Business context and reporting period
Flanigan’s Enterprises, Inc. filed this Form 10-K for the 52-week fiscal year ended September 30, 2017, compared with the 52-week year ended October 1, 2016. The Florida-based company operates restaurants and Big Daddy’s Liquors stores, primarily in South Florida, through company-controlled businesses and affiliated limited partnerships; it also franchises units and manages two other businesses. At year-end, it reported 26 operating units, one owned but not operated adult entertainment club, and five franchised units.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Total revenue | $106.822 million | $103.618 million | +3.1% |
| Income from operations | $6.258 million | $6.801 million | -8.0% |
| Net income | $4.390 million | $4.969 million | -11.7% |
| Net income attributable to company stockholders | $3.020 million | $3.040 million | -0.7% |
| Basic and diluted EPS | $1.63 | $1.64 | -$0.01 |
| Operating cash flow | $8.254 million | $8.767 million | -$0.513 million |
| Cash at year-end | $9.885 million | $10.174 million | -$0.289 million |
| Debt, as reported | $12.398 million | $10.255 million | +$2.143 million |
Operating margin was approximately 5.9%; net income was 4.1% of revenue and stockholder-attributable income was 2.8%. Restaurant food-and-bar gross margin fell to 63.86% from 65.16%, primarily due to higher food costs. Package-store gross margin edged up to 28.55% from 28.44%. Payroll and related costs were $32.795 million, or 30.70% of revenue, versus $32.102 million, or 30.98%.
Revenue included restaurant food sales of $66.917 million (+3.0%), restaurant bar sales of $20.476 million (-0.1%), and package-store sales of $16.842 million (+7.5%). Comparable weekly restaurant food sales rose 3.04%; comparable weekly bar sales declined 0.25%. Same-store weekly package-store sales increased to $324,000 from $301,000.
Investing cash outflow was $7.053 million, including substantial property, construction and refurbishment spending; financing cash outflow was $1.490 million. Current assets were $14.939 million. Working capital was reported as $3.736 million in MD&A, but the balance sheet lists current liabilities of $11.011 million, which would imply working capital of $3.928 million; the filing text does not reconcile this difference. The company said cash, operating cash flow and available term-loan funds were expected to cover operations and planned capital spending for at least the next 12 months. It paid a $0.20-per-share dividend in 2017, up from $0.18 in 2016.
Material changes versus prior year
- Revenue growth was led by package-store traffic and restaurant food sales, while restaurant bar sales were nearly flat.
- Operating costs and expenses increased 3.9% to $100.564 million, faster than revenue, and rose to approximately 94.14% of sales from 93.43%. Higher food costs and overall expenses contributed to lower consolidated earnings.
- Capital expenditures rose to $7.220 million from $3.424 million. The company bought adjacent North Miami property for approximately $2.47 million, funded partly with a $2.0 million credit-line draw, and completed a new package-liquor-store building.
- Debt increased, reflecting property and other borrowing. After year-end, the company drew the remaining $3.5 million available under its $5.5 million credit line; as of December 21, 2017, no availability remained.
- Quarterly FY 2017 revenue and stockholder-attributable income were $25.828 million and $467,000, respectively, for the quarter ended September 30, 2017, compared with $24.983 million and $395,000 for the quarter ended October 1, 2016. Quarterly EPS was $0.26 versus $0.21.
Outlook, risks and unusual items
Management provided no numerical FY 2018 earnings or revenue forecast. It expected operating costs to rise, particularly food costs, and anticipated higher restaurant food-and-bar gross profit from September 2017 menu increases, partially offset by higher costs. Management expected package-store sales and gross margin to remain stable and occupancy costs to remain stable, while SG&A and interest expense were expected to increase.
The company budgeted approximately $400,000 for FY 2018 refurbishments and planned a North Miami restaurant renovation and expansion estimated at approximately $2.5 million, partly to be financed. Subsequent to year-end, the Store #20 construction contract was increased to $1.08 million, with $345,000 paid; design agreements were also signed for planned Store #19 work. A November 2017 agreement committed the company to buy approximately $6.208 million of baby back ribs during calendar 2018 at a fixed cost.
The company abandoned plans to expand The Whale’s Rib concept in Miami after it could not obtain necessary approvals and wrote off approximately $54,000 of related costs. It disclosed three pending dram-shop claims, which it said it was defending vigorously, and other ordinary-course claims it considered not material. General liability coverage included up to $6 million of excess coverage above primary coverage, but the company was generally uninsured above $7 million per occurrence and in aggregate. Other key risks include food and labor inflation, minimum-wage increases, intense competition, dependence on South Florida and hurricane exposure, liquor-license requirements, lease renewals, food-safety and reputation risks, cybersecurity, and the ability to attract and retain staff. The company also said adoption of the new lease accounting standard was expected to materially increase reported assets and liabilities.
Management concluded disclosure controls and internal control over financial reporting were effective as of September 30, 2017; the independent auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Reconcile the MD&A working-capital figures with the balance-sheet current-liability amount.
- Review the full debt schedule and subsequent $3.5 million credit-line draw, including the conversion to a term loan, repayment terms, covenants and liquidity after the line was fully drawn.
- Assess whether menu-price increases can offset food, labor and other cost inflation without weakening customer traffic or comparable sales.
- Evaluate the North Miami and planned Hollywood capital projects, their financing, construction commitments and expected returns.
- Review the three dram-shop claims, insurance renewals and exposure above stated liability limits.
- Consider the $6.208 million rib-purchase commitment and the company’s dependence on major food and beverage suppliers.
- Assess related-party franchise and limited-partnership arrangements, including noncontrolling interests and distributions.