Nathan’s Famous, Inc. — FY2020 Form 10-K
Business context and reporting period. Nathan’s Famous is a branded food company with licensing, foodservice product sales, company-operated restaurants and franchising. The fiscal year ended March 29, 2020 comprised 52 weeks; the comparison year ended March 31, 2019 comprised 53 weeks. The filing was signed June 12, 2020. COVID-19 restrictions began disrupting operations in mid-March 2020, so the filing’s subsequent-event discussion is important when assessing the period’s reported results.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $103.325 million | $101.849 million |
| Operating income | $27.172 million | $27.976 million |
| Net income | $13.435 million | $21.493 million |
| Diluted EPS | $3.19 | $5.09 |
| Adjusted EBITDA (non-GAAP) | $29.964 million | $30.399 million |
| Cash from operations | $12.349 million | $11.156 million |
- Revenue rose 1.4% year over year, despite the shorter fiscal year. Sales were $70.559 million; license royalties were $25.859 million; franchise fees and royalties were $4.572 million. Advertising-fund revenue of $2.335 million is reported gross with related expense.
- Cost of sales increased to $54.488 million from $52.779 million. Reported gross profit was $16.071 million, or 22.8% of sales, versus $18.782 million, or 26.2%, mainly reflecting higher beef costs in the Branded Product Program.
- Operating income declined 2.9%. Net income fell 37.5%, with the comparison affected by $11.177 million of gains on property sales in FY2019; FY2020 had no comparable gain. Adjusted EBITDA declined 1.4%.
- Cash and cash equivalents were $77.117 million, up from $75.446 million. Working capital was $75.165 million. Cash from operations less $0.870 million of capital expenditures was approximately $11.479 million.
- Outstanding notes had $150 million principal, bear interest at 6.625%, and mature November 1, 2025; the balance-sheet carrying amount, net of issuance costs, was $146.140 million. FY2020 interest expense was $10.601 million; required annual cash interest is approximately $9.938 million.
- Total assets were $105.282 million and stockholders’ deficit was $66.401 million. Current assets were $89.784 million and current liabilities $14.619 million.
Material changes versus the prior period
- License royalties increased 9.5%, led by John Morrell & Co. royalties of $23.680 million versus $21.271 million, reflecting higher retail volume and pricing.
- Branded Product Program sales declined slightly to $57.586 million from $57.960 million, while its operating income fell to $7.688 million from $10.302 million, principally because the average cost per pound of hot dogs increased 6.7%.
- Company-owned restaurant sales decreased to $12.973 million from $13.601 million; comparable sales at the remaining restaurants increased about 4.5%, excluding the restaurant sold in the prior year. Traditional franchise royalties declined, and the franchise system contracted from 255 to 216 units after 55 closures and 16 openings.
- General and administrative expense rose 6.7% to $14.779 million, partly due to restaurant transformation costs, including compensation, severance, marketing and franchise solicitation.
- FY2019 included the $11.177 million property-sale gain and an additional fiscal week. Comparisons of revenue and restaurant sales should account for both effects.
Outlook, risks and unusual items
- Management expected COVID-19 to adversely affect FY2021 revenue and profitability, but provided no quantified forecast. Many franchise and Branded Product Program customers served venues that were closed or operating at reduced traffic. Company-owned restaurants were generally limited to takeout and delivery; the seasonal Coney Island location opened May 15, 2020 under restrictions.
- Management reported higher packaged-goods royalties during March 2020 and expected that trend might continue during shutdowns, while cautioning there was no assurance. It expected restaurant and Branded Product Program sales and profits to decline during disruption and planned to resume growth initiatives as conditions allowed.
- Hot-dog costs rose significantly beginning May 2020 amid meat-processing disruption. The company warned of continued beef-price volatility and limited ability to hedge; it had no open hot-dog purchase commitments at year-end. The primary hot-dog supplier accounted for 92% of product purchases.
- John Morrell is a major concentration and dependency: its retail and foodservice royalties represented 22.9% of total revenue. Separately, six Branded Product Program accounts represented about 77% of that program’s business, including two accounts at approximately 21% each.
- The $150 million secured notes and their covenants constrain additional debt, dividends, repurchases and other actions. The company reported covenant compliance at year-end and said cash and expected operating cash flow should cover operations, debt service and planned distributions for at least 12 months. The board authorized repurchase of up to $10 million of notes at par or better, effective June 1, 2020.
- The company paid $5.912 million in FY2020 dividends and repurchased 85,642 shares for $4.966 million. A $0.35-per-share dividend declared in June 2020 was payable June 26, subject to the indenture and board determinations.
- The company received a $1.225 million Paycheck Protection Program loan on April 21, 2020 and repaid it in full on April 29 after subsequent government guidance. The filing also cites ongoing New Jersey tax audits, routine litigation, a $110,000 recorded Brooklyn lease-guaranty liability, and possible future lease-guaranty exposure.
- Adoption of lease accounting guidance added operating lease assets and liabilities; the company recorded $9.181 million of operating lease assets and $10.115 million of lease liabilities at year-end. The change was noncash and did not affect reported cash flows.
Important facts for investors to verify
- Post-March 2020 trends in restaurant openings, same-store sales, franchise royalties and Branded Product Program volumes as COVID restrictions eased.
- Whether retail licensing growth and John Morrell royalties can offset declines in foodservice channels, given customer and supplier concentration.
- Actual hot-dog and beef cost increases, pricing actions, supply continuity and resulting segment margins.
- Cash generation and availability after dividends, share repurchases, lease payments and approximately $9.938 million of annual note interest; confirm covenant capacity and maturity/refinancing plans.
- The pace and causes of franchise closures, the sustainability of new openings, and the effect of Topic 606’s deferred franchise-fee recognition on reported fee revenue.
- Progress and potential financial impact of the tax audits and other disclosed contingencies. Marcum LLP issued unqualified opinions on the financial statements and internal control over financial reporting.