Business Context and Reporting Period
Company: Nathan's Famous, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: March 26, 2006
Business Overview: The Company operates and franchises fast food units under the Nathan's Famous, Miami Subs, Kenny Rogers Roasters, and Arthur Treacher's brands. Revenue is generated through company-owned restaurants, franchising, the Branded Product Program (selling proprietary products to foodservice operators), and retail licensing agreements.
Key Financial Metrics
| Metric | Fiscal 2006 | Fiscal 2005 |
|---|---|---|
| Total Revenues | $41,360,000 | $34,295,000 |
| Net Income | $5,677,000 | $2,737,000 |
| Income from Continuing Operations | $3,945,000 | $2,854,000 |
| Income from Discontinued Operations | $1,732,000 | ($117,000) |
| Diluted EPS | $0.87 | $0.45 |
| Working Capital | $19,075,000 | $14,009,000 |
| Total Assets | $37,423,000 | $31,269,000 |
| Long-Term Debt | $31,000 | $692,000 |
| Cash and Cash Equivalents | $3,009,000 | $2,935,000 |
| Marketable Securities | $16,882,000 | $11,641,000 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 20.6% to $41.36 million. Sales from the Branded Product Program surged 52.0% to $16.48 million, driven by new accounts and a 2.2% price increase. Company-owned restaurant sales rose 2.7% to $11.42 million.
- Profitability: Net income more than doubled to $5.68 million. This was significantly aided by a $2.92 million pre-tax gain from the sale of vacant land in Brooklyn, NY, classified as discontinued operations.
- Debt Reduction: The Company prepaid the balance of its outstanding bank loan ($694,000) in January 2006. Long-term debt decreased from $692,000 to $31,000, consisting solely of capital lease obligations.
- Acquisition: On February 28, 2006, the Company acquired all intellectual property rights to the Arthur Treacher's Fish N Chips brand for approximately $1.35 million (including legal fees).
- Franchise System: The system grew to 362 franchised/licensed units (up from 355), with 30 new units opened during the fiscal year, including international expansion in Kuwait, Japan, and the Dominican Republic.
Guidance, Outlook, and Risks
- Outlook: Management expects to continue expanding the Branded Product Program and co-branding efforts. They anticipate future revenues and profits will remain highest during the first two fiscal quarters due to seasonality in the New York metropolitan area.
- Capital Resources: The Company maintains a $7.5 million uncommitted line of credit (unused) and expects to fund operations and stock repurchases from operating cash flow.
- Key Risks:
- Commodity Costs: Beef costs represent approximately 85% of food costs. Prices have been volatile; the Company increased menu prices to offset margin pressure but may face further increases.
- Competition: The quick-service restaurant industry is highly competitive regarding price, service, and location.
- Franchisee Performance: Earnings depend on franchisee success; operational shortcomings by franchisees can damage the brand reputation.
- Real Estate: The Company is contingently liable for lease costs on 29 properties subleased to franchisees.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of net income by excluding the $2.92 million one-time gain from the sale of Brooklyn real estate.
- Beef Cost Sensitivity: Monitor beef commodity prices and the Company's ability to pass cost increases to consumers without reducing volume.
- Franchisee Health: Review the number of non-performing units (21 locations deemed unrealizable in 2006) and the impact of Hurricane Wilma on Florida franchisee sales.
- Arthur Treacher's Integration: Assess the return on investment for the $1.35 million acquisition of the Arthur Treacher's brand and its integration into co-branding strategies.
- Stock Repurchase Program: Note that while authorized to repurchase up to 1 million additional shares, no repurchases were made in fiscal 2006.