Nathan’s Famous, Inc. — Form 10-Q Summary
Reporting period: Thirteen and thirty-nine weeks ended December 25, 2016, compared with the periods ended December 27, 2015. Balance-sheet comparisons are against March 27, 2016. Dollar amounts below are in millions unless stated otherwise. The company markets branded food products and operates, franchises and licenses restaurants and products. At quarter-end, its system had 287 restaurants: 282 franchised and five company-operated.
Financial performance
| Metric | 13 weeks ended Dec. 25, 2016 | Prior-year quarter | 39 weeks ended Dec. 25, 2016 | Prior-year period |
|---|---|---|---|---|
| Total revenue | $19.937 | $20.564 | $77.366 | $81.837 |
| Operating income | $4.754 | $4.435 | $21.609 | $20.477 |
| Net income | $0.699 | $0.432 | $6.756 | $5.589 |
| Diluted EPS | $0.17 | $0.10 | $1.61 | $1.24 |
| Operating cash flow | Not separately reported | Not separately reported | $9.773 | $13.663 |
- For the quarter, sales declined 5.7% to $14.859 million, while license royalties rose 10.4% to $3.990 million. Franchise fees and royalties were $1.088 million versus $1.187 million.
- For the 39-week period, sales declined 7.4% to $58.012 million; license royalties increased to $15.602 million from $15.406 million; franchise fees and royalties decreased to $3.752 million from $3.804 million.
- Gross profit was $4.074 million, or 27.4% of sales, in the quarter, versus $3.681 million, or 23.4%. For the 39-week period, it was $16.280 million, or 28.1%, versus $14.779 million, or 23.6%.
- Quarterly general and administrative expense increased 11.5% to $3.394 million; 39-week expense increased 6.9% to $10.309 million. The filing attributes increases partly to compensation and marketing, including centennial activities.
- Cash and cash equivalents were $56.403 million at December 25, up from $50.228 million at March 27. Net working capital was $55.674 million, versus $49.779 million.
- Cash from operations was $9.773 million for 39 weeks, down from $13.663 million. Investing used $1.001 million, principally capital expenditures; financing used $2.597 million, including $1.272 million for share repurchases and $0.994 million in withholding taxes on share settlements.
- Senior secured notes had $135 million face value, carried at $131.176 million net of issuance costs. They bear 10% interest, mature in March 2020 and have no scheduled principal amortization before maturity. Interest expense was $3.663 million for the quarter and $11.002 million for 39 weeks. Stockholders’ deficit was $67.320 million.
Changes, outlook and risks
- Lower beef costs supported margins: management reported beef-cost declines of 14.5% in the quarter and 16.8% for the 39-week period. The company reduced selling prices under its cost-based pricing strategy; branded product volumes rose, but sales dollars fell.
- Company-operated restaurant sales weakened, attributed to weather, lower sales at Coney Island locations and, in the quarter, holiday closures and increased online shopping. Comparable domestic franchise sales also declined: 1.3% in the quarter.
- Management expects a 42%–44% effective tax rate for fiscal 2017, excluding the effects of stock-compensation tax benefits and possible reductions in uncertain tax benefits. No revenue or earnings guidance is provided. Management says cash and operating cash generation should be sufficient for operations, debt service and possible repurchases for at least 12 months.
- The company early adopted share-based payment accounting guidance. It recorded a $0.659 million excess tax benefit for the 39-week period, lowering reported tax expense; management notes this treatment may increase effective tax-rate volatility. The reported 39-week effective tax rate was 37.1%, versus 41.0% a year earlier.
- Key risks include beef and other commodity price volatility, the ability to pass cost increases through to customers, labor and minimum-wage increases in New York, reliance on principal supplier John Morrell & Co., weather and consumer demand, franchise and licensing performance, and substantial debt service and refinancing needs. A 10% change in food and paper costs for the 39-week period would have changed cost of sales by approximately $3.660 million, according to the filing.
- The company reported compliance with note covenants and effective disclosure controls. It reported no legal proceedings in Part II, while noting ordinary-course litigation and the possibility of adverse outcomes in the notes.
Important facts for investors to verify
- Whether lower beef costs and branded-product volume growth persist, and how pricing changes affect sales and margins.
- Whether company-operated restaurant trends recover and franchise comparable sales stabilize.
- Future labor, commodity and distribution costs, including the impact of New York minimum-wage increases.
- Cash generation and capacity to service the 10% notes, whose $135 million principal is due in 2020, and the terms or availability of refinancing.
- The effects of discrete stock-compensation tax benefits and uncertain tax positions on future reported tax rates and earnings.
- Share repurchases: 260,258 shares remained authorized under the existing plan at quarter-end; actual future purchases are not assured.