Nathan’s Famous, Inc. — Q3 Fiscal 2021 Form 10-Q
Business context and reporting period. The quarter comprised 13 weeks ended December 27, 2020; the year-to-date period comprised 39 weeks. Nathan’s earns revenue from branded foodservice products, product licensing, and company-operated and franchised restaurants. The filing compares results with the corresponding periods ended December 29, 2019. Amounts below are in millions of dollars unless noted.
Financial results and liquidity
| Metric | 13 weeks ended Dec. 27, 2020 | 13 weeks ended Dec. 29, 2019 | 39 weeks ended Dec. 27, 2020 | 39 weeks ended Dec. 29, 2019 |
|---|---|---|---|---|
| Total revenue | $18.03 | $21.38 | $57.56 | $81.62 |
| Income from operations | $4.40 | $3.86 | $20.08 | $20.68 |
| Net income | $1.36 | $1.21 | $9.01 | $10.24 |
| Diluted earnings per share | $0.33 | $0.29 | $2.19 | $2.43 |
| Adjusted EBITDA (non-GAAP) | $4.82 | $4.55 | $21.41 | $22.84 |
| Operating cash flow | Not separately reported | Not separately reported | $5.71 | $6.66 |
- Margins: Gross profit on sales was $2.39 million, or 21% of sales, for the quarter versus $3.09 million, or 20%; year to date it was $6.54 million, or 21%, versus $13.73 million, or 24%. The company attributed the year-to-date margin decline mainly to higher beef costs, restaurant food costs and labor.
- Cash and liquidity: Cash was $76.60 million at December 27, 2020, down $0.52 million from fiscal year-end. Working capital was $79.27 million, up from $75.17 million. Current assets were $90.29 million and current liabilities $11.01 million.
- Debt: $150.0 million principal of 6.625% senior secured notes due November 2025; carrying amount was $146.66 million net of issuance costs. Interest expense was $7.95 million year to date. No scheduled principal amortization is due before maturity. The company reported compliance with note covenants.
- Cash uses: Year-to-date investing cash outflow was $0.40 million; financing outflow was $5.83 million, including $4.32 million of dividends and $1.50 million of share repurchases. Three quarterly dividends of $0.35 per share were paid; a fourth $0.35 dividend was declared for payment March 5, 2021.
- Total liabilities were $167.69 million and stockholders’ deficit was $63.13 million at quarter-end.
Material changes versus prior comparable periods
- Quarterly revenue declined 16%, while year-to-date revenue fell 29%. Sales fell sharply in the Branded Product Program: 27% in the quarter and 47% year to date. Company-owned restaurant sales were down 21% and 47%, respectively.
- Licensing royalties grew 34% in the quarter and 33% year to date, led by retail hot dog sales. For the quarter, retail volume rose 40% and average net selling price rose 3%; year to date, retail volume rose 21% and average net selling price rose 15%.
- Franchise fees and royalties declined 59% in the quarter and 70% year to date. Franchise restaurant sales were $6.18 million for the quarter versus $14.59 million, and $15.37 million year to date versus $50.43 million.
- Quarterly net income rose 12%, despite lower revenue, as operating income improved and interest expense was unchanged. Year-to-date net income declined 12%, while operating income was down 3%.
- Cash from operations fell to $5.71 million from $6.66 million year to date. The company cited, among other factors, lower accrued liabilities and higher receivables.
- The restaurant system had 215 franchised units and four company-owned units at quarter-end, compared with 226 franchised and four company-owned units a year earlier. The company had expanded to 75 ghost kitchens.
Outlook, management commentary, risks and unusual items
- Management expected COVID-19 to continue negatively affecting revenue and net income for the remainder of fiscal 2021. At filing, approximately 60% of franchised locations were open; some operated in venues with closures or reduced traffic. Company dining rooms were subject to capacity limits and social-distancing requirements.
- Mitigation measures included payroll and discretionary expense reductions, postponing nonessential capital spending, curbside delivery, ghost kitchens and enhanced safety protocols. The quarter included approximately $0.34 million of severance expense related to personnel reductions.
- Beef and hot dog costs were volatile and had increased significantly beginning in May 2020. Management warned that margins could be pressured if costs rise and cannot be offset through pricing or efficiencies; no beef purchase commitments were outstanding.
- Other identified risks include dependence on John Morrell & Co. for licensing and supply, New York minimum-wage and labor regulations, franchisee economics, consumer behavior, and the ongoing pandemic. A 10% change in food and paper costs for the 39-week period would have changed cost of sales by approximately $2.12 million.
- Management stated that available cash and operating cash flow should be sufficient for operations, debt service, dividends and repurchases for at least 12 months. This is an expectation, not a guarantee. The notes restrict certain dividends, debt and other payments.
- The company recorded no impairment charges for goodwill, intangible assets or long-lived assets after COVID-19-triggered assessments. It recorded a $0.11 million liability for a Brooklyn lease guaranty; future amounts could include costs not currently determinable. Management considered routine litigation outcomes unlikely to materially affect results, while noting litigation uncertainty.
- No specific earnings or revenue guidance was provided. Management cautioned that interim results are seasonal and not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the recovery in licensing royalties can continue and offset weakness in foodservice, restaurants and franchise royalties.
- Changes in pandemic-related venue closures, franchised locations open, customer traffic and ghost-kitchen performance.
- Beef and labor cost trends, pricing actions and resulting gross margins.
- Cash generation relative to the $150 million notes, annual interest obligations, dividends and any further share or debt repurchases.
- Progress on franchise outlet openings, closures and the company’s dependence on John Morrell & Co.
- Future developments in impairment estimates, receivable collectibility, tax exposures and the Brooklyn lease guarantee.