Nathan’s Famous, Inc. — FY2021 Form 10-K
Reporting period: 52 weeks ended March 28, 2021, compared with the 52 weeks ended March 29, 2020. Although the request identifies “2020 Q4,” this filing is an annual report for fiscal 2021, not a standalone quarterly report. Unless otherwise noted, financial figures below are in millions of dollars.
Business context
Nathan’s Famous is a branded food company whose business spans foodservice product sales, retail product licensing, Company-owned restaurants, and franchising. At year-end, it had 213 franchised units and four Company-owned units; its Branded Product Program sold through foodservice operators, while licensing royalties were primarily tied to packaged retail products.
Financial performance and liquidity
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Total revenue | $75.839 | $103.325 | Down 26.6% |
| Income from operations | $25.515 | $27.172 | Down 6.1% |
| Net income | $11.075 | $13.435 | Down 17.6% |
| Diluted earnings per share | $2.69 | $3.19 | Down 15.7% |
| Adjusted EBITDA (non-GAAP) | $27.225 | $29.964 | Down 9.1% |
| Cash from operations | $11.766 | $12.349 | Down $0.583 |
Sales were $41.326 million, down from $70.559 million; gross profit on sales was $8.790 million, or 21.3% of sales, versus $16.071 million, or 22.8%. Total revenue includes royalties and advertising-fund revenue as well as sales. Net income was approximately 14.6% of total revenue, compared with 13.0% in FY2020.
- Channel results: Branded Product Program sales fell to $33.617 million from $57.586 million, with volume down approximately 41% and average selling prices up 0.4%. Company-owned restaurant sales fell to $7.709 million from $12.973 million.
- Licensing: License royalties increased to $31.368 million from $25.859 million. Royalties from John Morrell & Co. rose to $28.694 million from $23.680 million, reflecting reported increases in retail volume and average net selling price of 12% each.
- Franchising: Franchise fees and royalties declined to $1.601 million from $4.572 million. Franchise restaurant sales reported by operators fell to $22.269 million from $61.542 million. Ten units closed and seven opened during FY2021.
- Costs and margins: Company-owned restaurant cost of sales rose to 68.7% of restaurant sales from 56.6%, which management attributed mainly to new menu items and higher labor costs. General and administrative expense declined 18.5% to $12.041 million, reflecting cost reductions and lower incentive compensation, partly offset by professional fees and severance.
- Cash, working capital, and debt: Cash and cash equivalents were $81.064 million, up from $77.117 million; working capital was $80.072 million. The company reported $150 million principal outstanding on 6.625% senior secured notes due November 2025; carrying value net of issuance costs was $146.831 million. Interest expense was $10.601 million. Cash paid for interest was $9.938 million.
- Cash uses and returns: Investing activities used $0.551 million, primarily for capital expenditures. Financing activities used $7.268 million, including $5.761 million of dividends and $1.501 million of share repurchases. Dividends declared were $1.40 per share for the year.
Material changes, outlook, and risks
- COVID-19 restrictions and reduced consumer traffic weighed on restaurants and foodservice customers, particularly venues such as theaters, arenas, amusement parks, malls, airports, and travel plazas. Three of four Company-owned restaurants were open at year-end; management reported approximately 77% of the franchise system open at the time of filing.
- Retail licensing demand strengthened as consumers bought more packaged products for home consumption, partly offsetting the weakness in foodservice and restaurant channels. The company also launched virtual kitchens and its Wings of New York delivery concept; 130 virtual kitchens were operating at year-end.
- Management said the pandemic’s effects were expected to continue to negatively affect revenue and net income for the foreseeable future. It reported increased reopenings in the franchise system and some Branded Product Program venues, but gave no quantified earnings or revenue guidance.
- Key concentration risks include John Morrell & Co., whose royalties represented 37.8% of total revenue, and the five largest Branded Product Program customers, which represented 70.4% of that program’s revenue. The primary hot dog supplier accounted for 92% of product purchases.
- Management cited possible FY2022 volatility in beef costs, higher New York labor costs, and continued uncertainty around pandemic restrictions and consumer behavior. The company said it had no open hot-dog purchase commitments at year-end and does not effectively hedge most commodity purchases.
- Debt service, refinancing, and restrictions on dividends and other payments under the notes indenture are relevant risks. Management believed available cash and operating cash flow would be sufficient for at least the next 12 months. The board declared a further $0.35-per-share dividend payable in June 2021, subject to applicable restrictions and board decisions.
- Other disclosed exposures include a recorded $0.113 million liability under a lease guaranty, a possible multi-employer pension withdrawal liability estimated at $0.384 million (with no current plan to withdraw), and ordinary-course litigation that management did not expect to be material. The independent auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether retail licensing growth can persist and how much revenue and profit remain dependent on John Morrell & Co. and its major retail customers.
- The pace and durability of reopening in franchised and Branded Product Program venues, and whether restaurant and foodservice sales recover from FY2021 declines.
- Beef and other input-cost trends, the company’s ability to pass through cost increases, and the resulting effect on gross and restaurant margins.
- Cash generation relative to $150 million of notes, annual interest obligations, lease commitments, dividends, and any share repurchases; also confirm compliance with indenture restrictions.
- The performance and economics of virtual kitchens and Wings of New York, which are growth initiatives but are not separately quantified here.