Nathan’s Famous, Inc. — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2015, the 13 weeks ended December 28, 2014, with year-to-date results for the 39 weeks ended that date. Comparatives are the corresponding periods ended December 29, 2013. Amounts below are in U.S. dollars; financial statement amounts are presented in millions unless otherwise noted.
Business context
Nathan’s markets branded food products, operates and franchises restaurants, and earns royalties from product licensing. Its 310-unit restaurant system comprised 305 franchised units and five company-operated units. The new John Morrell & Co. retail licensing agreement began March 1, 2014, and management said future results would depend substantially on its success.
Financial performance
- Third quarter: Revenue rose 20.6% to $22.35 million. Sales increased 13.5% to $17.30 million; license royalties increased to $3.55 million from $1.82 million. Net income was $2.24 million versus $1.11 million; diluted EPS was $0.49 versus $0.24.
- Year to date: Revenue increased 20.4% to $78.97 million. Net income rose to $10.17 million from $7.11 million; diluted EPS was $2.21 versus $1.54.
- Margins and costs: Third-quarter gross profit was $2.59 million, or 15.0% of sales, compared with $2.46 million, or 16.1%. For the 39 weeks, gross profit was $11.55 million, or 19.0% of sales, versus $10.45 million, or 20.1%. Management attributed the margin pressure primarily to higher hot dog and other food costs.
- Cash flow: Year-to-date operating cash flow was $10.51 million, compared with cash used of $1.46 million in the prior-year period. Investing activities provided $3.40 million; financing activities used $1.46 million. Cash increased $12.46 million to $34.54 million.
- Liquidity and debt: Cash and cash equivalents were $34.54 million and marketable securities were $6.82 million at December 28, 2014. Working capital was $44.49 million. The company reported no outstanding borrowings.
- Other metrics: Year-to-date capital expenditures were $0.70 million. The company repurchased 37,661 shares for $1.92 million during the period. Total liabilities were $12.04 million at period-end.
Changes versus the prior comparable periods
- Year-to-date license royalties increased to $13.65 million from $6.21 million, driven chiefly by the John Morrell agreement: royalties from John Morrell were $11.07 million versus $3.62 million from the previous licensee, SMG.
- Company-operated restaurant sales increased 25.7% year to date, primarily because the Coney Island and Yonkers restaurants operated for more of the period than in the prior year after earlier closures and redevelopment.
- Comparable domestic franchise sales declined 2.0% in the quarter and 2.3% year to date. Management cited closed restaurants; traditional franchise royalties also declined year to date.
- Hot dog market prices were approximately 17.0% higher year to date than in the prior-year period. The company had no hot dog purchase commitments outstanding, while prior-year commitments had reduced costs.
- Prior-year year-to-date results included a $2.80 million insurance gain related to Superstorm Sandy and a $0.40 million long-term investment impairment charge. The prior-year period also included $0.14 million of interest expense related to litigation.
Outlook, risks and contingencies
- Management estimated a fiscal 2015 annual effective tax rate of approximately 39.5%–41.5%; the year ends March 29, 2015. It noted uncertain tax benefits could decline by up to $64,000, excluding related interest and penalties, subject to settlement and uncertainty.
- Management expected cash, marketable securities and operating cash generation to fund operations and repurchases for at least 12 months. It expected approximately $1.3 million of remaining-fiscal-year spending to relocate and redevelop the Oceanside restaurant; a related construction contract of approximately $0.7 million had been entered into.
- Management cited continued volatility in beef costs, distribution and utility costs, and insurance. Its ability to pass higher food costs through to customers is uncertain; a 10% change in food and paper costs would have changed year-to-date cost of sales by approximately $4.40 million.
- Other stated risks include dependence on John Morrell, labor and minimum-wage increases, healthcare and paid-sick-leave costs, franchisee performance, and potential joint-employer liability if the NLRB’s position on franchise labor violations is upheld and applied to Nathan’s.
- The company disclosed routine litigation and a $76,000 recorded liability for a lease guaranty; management did not believe pending routine proceedings would materially affect the company, while noting litigation outcomes are uncertain. No outstanding debt was reported.
Key facts for investors to verify
- Whether growth and royalties under the John Morrell agreement continue, and how concentrated earnings remain in that relationship.
- Whether pricing offsets higher beef costs without further weakening gross margins or franchise sales.
- Comparable franchise sales, unit closures and openings, and performance of the redeveloped company-operated restaurants.
- Actual Oceanside relocation costs and timing, future capital spending, and the pace of share repurchases.
- Tax-rate outcomes and any developments in uncertain tax positions, franchise labor liability, or lease contingencies.