Nathan’s Famous, Inc. — Form 10-Q Summary
Business context and reporting period. This filing covers the 13 and 26 weeks ended September 29, 2013, compared with the periods ended September 23, 2012. Nathan’s earns revenue from branded food-product sales, company restaurants, franchising, and licensing. At period-end, its system included 316 franchised units and five company-owned units. Results are seasonal and interim performance may not indicate full-year results.
Financial performance
| Metric | 13 weeks ended Sep. 29, 2013 | Prior-year 13 weeks | 26 weeks ended Sep. 29, 2013 | Prior-year 26 weeks |
|---|---|---|---|---|
| Total revenue | $23.7 million | $21.4 million | $47.1 million | $41.5 million |
| Net income | $2.6 million | $2.8 million | $6.0 million | $4.9 million |
| Diluted EPS | $0.57 | $0.62 | $1.30 | $1.06 |
| Gross profit / margin on sales | $4.5 million / 22.7% | $4.7 million / 26.7% | $8.0 million / 21.7% | $8.1 million / 23.9% |
Second-quarter revenue rose 10.8%, while net income declined 6.9%; higher hot-dog costs and general and administrative expenses pressured earnings. First-half revenue increased 13.3% and net income increased 23.7%, including a $2.8 million insurance gain related to Superstorm Sandy. First-half results also included a $0.4 million impairment charge on a private-company investment.
- Revenue mix and changes: Second-quarter sales rose 12.9% to $19.9 million, led by Branded Product and Branded Menu sales, up 21.5%. Company-owned restaurant sales fell $0.3 million, partly because Yonkers remained closed for redevelopment. First-half sales rose 8.1%; franchise and royalty revenue declined to $2.9 million from $2.9 million, while license royalties increased to $4.4 million from $4.4 million.
- Costs and margins: Management attributed lower gross margins principally to higher hot-dog costs. Market hot-dog costs were about 9.8% higher year over year in the quarter and 5.9% higher for the half-year. The company said some price increases had already occurred and expected to pass through recent cost increases.
- Cash flow and liquidity: Operating cash flow was negative $1.8 million for the half-year, versus positive $4.9 million a year earlier, including the $6.0 million SMG litigation payment and higher receivables. Investing cash flow was positive $6.2 million, including insurance proceeds and a litigation-settlement cash-flow presentation. Cash and equivalents were $19.1 million, marketable securities $11.1 million, and working capital $33.6 million at September 29. The company reported no outstanding debt and said available cash, securities, and expected operating cash flow should fund operations and repurchases for at least 12 months.
- Balance sheet: Total assets were $52.3 million and stockholders’ equity was $41.7 million. Current liabilities were $8.0 million. No clear standalone operating cash balance beyond reported cash and cash equivalents is stated.
Outlook, risks, and unusual items
- The SMG litigation was concluded when SMG withdrew $6.009 million from the blocked account on July 24, 2013, satisfying the judgment. Nathan’s new exclusive retail hot-dog licensing agreement with John Morrell & Co. was expected to begin in March 2014, when the SMG agreement expires. The transition and production levels remain key execution risks.
- Superstorm Sandy damaged the flagship Coney Island restaurant, which reopened May 20, 2013. Nathan’s recognized a $2.801 million insurance gain in the first quarter and recorded a $0.745 million receivable for business-interruption expenses it considered probable of recovery. The filing says the business-interruption claim exceeded that recorded receivable.
- Management expected the redeveloped Yonkers restaurant to open in November 2013 and estimated approximately $1.2 million of investment for the year, of which $0.36 million had been incurred by September 29. It also expected higher post-reopening depreciation and higher property-insurance costs.
- Key risks include volatile beef and hot-dog costs, drought-related commodity pressure, the ability to pass cost increases to customers, foodservice demand, franchisee performance, labor and healthcare costs, utilities, and insurance costs. The company had no hot-dog purchase commitments outstanding at period-end.
- Management estimated a fiscal-year tax rate of approximately 39%–41%. It reported $314,000 of unrecognized tax benefits and $358,000 of related accrued interest and penalties; up to $67,000 could be reduced during the remainder of fiscal 2014, with no assurance.
- The company adopted a stockholder rights plan with a 15% ownership trigger, subject to plan terms. It made no share repurchases during the first half.
Important facts for investors to verify
- Whether John Morrell’s agreement commenced as scheduled and whether supply, production, and royalties transitioned successfully from SMG.
- Whether hot-dog price increases offset commodity-cost inflation without materially reducing sales or margins.
- Recovery and timing of the outstanding Sandy business-interruption claim, and the final costs and performance of the Coney Island and Yonkers projects.
- Underlying earnings excluding the $2.801 million insurance gain and the $0.400 million investment impairment, as well as the causes of weak operating cash flow.