Nathan’s Famous, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first 39 weeks of fiscal 2022, ended December 26, 2021; comparable periods ended December 27, 2020. Financial amounts below are in U.S. dollars. The company markets branded products, licenses its brand, and operates and franchises restaurants.
Financial performance
| Metric | 13 weeks ended Dec. 26, 2021 | 13 weeks ended Dec. 27, 2020 | 39 weeks ended Dec. 26, 2021 | 39 weeks ended Dec. 27, 2020 |
|---|---|---|---|---|
| Revenue | $25.9m | $18.0m | $90.1m | $57.6m |
| Income from operations | $5.6m | $4.4m | $23.8m | $20.1m |
| Net income | $2.1m | $1.4m | $11.4m | $9.0m |
| Diluted earnings per share | $0.52 | $0.33 | $2.78 | $2.19 |
| Operating cash flow | Not presented by quarter | $9.9m | $5.7m |
- Quarter revenue rose 44%; nine-month revenue rose 57%. Branded Product Program revenue was $16.9m for the quarter and $52.0m for the nine months. Company-operated restaurant sales were $1.7m and $9.5m, respectively. License royalties were broadly flat for the quarter and down 2% year to date; franchise fees and royalties increased.
- Cost of sales grew faster than revenue: 79% for the quarter and 113% year to date. Gross profit as a share of sales declined to 14% from 21% for the quarter and to 16% from 21% year to date. Management cited increased beef, labor, packaging and transportation costs, alongside higher sales volumes.
- Operating income increased, but operating margin narrowed to about 21.7% from 24.4% for the quarter and 26.4% from 34.9% year to date. Net income benefited from sales recovery, while the company’s $7.95m nine-month interest expense was unchanged from the prior-year period.
- Cash from operations was $9.9m; capital spending was $0.5m, or approximately $9.4m of operating cash flow after capital expenditures. Cash and cash equivalents were $86.2m, versus $81.1m at March 28, 2021.
- Net working capital was $48.2m, down from $80.1m at fiscal year-end, principally because the planned $40m note redemption was classified as a current liability.
Debt, liquidity and capital allocation
- At December 26, 2021, the company had $150m face value of 6.625% senior secured notes due November 2025. The balance sheet classified $40m as current and reported $107.3m of long-term debt net of issuance costs. The notes have no scheduled principal amortization before maturity and are subject to covenants; the company reported compliance at period-end.
- After quarter-end, on January 26, 2022, the company redeemed $40m principal for $41.3m, including premium and accrued interest, and recognized an approximately $1.4m early-extinguishment loss. Management expects the redemption to reduce annual cash interest by $2.65m.
- Cash dividends paid during the nine-month period totaled $4.32m, or $1.05 per share. On February 4, 2022, the board raised the quarterly dividend to $0.45 per share from $0.35 and declared the next payment. Future dividends remain subject to board approval and debt-indenture restrictions.
- Management stated that cash, cash equivalents and operating cash flow should be sufficient for operations, debt service, dividends and repurchases for at least the next 12 months. No shares were repurchased in the period.
Outlook, commentary and risks
- The filing provides no specific revenue or earnings guidance. Management described a strategy to expand branded-product distribution, licensing and franchising, including ghost kitchens, while improving the existing restaurant system; it does not expect significant growth in company-owned restaurants.
- Sales recovery reflected reopened foodservice customers and franchised locations as pandemic restrictions eased. At quarter-end, 88% of the franchise system was open, compared with 62% a year earlier; the system had 242 franchised outlets and four company-owned units.
- COVID-19, including the Omicron variant, continued to create uncertainty around customer traffic, staffing, supply availability and operating restrictions. The company also reported labor recruitment challenges and intermittent supplier shortages.
- Beef and beef-trimming costs, labor, packaging, freight, utilities and insurance are key margin risks. Average hot-dog cost was about 14% higher year to date; the company had no open hot-dog purchase commitments and cautioned that it may not be able to pass through future cost increases.
- Licensing royalties and profitability are substantially dependent on the John Morrell & Co. agreement. Other identified risks include franchisee viability, minimum-wage and other labor requirements, consumer demand, and collectibility of receivables.
- COVID-related impairment tests found no impairment of goodwill, intangible assets or long-lived assets. Ordinary litigation was disclosed; management did not expect its outcome to materially affect results, though unfavorable rulings remain possible. The company also disclosed $445,000 of unrecognized tax benefits and $307,000 of related accrued interest and penalties.
Most important facts for investors to verify
- Whether higher food, labor and distribution costs can be offset by pricing without weakening volume or demand, and whether gross margins stabilize.
- The remaining debt principal, interest savings and early-extinguishment accounting after the $40m redemption, as well as the notes’ dividend and restricted-payment limits.
- Whether operating cash flow remains sufficient to support dividends, debt service and planned investment as working capital and sales volumes change.
- The durability of the reopening-driven Branded Product Program and franchise recovery, and the effect of continued dependence on John Morrell & Co.
- Whether COVID-19 developments, labor availability, commodity volatility and supply disruptions materially alter operations or the company’s stated 12-month liquidity outlook.