Business Context and Reporting Period
Company: Nathan's Famous, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: March 29, 2009 (52-week fiscal year)
Business Overview: The Company operates and franchises quick-service restaurants featuring hot dogs and fries, sells branded products to foodservice operators (Branded Product Program), and licenses its trademarks for retail packaged goods. As of March 29, 2009, the system included 249 franchised/licensed units and 5 Company-owned units. The Company recently divested its Miami Subs and Kenny Rogers Roasters subsidiaries, which are reported as discontinued operations.
Key Financial Metrics
| Metric | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Total Revenues | $49,221,000 | $47,225,000 |
| Net Income | $7,482,000 | $6,555,000 |
| Diluted EPS | $1.21 | $1.01 |
| Income from Continuing Ops | $4,958,000 | $4,781,000 |
| Income from Discontinued Ops | $2,524,000 | $1,774,000 |
| Gross Profit Margin | 23.2% | 25.3% |
| Cash and Cash Equivalents | $8,679,000 | $14,371,000 |
| Marketable Securities | $25,670,000 | $20,950,000 |
| Working Capital | $35,303,000 | $35,650,000 |
| Long-Term Debt | $0 | $0 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 4.2% to $49.2 million. Sales from the Branded Product Program grew 12.3% due to price increases and volume growth. However, Company-owned restaurant sales declined 4.8% primarily due to the economic recession and unfavorable weather in the fourth quarter.
- Margin Compression: Gross profit margin decreased from 25.3% to 23.2%. This was driven by a 10.7% increase in the cost of hot dogs (beef commodity costs), which was partially offset by price increases and a purchase commitment that locked in costs for a portion of inventory.
- Discontinued Operations: Net income was significantly boosted by gains from the sale of subsidiaries. The Company sold NF Roasters Corp. (Kenny Rogers Roasters) in April 2008, recognizing a gain of $3.66 million in fiscal 2009. It also recognized an additional $250,000 gain from the prior sale of Miami Subs.
- Franchise Performance: Comparable domestic franchise sales declined 7.1% to $67.1 million, with approximately 87% of the decline occurring between September 2008 and March 2009, attributed to the economic downturn.
- Stock Repurchases: The Company repurchased 693,806 shares of common stock for $9.7 million during the fiscal year.
Guidance, Outlook, and Risks
- Economic Outlook: Management expects the economic recession to continue negatively impacting profitability and operating results, citing reduced sales at owned/franchised restaurants and increased uncollectible accounts receivable.
- Commodity Costs: The Company anticipates continued price volatility for beef products in fiscal 2010. While beef costs declined in the fourth quarter of fiscal 2009, they remain higher than the prior year. The Company has entered into a purchase commitment for 2.6 million pounds of hot dogs for April through September 2009.
- Strategic Focus: The Company plans to continue expanding the Branded Product and Branded Menu Programs, develop international franchising, and selectively consider new Company-owned restaurants. It also intends to perpetuate co-branding with Kenny Rogers products in existing locations.
- Key Risks:
- Supplier Litigation: The Company is engaged in litigation with its primary hot dog supplier (SMG, Inc.) regarding the termination of a license agreement. A disruption in supply could materially harm operations.
- Geographic Concentration: A significant portion of restaurants are located in the Northeast and Southeast (NY, NJ, FL, GA, PA), making results sensitive to regional economic conditions.
- Seasonality: Sales are historically highest in the first two fiscal quarters and lowest in the fourth quarter due to weather conditions.
Investor Verification Checklist
- Supplier Dependency: Verify the status of the litigation with SMG, Inc. and the Company's progress in securing alternative hot dog suppliers to mitigate supply chain risk.
- Beef Cost Hedging: Assess the effectiveness of the January 2009 purchase commitment in stabilizing costs for fiscal 2010 given ongoing commodity volatility.
- Franchisee Health: Review the increase in uncollectible royalties ($198,000 in fiscal 2009 vs. $19,000 in fiscal 2008) as an indicator of franchisee financial distress.
- Discontinued Operations: Confirm that future earnings guidance excludes the one-time gains from the sale of NF Roasters and Miami Subs to evaluate core business performance.
- Stock Repurchase Program: Monitor the remaining authorization under the fourth stock repurchase plan (306,194 shares remaining as of March 29, 2009).