Flanigan’s Enterprises, Inc. — Q2 FY2020 Form 10-Q
Business context and period. The unaudited quarter ended March 28, 2020 (13 weeks), with year-to-date results covering 26 weeks. Flanigan’s operates restaurants and package liquor stores, including limited-partnership locations, and franchises additional units. As of quarter-end it reported 27 owned or operated units and five franchised units. Financial amounts below are in millions unless stated otherwise.
Key financial results
| Metric | 13 weeks ended Mar. 28, 2020 | 13 weeks ended Mar. 30, 2019 | 26 weeks ended Mar. 28, 2020 | 26 weeks ended Mar. 30, 2019 |
|---|---|---|---|---|
| Total revenue | $30.128 | $29.736 | $61.069 | $57.630 |
| Operating income | $1.517 | $1.890 | $2.748 | $2.545 |
| Net income, consolidated | $1.420 | $1.465 | $2.341 | $2.463 |
| Net income attributable to Flanigan’s stockholders | $0.648 | $1.021 | $1.142 | $1.764 |
| EPS, basic and diluted | $0.35 | $0.55 | $0.61 | $0.95 |
| Operating cash flow | Not separately presented | Not separately presented | $4.213 | $5.069 |
Revenue mix and margins. Q2 restaurant food sales were $18.213 million (roughly flat year over year); bar sales fell 7.5% to $5.315 million; package-store sales rose 18.4% to $6.027 million. Restaurant food-and-bar gross margin was 66.42%, up from 65.29%; package-store gross margin was 28.22%, up from 26.96%. Operating costs rose 2.75% in Q2, faster than total sales, and were 94.96% of sales versus 93.64%. Management reported consolidated net income margins of 4.71% in Q2 and 3.83% year to date; stockholder-attributable net income was 2.15% and 1.87% of sales, respectively.
Liquidity, cash flow, and debt
- Cash was $18.061 million at March 28, 2020, up $4.389 million from September 28, 2019. Working capital was $9.367 million, compared with $6.464 million at fiscal year-end.
- For the first 26 weeks, operating cash flow was $4.213 million, investing cash use was $1.982 million, and financing cash provided was $2.158 million. Cash flow from operations declined from $5.069 million a year earlier.
- Debt, including current maturities, totaled $17.448 million at quarter-end, versus $13.080 million at September 28, 2019. The increase principally reflected refinancing a subsidiary mortgage from $2.72 million to $7.21 million and insurance-premium financing. The refinanced mortgage bears fixed interest of 3.86% and matures in November 2026.
- ASC 842 adoption added $26.309 million of operating lease assets and $27.011 million of lease liabilities at quarter-end ($3.109 million current and $23.902 million noncurrent). Lease expense was $2.261 million for the first 26 weeks.
- Management said it was in compliance with loan covenants and believed cash, operating cash flow, and borrowing proceeds would fund operations and planned capital spending for at least 12 months. It reported no line of credit or other borrowing availability as of March 28.
Material changes and management commentary
- COVID-19 restrictions began affecting operations in mid-March. Dine-in service and restaurant alcohol sales were suspended, restaurants shifted to takeout and delivery, and package-store hours were reduced. Management attributed the modest Q2 revenue increase partly to the fact that restrictions affected only part of the quarter.
- Q2 operating income fell 19.7% and stockholder-attributable income fell 36.5% year over year. For the first 26 weeks, revenue grew 6.0%, but consolidated net income fell 5.0% and stockholder-attributable income fell 35.3%. The filing cites COVID-19, higher food costs and expenses, and ASC 842-related occupancy costs among the pressures; higher pre-pandemic traffic, price increases, liquor-store growth, and cost controls partly offset them.
- Management expected revenue and restaurant food and bar sales to decline for the balance of FY2020, with continuing uncertainty into FY2021. It expected package-store sales to increase, supported by demand during the pandemic and a new Kendall store. Management also anticipated lower restaurant gross margins, lower package-store margins from costs and competitive pricing, and higher occupancy costs.
- As of March 28, 525 restaurant employees had been laid off, with estimated annualized salary savings of about $1.04 million; corporate and executive salary reductions were also implemented. After mid-May, management said it reversed most cuts and reinstated employees as restrictions eased, with restaurant capacity limited to as much as 50% depending on location and no bar service at that time.
- After quarter-end, the company and related limited partnerships, franchisees, and a managed store received approximately $13.1 million in PPP loans: $5.9 million to the company and the remainder to other borrowers. The loans bear 1% interest and may be forgiven subject to program requirements; management said forgiveness was not assured.
- The board cancelled a previously declared $0.30-per-share dividend on March 24, 2020. No dividend was paid in the first 26 weeks of FY2020, compared with $0.521 million paid in the prior-year period.
Other risks, contingencies, and unusual items
- COVID-19 was identified as a material operating and financial risk, with effects on demand, liquidity, and financial condition difficult to predict. The company noted potential future supply-chain and labor disruption, although it had not experienced significant disruption to date.
- A fire-damaged Hollywood location (Store #19) remained closed; management did not expect it to generate revenue during the balance of FY2020. The company also had development projects in Sunrise and Miramar and construction commitments for Store #19.
- The company had a fixed-price 2020 baby-back-rib purchase agreement of approximately $5.314 million. It said alternative vendors were available.
- The company reported no current dram-shop claims. Other ordinary-course legal matters were not expected by management, after consultation with counsel, to have a material adverse effect.
- ASC 842 was adopted in FY2020 using the modified retrospective method, materially affecting the balance sheet and occupancy expense presentation. The company reported no material impact on cash flows.
Important facts for investors to verify
- How post-quarter restaurant capacity limits, bar-service restrictions, customer demand, and package-store demand affected subsequent-period sales and margins.
- The status, eligibility, and ultimate forgiveness of the approximately $13.1 million of PPP loans, including the $5.9 million received by the company.
- Liquidity and covenant compliance as cash flows, debt service, and lease payments evolve; quarter-end cash preceded PPP proceeds.
- Execution costs and timing for the Store #19 rebuild and Sunrise/Miramar development projects, alongside the company’s capital-spending plans.
- Whether the cancelled dividend remains suspended and how the board’s capital-allocation decisions respond to operating conditions.