Flanigan’s Enterprises, Inc. — Q2 FY2012 Form 10-Q
Business context and period: The unaudited quarter covered 13 weeks ended March 31, 2012; year-to-date figures cover 26 weeks. Comparisons are with the periods ended April 2, 2011. Flanigan’s operates restaurants and package liquor stores, including units held through controlled limited partnerships, and franchises five units. Unless noted, amounts below are in thousands of dollars.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | 26 weeks FY2012 | 26 weeks FY2011 |
|---|---|---|---|---|
| Total revenue | $20,618 | $19,164 | $39,570 | $36,952 |
| Operating income | $1,113 | $1,207 | $1,773 | $1,875 |
| Income before taxes | $905 | $1,310 | $1,408 | $1,882 |
| Net income attributable to stockholders | $509 | $735 | $845 | $1,085 |
| Basic and diluted EPS | $0.27 | $0.39 | $0.45 | $0.58 |
- Revenue mix and growth: Q2 revenue rose 7.6%; year-to-date revenue rose 7.1%. Q2 restaurant food sales increased 6.9%, bar sales 12.4%, and package-store sales 2.0%. Comparable weekly restaurant food and bar sales rose 7.4% and 12.5%, respectively; same-store package sales rose 1.9%.
- Margins and costs: Restaurant food-and-bar gross margin was 64.64% for Q2, down from 66.23%; year-to-date it was 65.03%, down from 65.96%. Package-store gross margin was 29.76% for Q2 versus 34.61%, and 29.52% year to date versus 34.37%. Operating costs and expenses increased 8.6% in Q2, faster than revenue; management cited food costs, including ribs, and higher payroll costs. Q2 operating expenses were 94.6% of total sales, versus 93.7% a year earlier.
- Cash flow: For the 26 weeks, operating cash flow was $3,807, investing cash outflow $1,097, and financing cash outflow $1,397. Cash increased $1,313 to $5,577. Capital expenditures were $7,072, including $6,100 financed through debt for property; cash purchases of property and equipment were $942.
- Liquidity and debt: At March 31, cash was $5,577, current assets $9,832, and current liabilities $8,584, leaving working capital of $1,248 (versus $1,820 at October 1, 2011). Long-term debt, including current maturities, was $14,549, up from $8,757 at October 1, 2011. Management said cash on hand and expected operating cash flow should fund operations and capital expenditures for at least 12 months.
Material changes and notable items
- Profit declined despite higher sales: stockholder-attributable net income fell 30.7% in Q2 and 22.1% year to date. Interest expense rose to $217 in Q2 and $394 year to date, principally due to borrowings used to acquire a Miami shopping center.
- The prior-year comparison benefited from a $231 gain on sale of a guaranteed leasehold interest, partly offset by $69 of related income tax. Management identified this as a contributor to lower current-period net income.
- During the first quarter, the company’s wholly owned subsidiary acquired a Miami shopping center; the filing reports $6,100 of property acquired in exchange for debt. The property includes retail space leased to third parties and a building used by an affiliated restaurant. Rental income was $179 in Q2 and $230 year to date.
- A limited partnership acquired a Miami restaurant operation for $155 and received a further $100 advance from the company. The planned renovation was estimated at approximately $1,745, in addition to the $255 advanced. The restaurant was expected to open by fiscal year-end 2012; it recorded a $30 loss year to date, mainly from pre-opening costs.
Outlook, risks, and contingencies
- Management expected restaurant gross profit to face moderate pressure from higher food costs, particularly ribs, despite menu and bar-price increases. Package-store sales were expected to remain stable, but management anticipated further margin declines because close-out and inventory-reduction purchases from wholesalers were unavailable.
- Management expected higher overall expenses, including payroll, occupancy, and costs associated with the Miami restaurant and shopping-center acquisition, to pressure net income. It said further menu-price increases might be required where competitive conditions permit.
- The company agreed to purchase approximately $3,100 of baby-back ribs during calendar 2012 at a fixed cost, beginning March 1, 2012. Management believed alternative suppliers were available if needed.
- Variable-rate borrowing exposes the company to interest-rate risk; four interest-rate swaps were in place to convert specified debt obligations to fixed rates. Management cautioned that interest-rate changes could adversely affect operations.
- The company guaranteed approximately $114 of remaining lease commitments for franchisees and previously sold locations; no liability was accrued because management did not consider performance probable. Ordinary-course litigation includes personal-injury, accessibility, employment, and food-quality claims; the filing says none had materially affected the company to date.
- No formal earnings or revenue guidance was provided. Management cautioned that interim results may not indicate full-year results. It reported effective disclosure controls and internal control over financial reporting, with no material control changes during the quarter.
Investor verification checklist
- Track restaurant and package-store gross margins, especially food and rib costs and the loss of close-out merchandise opportunities.
- Verify debt balances, repayment terms, interest-rate exposure, and cash-flow effects of the shopping-center financing.
- Monitor the Miami restaurant renovation budget, opening timing, partnership fundraising, and the company’s eventual ownership percentage.
- Assess whether operating cash flow can support planned refurbishment and other capital spending while working capital remains reduced.
- Review the $3.1 million rib purchase commitment, lease guarantees, and any material developments in litigation or other contingencies.