Flanigan’s Enterprises, Inc. — Q3 2023 Form 10-Q
Reporting period: 13 weeks ended July 1, 2023; year-to-date figures cover 39 weeks. Comparative periods ended July 2, 2022. Amounts below are in millions unless otherwise stated. The unaudited consolidated results include the company and controlled limited partnerships.
Financial performance
| Metric | 13 weeks ended July 1, 2023 | 13 weeks ended July 2, 2022 | 39 weeks ended July 1, 2023 | 39 weeks ended July 2, 2022 |
|---|---|---|---|---|
| Revenue | $45.372 | $40.675 | $131.036 | $118.408 |
| Operating income | $2.700 | $2.083 | $6.608 | $4.698 |
| Net income | $2.411 | $1.964 | $5.463 | $7.245 |
| Net income attributable to Flanigan’s shareholders | $1.605 | $1.835 | $4.126 | $5.059 |
| Basic and diluted EPS | $0.86 | $0.99 | $2.22 | $2.72 |
| Operating cash flow | — | $7.200 | $7.790 | |
| Capital expenditures (cash flow statement) | — | $16.998 used in investing | $6.519 used in investing |
- Quarterly revenue increased 11.6%; year-to-date revenue increased 10.7%. Growth reflected price increases, additional locations and higher sales across restaurants and package stores.
- Quarterly net income rose 22.8%, but earnings attributable to company shareholders fell 12.5%, primarily due to higher expenses and a larger share of income attributable to noncontrolling interests.
- Year-to-date net income fell 24.6% and shareholder-attributable income fell 18.4%. The prior-year period included a $3.488 million gain from PPP loan forgiveness; current-year operating cost increases also weighed on results.
- Operating margin, calculated as operating income divided by revenue, was approximately 6.0% for the quarter versus 5.1%; year to date it was approximately 5.0% versus 4.0%. Year-to-date restaurant food and bar gross margin increased to 66.90% from 63.50%; package-store gross margin was 26.66% versus 26.54%.
- Year-to-date operating cash flow was $7.2 million, down from $7.8 million. Investing used $17.0 million, mainly for property, equipment and construction; financing used $5.2 million. Cash decreased $15.0 million to $27.106 million on the balance sheet.
- At July 1, long-term debt, including its current portion, was $23.430 million, compared with $25.389 million at October 1, 2022. Operating lease liabilities totaled $28.808 million. Current assets were $37.319 million and current liabilities $21.599 million on the balance sheet.
Business, changes and management outlook
- At period-end the company operated or controlled 32 units and franchised five. It operates restaurant and package-store segments. New or recently opened locations included a Miramar restaurant, Miramar package store and Hollywood package store; the Hollywood restaurant damaged by fire remained under reconstruction.
- Management attributed sales growth to menu price increases, new locations and stronger comparable sales. Comparable quarterly restaurant food and bar sales rose 2.20% and 3.66%, respectively; comparable package-store sales rose 3.24%. Year-to-date comparable restaurant bar sales declined 3.28%, including a 15.02% decline at company-owned restaurants.
- Menu prices were increased in March 2023, targeting annual revenue increases of about 2.06% for food and 5.65% for bar offerings. Management expected restaurant and package-store sales to increase for the remainder of fiscal 2023, but also anticipated continued growth in operating costs and a potential decline in package-store gross margin from higher costs and price reductions on some products.
- Cash use reflected cash purchases of real estate in El Portal ($3.2 million) and Hallandale Beach ($8.5 million), construction and equipment spending, and payment of annual insurance premiums without financing. Management said cash, operating cash flow and borrowing capacity should fund operations and planned capital spending for at least 12 months, subject to uncertainty.
- The company paid a $0.45-per-share dividend during the period. Future dividends are at the board’s discretion. It also committed to purchase approximately $6.8 million of ribs during calendar 2023 at prescribed prices.
Debt, risks and unusual items
- The company did not meet a fixed-charge covenant as of December 31, 2022. Its institutional lender waived the breach and related acceleration rights. The covenant requires a ratio of at least 1.15:1.00; the company reported 1.50:1.00 for the 12 months ended July 1, 2023 and said it expected future compliance.
- The $5.5 million term loan was paid off in the first fiscal quarter. A separate $8.9 million loan used to refinance the Store #31 mortgage carries an interest-rate swap that fixes the rate at 4.90% for the swap period; the company reported the swap’s fair value as immaterial.
- Inflation, food and beverage costs, labor availability and costs, supply-chain disruption, customer demand, competition and COVID-19 effects remain risks. Management anticipated higher operating costs and noted that results may not indicate full-year performance.
- Construction commitments include the Store #19 restaurant rebuild, whose contract was increased to $2.968 million after quarter-end, and Store #85 exterior renovations. The filing reports ordinary-course claims and no current dram-shop claims; management did not expect other disclosed litigation to have a material adverse effect.
- Management concluded disclosure controls were not effective because of a material weakness in financial reporting: insufficient trained and knowledgeable accounting personnel contributed to transaction-recording and debt-covenant calculation errors. Accounting consultants were engaged; remediation was ongoing and not assured.
Important facts for investors to verify
- Cash is reported as $27.106 million in the balance sheet and cash-flow statement, while MD&A cites approximately $26.995 million and a different decrease from October 1. Confirm the intended cash figure and reconciliation.
- MD&A reports current assets of $37.208 million and working capital of $15.609 million; the balance sheet reports current assets of $37.319 million, which implies working capital of $15.720 million using reported current liabilities. Reconcile these amounts.
- Track compliance with the fixed-charge covenant and any changes to lender waivers, borrowing terms or liquidity.
- Assess whether sales growth, comparable restaurant trends and pricing can offset labor, food, occupancy and other operating cost increases, while considering the lower year-to-date shareholder-attributable earnings.
- Monitor capital spending, Store #19’s rebuild costs and timing, and execution of the material-weakness remediation.