Flanigan’s Enterprises, Inc. — Fiscal 2013 First-Quarter 10-Q
Reporting period: Thirteen weeks ended December 29, 2012; comparisons are with the thirteen weeks ended December 31, 2011, unless noted. Financial amounts are in thousands of dollars, except per-share data. Statements are unaudited.
Business context
The company operates restaurants and package liquor stores, including units owned through controlled limited partnerships, and franchises five units. At quarter-end, it reported 25 operating units under its control, one owned adult entertainment club that it does not operate, and five franchised units. A new limited-partnership-owned Miami restaurant opened on December 27, 2012.
Financial results and liquidity
| Metric | Q1 FY2013 | Prior-year quarter |
|---|---|---|
| Total revenue | $19,613 | $18,952 |
| Operating income | $636 | $660 |
| Income before taxes | $436 | $503 |
| Consolidated net income | $288 | $359 |
| Net income attributable to stockholders | $345 | $336 |
| Basic and diluted EPS | $0.19 | $0.18 |
| Operating cash flow | $1,642 | $2,461 |
| Capital expenditures (as reported) | $4,230 | $6,603 |
Revenue rose 3.5%. Operating margin was approximately 3.2%, down from 3.5%. Restaurant food-and-bar gross margin declined to 64.22% from 65.48%; package-store gross margin edged up to 29.49% from 29.30%. Stockholder-attributable net income increased despite lower consolidated net income, reflecting the change in income attributable to noncontrolling interests.
At December 29, cash was $5,992, current assets $11,128, and current liabilities $9,689; working capital was $1,440, down from $3,150 at September 29, 2012. Long-term debt, including current maturities, totaled $15,327, versus $13,418 at September 29, 2012. Cash declined $1,229 during the quarter. Operating cash flow was more than offset by investing outflows of $2,047 and financing outflows of $824. The company reported compliance with loan covenants and no dividends paid.
Material changes and unusual items
- Restaurant food and bar sales increased, primarily attributed to menu-price increases. Comparable weekly restaurant food sales rose 2.78% and bar sales rose 12.18%. Package-store sales fell 6.19% on a same-store weekly basis; management cited the quarter’s earlier year-end cutoff and increased competition.
- Operating expenses increased 3.7%, slightly faster than revenue. Higher food costs, payroll, and costs associated with the new restaurant and Miami shopping-center operations contributed. The new restaurant recorded a $208 loss, primarily due to pre-opening costs; the company also recognized approximately $31 in pre-opening rent expense.
- The company purchased two North Miami parcels for $2,900, financing $1,950 with a seller mortgage at 7.5% and paying the balance in cash. It intends to expand customer parking on one parcel and lease the building on the other.
- After quarter-end, the company obtained an undrawn $500 line of credit bearing interest at prime plus 1.5%, due April 30, 2013 and secured by substantially all assets. It also disclosed refinancing activity for the Hallandale property: a $1,405 mortgage with a 4.35% swap-fixed rate and a $1,595 term loan with a 4.00% swap-fixed rate, amortized over 42 months with stated monthly payments of $41. The filing reports a $1,600 prepayment penalty related to refinancing.
- Capital spending includes noncash financing: the cash-flow disclosures report $1,950 of property acquired in exchange for debt. Management also cited planned refurbishment spending of approximately $850 and a $375 restaurant point-of-sale system.
Outlook, risks, and contingencies
Management expected restaurant food and bar sales to increase, but forecast lower restaurant food-and-bar gross profit due to higher food costs, including poultry, partly offset by lower rib costs. It expected package-store sales and margins to stabilize during FY2013, while higher food costs and overall expenses could pressure net income. Management anticipated increased operating costs during the year, planned continued advertising, and said it would limit further menu-price increases where possible. It stated cash on hand and expected operating cash flow should fund operations and capital expenditures for at least 12 months, while acknowledging uncertainty from unexpected expenses or revenue declines.
The company had a calendar-2013 fixed-cost purchase commitment for approximately $3,800 of baby back ribs. It identified food, beverage, labor, minimum-wage, competition, and interest-rate changes as relevant risks. Ordinary-course litigation includes personal-injury, accessibility, employment, and food-quality claims; management said such matters had not had a material effect. The filing reports no off-balance-sheet arrangements. Disclosure controls and internal control over financial reporting were assessed as effective.
Important facts for investors to verify
- Whether restaurant sales growth and the new restaurant’s performance offset the expected food-cost and expense pressures.
- Cash needs and debt-service capacity after the parcel purchase, capital projects, and post-quarter financing transactions; verify the terms and status of both Hallandale refinancing disclosures.
- Actual spending against the stated refurbishment and point-of-sale plans, and the timing and funding of remaining capital expenditures.
- Whether package-store sales stabilize and whether the rib purchase commitment delivers the anticipated cost and supply benefits.
- The effect of noncontrolling interests on reported consolidated earnings versus net income attributable to stockholders.