Nathan’s Famous, Inc. — Form 10-Q Summary
Reporting period: Thirteen weeks ended June 30, 2013, the first quarter of fiscal 2014. Unless noted otherwise, financial amounts are in millions of dollars. Comparisons are with the thirteen weeks ended June 24, 2012.
Business context
Nathan’s markets its brand through Branded Product and Branded Menu programs, company-operated restaurants, franchising and product licensing. At June 30, 2013, it had 310 franchised outlets and five company-operated restaurants. Its flagship Coney Island restaurant reopened in May after damage from Superstorm Sandy; its Yonkers restaurant remained closed for redevelopment.
Financial performance and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Total revenues | $23.401 | $20.182 |
| Sales | $16.880 | $16.405 |
| Income before taxes | $5.527 | $3.311 |
| Net income | $3.354 | $2.006 |
| Diluted earnings per share | $0.73 | $0.44 |
| Cash from operating activities | $(1.296) | $0.585 |
- Reported revenue rose 16%, but included a $2.801 million insurance gain related to Sandy damage. Excluding that gain, revenue was approximately $20.6 million.
- Sales increased 2.9%. Branded Product and Branded Menu sales rose 11.3% to $13.141 million, while company-operated restaurant sales fell 18.8% to $3.726 million, chiefly due to Coney Island and Yonkers closures.
- Gross profit was $3.475 million, or 20.6% of sales, versus $3.420 million, or 20.8%. The company attributed the slight margin decline primarily to lower company-restaurant sales.
- Net income included the insurance gain and a $0.400 million impairment charge on a private-company investment. The company reported a 39.3% effective tax rate.
- Operating cash use reflected seasonal and other working-capital increases, including receivables, prepaids and inventory. Investing activities provided $0.668 million; capital expenditures were $2.718 million, primarily for Coney Island rebuilding and the Branded Product Program.
- At June 30, cash and cash equivalents were $14.085 million, marketable securities $11.399 million, and restricted cash $5.949 million. Working capital was $31.444 million. Restricted cash secured the SMG judgment and was not freely available.
- The company reported no outstanding borrowings. Total liabilities were $16.758 million and stockholders’ equity was $38.882 million.
Material changes and unusual items
- Branded Product and Branded Menu sales grew on a 10.5% increase in product volume, while comparable domestic traditional franchise sales declined 1.5%. Franchise fees and royalties decreased to $1.347 million from $1.430 million.
- Company restaurant sales were affected by approximately $1.4 million from closure periods at Coney Island and Yonkers. Management reported Coney Island sales for its first five weeks after reopening were about 19% above the comparable prior-year weeks; the Boardwalk restaurant’s sales were about 35% higher. Management cautioned that these trends may not continue.
- On July 24, 2013, after quarter-end, SMG withdrew $6.009 million from the blocked account, satisfying the litigation judgment. The quarter-end balance sheet still included a $5.986 million litigation accrual and $5.949 million of restricted cash; the company said it would record about $23,000 of additional interest in July.
- The $0.400 million impairment reduced the carrying value of the company’s 2.5% private-company investment from $0.500 million to $0.100 million.
- The company adopted a new stockholder rights plan. Among other triggering conditions, it may become exercisable if a person or group acquires 15% or more of the common stock; it expires in June 2018 unless earlier redeemed or exchanged.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management estimated a fiscal 2014 tax rate of approximately 39%–41%.
- Management expected to invest approximately $1.2 million in the Yonkers redevelopment during the year and anticipated the new Yonkers restaurant would open in December 2013. It also expected higher annual depreciation of approximately $180,000 from the Coney Island redevelopment.
- The existing primary hot-dog supply agreement with SMG was scheduled to expire February 28, 2014. The filing cited a new supply agreement with John Morrell & Co. as a factor that could affect results, but provided no detailed financial terms. Beef and other food costs, including the effects of drought-related corn prices, remain risks; hot-dog market prices were about 2.8% higher year over year.
- Other stated risks include changes in consumer demand, franchisee attraction and performance, wage and healthcare costs, utilities, insurance costs, weather, food safety, and collectibility of receivables. Management noted New York minimum-wage increases through 2015 and possible higher healthcare costs beginning in 2014.
- The company had $0.190 million remaining on a hot-dog purchase commitment. It also disclosed $19.137 million in net contractual cash obligations after expected sublease income, including operating leases and employment agreements. A lease guaranty liability of approximately $0.228 million was recorded.
- Management believed available cash, marketable securities and operating cash generation would be sufficient to fund operations and stock repurchases for at least 12 months. The company had no debt at quarter-end and retained authorization to repurchase 319,396 shares, but gave no assurance that it would do so.
Most important facts for investors to verify
- How much of reported earnings and revenue growth is attributable to the nonrecurring Sandy insurance gain, and how the related business-interruption claims are collected.
- The cash and liquidity impact of the $6.009 million SMG payment made after quarter-end, including the release of restricted cash and the remaining litigation accrual.
- Terms, timing and economics of the successor hot-dog supply agreement, given the SMG agreement’s scheduled 2014 expiration and commodity-cost volatility.
- Progress, cost and reopening timing for the Yonkers redevelopment, and whether Coney Island sales recovery continues.
- Performance of Branded Product sales, franchise royalties and restaurant margins, along with working-capital needs and operating cash generation.