Nathan’s Famous, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first half of fiscal 2022, ended September 26, 2021; comparisons are to periods ended September 27, 2020. The interim financial statements are unaudited. Nathan’s markets branded food products through its Branded Product Program, product licensing, and Company-operated and franchised restaurants.
Financial performance
| Metric | 13 weeks ended Sept. 26, 2021 | 13 weeks ended Sept. 27, 2020 | 26 weeks ended Sept. 26, 2021 | 26 weeks ended Sept. 27, 2020 |
|---|---|---|---|---|
| Total revenue | $32.9 million | $21.8 million | $64.2 million | $39.5 million |
| Income from operations | $7.4 million | $7.6 million | $18.1 million | $15.7 million |
| Net income | $3.5 million | $3.7 million | $9.3 million | $7.7 million |
| Diluted EPS | $0.86 | $0.89 | $2.26 | $1.86 |
| Gross profit as % of sales | 14.3% | 21.8% | 17.1% | 21.4% |
| Operating cash flow | Not reported for quarter | Not reported for quarter | $8.9 million | $9.1 million |
- Quarterly revenue increased 51%, led by Branded Product Program sales, which rose 97% to $19.1 million. Company-operated restaurant sales grew 48% to $4.4 million; franchise fees and royalties increased to $1.2 million. License royalties declined 7% to $7.7 million.
- Despite higher quarterly revenue, operating income declined about 2% and net income declined about 3%. Cost of sales more than doubled, and reported gross margin on sales fell to 14.3% from 21.8%. Management cited higher product, commodity and labor costs.
- For the first half, revenue increased 62%, operating income rose 16%, and net income rose 22%. Branded Product Program sales increased 143%; first-half license royalties declined 2.4%.
- First-half operating cash flow was $8.9 million, versus $9.1 million a year earlier. Capital expenditures were $0.3 million; dividends paid were $2.9 million. Cash increased $5.7 million during the period.
Balance sheet and liquidity
- At September 26, 2021, cash was $86.8 million and working capital was $87.3 million. Current assets were $103.1 million and current liabilities $15.9 million.
- Long-term debt was $150.0 million face value, reported at $147.2 million net of unamortized issuance costs. The debt consists of 6.625% senior secured notes due November 2025, with no scheduled principal amortization before maturity. Annual interest is approximately $9.9 million.
- Total liabilities were $172.5 million and stockholders’ deficit was $56.0 million. The company paid two quarterly dividends of $0.35 per share during the half-year and declared another $0.35 dividend payable December 3, 2021.
- Management said cash, cash equivalents and expected operating cash flow should be sufficient for operations, debt service, dividends and repurchases for at least the next 12 months. Future dividends and certain payments remain subject to note-indenture restrictions and Board decisions.
Changes, outlook and risks
- Management attributed much of the year-over-year rebound to reopening and easing COVID-19 restrictions. By quarter-end, about 87% of the franchise system was open, versus 58% a year earlier. The system included 224 franchised and four Company-owned outlets; additional virtual kitchens were opened.
- Input-cost pressure was material: the average hot-dog cost for the first half was about 6% above the prior-year period, and the cost per pound in the second quarter was 16% higher year over year. Supply-chain challenges and increased demand contributed to shortages and further cost increases beginning in July. The company had no open beef or hot-dog purchase commitments during the period.
- Labor availability remained challenging, and New York State’s minimum wage for the remainder of the state rose to $15 per hour on July 1, 2021. Management said it may seek to offset cost inflation through menu-price increases but gave no assurance it can do so.
- COVID-19 duration, variants, restrictions, staffing, customer traffic and supply availability remain uncertain. Other cited risks include dependence on John Morrell & Co. for licensed products, beef-price volatility and the ability to pass through cost increases. Management noted licensing revenue and overall profitability are substantially dependent on its agreement with John Morrell & Co.
- No specific earnings or revenue guidance was provided. Management plans to support branded-product and restaurant programs, service debt and fund dividends, with possible selective investment and share repurchases. No impairment charges were recorded after interim impairment reviews.
- Contingencies include a $113,000 recorded liability under a Brooklyn franchisee lease guaranty, with certain potential costs not reasonably determinable, and ordinary-course litigation that management does not expect to have a material adverse effect. The company reported compliance with note covenants and no legal proceedings in Part II.
Investor verification points
- Track whether hot-dog, beef, distribution and labor cost increases persist and whether pricing or other actions protect margins.
- Assess recovery in foodservice and restaurant traffic against the unusually disrupted prior-year comparison, including ongoing COVID-19 and staffing effects.
- Monitor John Morrell & Co. agreement performance and the concentration of licensing royalties, particularly the Walmart-related business.
- Review cash conversion and receivables growth: receivables rose to $14.8 million, including higher Branded Product Program balances.
- Evaluate the $150 million notes, annual interest burden, 2025 maturity and indenture limits on dividends, debt and other restricted payments.