Nathan’s Famous, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Thirteen weeks ended June 28, 2020; comparable period ended June 30, 2019. Amounts below are in U.S. dollars. Financial statements are unaudited.
Business context and results
Nathan’s markets branded food products through its Branded Product Program, product licensing, and Company-owned and franchised restaurants. COVID-19 restrictions disrupted restaurants and foodservice customers, while at-home demand supported retail licensing. At quarter-end, the system had 217 franchised outlets and four Company-owned restaurants; about 52% of franchised locations were open as of the filing date.
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenue | $17.686 million | $30.518 million | Down 42.0% |
| Operating income | $8.094 million | $9.448 million | Down 14.3% |
| Net income | $4.000 million | $5.369 million | Down 25.5% |
| Diluted EPS | $0.97 | $1.28 | Down $0.31 |
| Operating cash flow | $3.002 million | $(1.036) million | Improved |
| Adjusted EBITDA (non-GAAP) | $8.550 million | $10.173 million | Down 16.0% |
Sales fell 67.0% to $6.683 million: Branded Product Program sales declined 70.5% to $4.749 million and Company-owned restaurant sales declined 53.1% to $1.934 million. License royalties increased 20.6% to $10.523 million, led by retail hot-dog royalties. Franchise fees and royalties fell to $0.191 million from $1.077 million. Product sales gross margin declined to 20.7% from 23.8%; management cited higher beef costs and restaurant costs associated with new menu offerings. Overall operating margin rose to about 45.8% from 31.0%, reflecting the larger share of high-margin licensing revenue.
Cash, debt and liquidity
Cash and equivalents were $76.941 million at June 28, 2020, down $0.176 million from March 29, 2020. Working capital was $76.404 million. Operating cash flow of $3.002 million, less $0.237 million of capital expenditures, was offset in part by $1.440 million of dividends and $1.501 million of share repurchases. The prior-year quarter used $1.036 million of operating cash.
Long-term debt was $150.0 million principal amount of 6.625% Senior Secured Notes due November 2025 (carrying amount, net of issuance costs, $146.313 million). There are no scheduled principal payments before maturity; annual interest is approximately $9.938 million. The company reported covenant compliance. Stockholders’ deficit was $65.313 million.
Outlook, risks and unusual items
- Management expects COVID-19 to continue negatively affecting revenue and net income for the remainder of fiscal 2021, but says the duration and extent are uncertain and gives no numerical forecast.
- Mitigation actions included payroll and discretionary expense reductions, postponed nonessential capital spending, curbside service, ghost-kitchen initiatives, and enhanced safety protocols.
- Beef and hot-dog costs rose sharply beginning in May 2020. Management warned that commodity volatility, labor costs and minimum-wage increases could pressure margins, particularly if price increases and efficiencies do not offset costs.
- Licensing revenue and profitability are substantially dependent on the John Morrell & Co. agreement. The company also identified receivable collectibility, franchise recovery, consumer behavior and pandemic-related operating restrictions as risks.
- COVID-19 triggered interim impairment reviews; no goodwill, intangible-asset or long-lived-asset impairment was recorded. A New Jersey tax audit is ongoing. The company reported a $110,000 liability for a franchisee lease guaranty and ordinary litigation that management does not expect to materially affect results.
- The Board declared a $0.35-per-share quarterly dividend in June, paid June 26, and declared another $0.35 dividend on August 7, payable September 4. Future dividends are subject to Board determination and debt-indenture restrictions.
Most important facts for investors to verify
- Whether franchise reopenings and foodservice demand recover, and how prolonged pandemic effects alter sales and cash generation.
- Whether retail licensing growth continues and the status and terms of the John Morrell & Co. relationship.
- Beef-cost trends, pricing pass-through, and the effect of labor and New York minimum-wage increases on margins.
- Cash available after debt interest, dividends, repurchases and operating needs; also note the $150 million 2025 note principal and covenant limitations.
- Results of the New Jersey tax audit, evolving credit-loss exposure, and any subsequent impairment or franchisee-guaranty developments.