traffic and the extra fiscal week. Comparable weekly food sales increased 5.36%, bar sales 10.29%, and same-store liquor sales 7.92%.
- Operating costs and expenses increased 10.12% to $91.7 million, including higher food costs and the extra week. As a percentage of sales, they edged down to 92.53% from 92.75%.
- Restaurant food-and-bar gross margin declined 0.77 percentage points, and liquor-store gross margin declined 1.07 percentage points. Payroll and related costs increased 10.38% to $30.2 million.
- Net income attributable to stockholders increased 25.17%; operating cash flow rose to $11.1 million. Debt declined by approximately $2.0 million.
Outlook, risks, contingencies and unusual items
- Management expected restaurant sales to increase in FY 2016 but restaurant gross profit to decline because of higher food costs. It expected liquor-store sales and gross margin to remain stable, while higher food, insurance, health-care and other expenses could pressure net income. Further menu price increases were to be limited where possible.
- No new restaurant was under development. Planned FY 2016 spending included about $2.0 million to construct a building and expand the North Miami location, about $350,000 for a catering kitchen, and a $350,000 restaurant refurbishment budget. Management expected operating cash flow to fund planned spending and debt reduction.
- On October 15, 2015, the company agreed to buy approximately $5.076 million of baby back ribs at a fixed cost for calendar 2016.
- The company cancelled a three-year property policy after its insurer entered administrative supervision; it repaid $665,000 remaining on related premium financing and recorded an $82,000 charge for associated out-of-pocket costs. It replaced the coverage with a one-year policy. General liability exposure above stated insurance limits remains a risk.
- The filing identifies four dram-shop claims being vigorously defended. Seven self-insured employment lawsuits were settled for approximately $193,000 in the first quarter; the liability had previously been accrued. The company warns that uninsured or underinsured claims could materially affect results.
- Other key risks include food and labor inflation, minimum-wage increases, intense competition, lease renewals and rent increases, South Florida hurricane exposure and availability or cost of windstorm coverage, liquor-license regulation, food-safety and reputational issues, and cybersecurity and employment-law compliance.
- Five limited partnerships are consolidated because the company controls them despite minority ownership; related-party interests and noncontrolling investor distributions are material features of this structure. The company declared a $0.15-per-share dividend in FY 2015; future dividends are discretionary.
Important facts for investors to verify
- How much of annual and quarterly sales growth reflects comparable-store performance versus the additional fiscal week, and whether traffic and margins persisted after year-end.
- Whether anticipated food, insurance, labor and health-care cost increases reduced FY 2016 profitability, especially given lower restaurant gross margin and management’s expectation of further margin pressure.
- Funding and execution of the North Miami construction, catering-kitchen and refurbishment plans, alongside scheduled debt maturities and the $5.076 million rib-purchase commitment.
- Current status, insurance coverage and potential exposure for the four dram-shop claims and other contingencies; confirm the scope and terms of replacement property coverage.
- Related-party arrangements and limited-partnership economics, including distributions to noncontrolling interests and the company’s role as general partner.
- The filing reports an unqualified independent audit opinion on the financial statements and effective management-assessed disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.