NATH

Business Context and Reporting Period

Company: Nathan's Famous, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Thirteen and thirty-nine weeks ended December 24, 2006 (Fiscal 2007)
Business Overview: The Company operates and franchises Nathan's, Miami Subs, Arthur Treacher's, and Kenny Rogers Roasters restaurants. It also generates revenue through a Branded Product Program (selling hot dogs and proprietary items to foodservice operators) and licensing trademarks for retail products.

Key Financial Metrics

Note: The Company reported no interest expense for the thirteen weeks ended Dec 24, 2006, and minimal interest expense ($1,000) for the thirty-nine weeks, following the repayment of prior loans and termination of capital leases.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 11.4% for the thirteen weeks and 10.5% for the thirty-nine weeks compared to the prior year periods. Sales from the Branded Product Program grew 12.0% (13 weeks) and 14.7% (39 weeks), driven by volume increases.
• Profitability: Net income for the thirteen weeks rose 37.8% to $1.061 million. However, net income for the thirty-nine weeks decreased 14.8% to $4.301 million, primarily due to a significant reduction in gains from discontinued operations ($400k in 2006 vs. $2.819M in 2005).
• Margin Expansion: Gross profit margin for the Branded Product Program improved due to lower beef costs (down ~6.1% in Q3 and ~11.3% YTD). Overall gross margin for the thirty-nine weeks improved to 29.1% from 26.4%.
• Discontinued Operations: The Company recognized a $400,000 gain from the sale of a leasehold interest in the current period, compared to a $2.819 million gain in the prior year from the sale of a Brooklyn property.
• Accounting Changes: The Company adopted SFAS No. 123R (Share-Based Payments) at the beginning of fiscal 2007, resulting in an incremental pre-tax expense of $86,000 (13 weeks) and $208,000 (39 weeks).

Guidance, Outlook, and Risks

• Management Commentary: Management attributes sales increases at Company-owned restaurants to unseasonably mild weather in the Northeast. They note that while beef costs softened in the current period, costs have risen subsequent to December 24, 2006.
• Future Expenses: The Company expects to incur quarterly share-based compensation expenses of approximately $87,000 for the remainder of fiscal 2007 related to June 2006 option grants.
• Liquidity: The Company maintains a strong liquidity position with $26.9 million in cash and marketable securities and a $7.5 million uncommitted bank line of credit (unused). Management believes this is sufficient to fund operations for the next twelve months.
• Key Risks:
  • Supplier Concentration: The Company relies on a single supplier for the vast majority of its hot dogs. This supplier has only one manufacturing facility (closed a second in Dec 2006) and may be experiencing financial difficulties.
  • Commodity Costs: A 10% fluctuation in food and paper product costs would impact cost of sales by approximately $1.445 million (39-week period).
  • Franchisee Performance: Earnings depend on franchisee success; actions by franchisees outside the Company's control could harm the brand reputation.
• Subsequent Events: Effective January 1, 2007, Howard M. Lorber became Executive Chairman and Eric Gatoff became CEO. New employment agreements were executed.

Investor Verification Checklist

• Supplier Stability: Verify the financial health and operational continuity of the primary hot dog supplier, given the reliance on a single facility.
• Commodity Pricing: Monitor beef and paper product costs, as recent increases post-filing could erode the margin improvements seen in the current period.
• Discontinued Operations: Confirm the closing of the Fort Lauderdale leasehold sale to CVS (expected by May 31, 2007) to realize the remaining proceeds.
• Franchisee Collectibility: Review the number of non-performing franchise units (21 domestic locations deemed unrealizable in Q3) and the impact on royalty revenue.
• Executive Transition: Assess the impact of the leadership transition (Lorber to Gatoff) on strategic execution and operational stability.