Flanigan’s Enterprises, Inc. — Form 10-Q Summary
Business context and reporting period. The unaudited filing covers the 13 and 39 weeks ended June 29, 2013, compared with the periods ended June 30, 2012. Flanigan’s operates restaurants and package liquor stores, franchises additional units, and consolidates nine limited partnerships in which it has a controlling interest. At quarter-end it reported 26 company-owned/operated units and five franchised units.
Financial performance
- Revenue: Third-quarter revenue rose 8.4% to $21.012 million; 39-week revenue rose 6.7% to $62.880 million. Growth reflected the new limited-partnership restaurant, which opened December 27, 2012, and menu price increases. Excluding that restaurant, management said revenue increased 4.1% for the quarter and 3.7% year to date.
- Profit: Third-quarter operating income was $1.629 million, versus $0.969 million; net income attributable to Flanigan’s stockholders was $0.660 million, versus $0.236 million. For 39 weeks, operating income was $3.770 million, versus $2.742 million, and stockholder-attributable net income was $1.756 million, versus $1.081 million. Basic and diluted EPS were $0.35 and $0.94, respectively, versus $0.13 and $0.58.
- Margins: Restaurant food-and-bar gross margin was 65.66% for the quarter and 64.92% year to date, compared with 63.59% and 64.55%. Package-store gross margin was 31.28% for the quarter and 29.93% year to date, compared with 32.13% and 30.29%. Operating expenses were 92.25% of sales for the quarter and approximately 94.0% year to date, down from 95.00% and 95.35%.
- Cash flow: Year-to-date operating cash flow was $5.026 million, versus $4.587 million. Investing activities used $2.790 million and financing activities used $2.772 million. Cash declined $0.536 million to $6.685 million from September 29, 2012.
- Liquidity and debt: At June 29, cash was $6.685 million, current assets $11.439 million, and current liabilities $8.890 million; working capital was $2.549 million, down from $3.150 million at fiscal year-end. Total long-term debt, including current maturities, was $14.052 million, versus $13.418 million at fiscal year-end. The company reported $3.0 million of debt proceeds and $4.852 million of debt payments during the 39 weeks.
- Investment and capital spending: Property and equipment increased to $34.768 million from $31.595 million at fiscal year-end. Year-to-date capital expenditures were $5.039 million, including $1.301 million for new-restaurant renovations. Cash and seller financing funded a $2.9 million purchase of two North Miami parcels; $1.95 million was seller-financed at 7.5%.
Material changes and operating trends
- Restaurant food and bar sales increased; comparable weekly sales for the quarter rose 3.98% for food and 4.55% for bar sales. Package-store sales were nearly flat for the quarter and down 0.7% year to date.
- Quarterly payroll costs rose 11.1%, primarily including costs at the new restaurant. Management also cited higher food costs, partly offset by lower rib costs and cost-control efforts.
- The new restaurant generated $1.799 million in revenue year to date but operated at a $239,000 net loss, compared with a $68,000 loss in the prior-year period.
- During the second quarter, the company refinanced debt on its Hallandale property and obtained a $1.595 million term loan. Interest-rate swaps fixed the stated rates on the refinanced $1.405 million loan and the new term loan at 4.35% and 4.00%, respectively. A $500,000 line of credit was unused and terminated in the third quarter.
Outlook, risks and contingencies
Management expected restaurant food and bar sales to increase through the remainder of fiscal 2013, primarily due to the new restaurant; it expected package-store sales and margins to remain stable. It anticipated higher food costs and overall expenses could reduce restaurant gross profit and net income, while menu-price increases would be limited where possible. The company planned continued advertising and was searching for restaurant locations, with potential new sites likely to use its limited-partnership model. No quantified earnings or revenue guidance was provided.
Management stated that cash on hand and expected operating cash flow should fund operations and capital expenditures for at least the next 12 months, while noting that unexpected expenses or revenue declines could affect that assessment. A purchase agreement commits the company to buy approximately $3.8 million of baby back ribs during calendar 2013 at a fixed cost. An uninsured Florida minimum-wage lawsuit alleging charges to employees for required uniforms is seeking class certification; an adverse outcome could materially affect the company. Other ordinary-course litigation was described as not having had a material effect. The filing reported no off-balance-sheet arrangements and no subsequent events requiring disclosure.
Important facts for investors to verify
- Whether the new restaurant improves from its reported year-to-date net loss and how much of sales growth is attributable to it.
- Whether higher food, labor, and other costs offset sales gains, particularly given management’s stated concern about future restaurant margins and net income.
- Debt balances, repayment terms, collateral and interest-rate swap coverage, including the company’s debt-service capacity.
- Developments in the uninsured employee-uniform lawsuit and potential class certification.
- Planned refurbishment spending, remaining fiscal-year capital requirements, and the effect on cash and working capital.