Nathan’s Famous, Inc. — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2013, the 13 weeks ended December 23, 2012; year-to-date figures cover 39 weeks. Comparisons are with periods ended December 25, 2011. Amounts are in U.S. dollars unless noted.
Business context and financial performance
Nathan’s markets its brand through Branded Product and Branded Menu programs, company-operated and franchised restaurants, and retail and foodservice licensing. At quarter-end, it had 308 franchised units and five company-owned units, including restaurants closed after Hurricane Sandy or for redevelopment.
| Metric | 13 weeks ended Dec. 23, 2012 | 13 weeks ended Dec. 25, 2011 | 39 weeks ended Dec. 23, 2012 | 39 weeks ended Dec. 25, 2011 |
|---|---|---|---|---|
| Total revenue | $15.025 million | $14.800 million | $56.567 million | $51.815 million |
| Income before taxes | $1.730 million | $1.959 million | $9.763 million | $8.285 million |
| Net income | $1.062 million | $1.211 million | $5.913 million | $5.076 million |
| Diluted EPS | $0.23 | $0.24 | $1.29 | $0.98 |
| Gross profit margin | 17.2% | 17.5% | 22.1% | 20.7% |
- Quarterly revenue rose 1.5%; quarterly net income fell 12.3%. Year-to-date revenue rose 9.2% and net income rose 16.5%.
- Year-to-date sales increased 10.1%, led by Branded Product and Branded Menu foodservice sales, up 12.1%, and higher license royalties. Price increases supported year-to-date gross margin, despite higher hot-dog costs.
- Quarterly gross margin declined as storm-related restaurant closures reduced sales leverage; higher product prices partly offset increased hot-dog costs. General and administrative expense rose 17.6% for the quarter, largely due to compensation and share-based compensation.
Cash, liquidity, debt and capital
- At December 23, 2012, cash and cash equivalents were $14.300 million, marketable securities $12.416 million, and restricted cash $5.754 million. Net working capital was $28.739 million, compared with $21.989 million at March 25, 2012.
- Operating cash flow for the 39 weeks was $7.132 million, compared with $6.442 million a year earlier. Investing activities provided $1.292 million; financing activities used $0.153 million. Cash increased by $8.271 million from the fiscal-year start.
- The company reported no outstanding borrowings. Current liabilities were $12.824 million, including a $5.754 million litigation accrual matched by restricted cash. The restricted funds are not available for general use while the SMG matter remains unresolved.
- Capital expenditures were $0.322 million year to date; the company also invested $0.500 million in a privately held company. It repurchased 20,458 shares for $0.592 million and had authorization remaining for 387,015 shares.
Material developments, outlook and risks
- Hurricane Sandy: The storm closed all company-owned restaurants temporarily and affected 78 franchised locations; two franchised locations and both Coney Island restaurants remained closed at the reporting date. The new Boardwalk restaurant was expected to reopen in March 2013; the damaged flagship location was targeted for reopening in spring 2013. The company reported approximately $797,000 in losses through December 23 and expected roughly $100,000 monthly in further operating and cleanup costs until reopening. It believed insurance would cover repairs and eligible business-interruption losses; insurer advances totaled $1 million, of which approximately $203,000 remained unused.
- SMG litigation: A judgment of approximately $4.9 million plus post-judgment interest was secured with restricted cash; interest accrues at 9% annually. On January 25, 2013, after the reporting date, the Illinois appellate court affirmed the trial-court ruling. Nathan’s was evaluating further appeal options. The judgment’s ultimate payment timing and appeal outcome remain material uncertainties.
- Supply agreement: On December 5, 2012, Nathan’s entered a binding letter agreement making John Morrell & Co. its exclusive retail licensee for hot dogs, sausage and corned beef beginning March 2, 2014, for 18 years. Royalties are 10.8% of sales, subject to first-year minimum royalties of at least $10 million that increase annually. Management noted potential benefits versus the current arrangement, but also risks involving product quality, consistency and transition execution.
- Costs and commitments: Beef and hot-dog prices were volatile, with beef costs at record levels for the Branded Product Program period described. Nathan’s had a $4.3 million hot-dog purchase commitment for January–March 2013 and a similar commitment for April–June, whose final value was not yet determined. Management warned that it may not be able to pass future cost increases through to customers.
- Management outlook: No earnings or revenue guidance was provided. Management expected cash, marketable securities and operating cash generation to fund operations and planned investments for at least 12 months. It estimated a fiscal 2013 effective tax rate of approximately 38.5%–40.0%. It also cited possible future pressure from commodities, utilities, distribution, insurance, labor and health-care costs, consumer spending, and storm-related closures.
- Comparable domestic franchise sales declined 3.6% year to date; management attributed part of the decline to storm closures and noted weakness in some venues. The filing says results are seasonal and interim performance may not indicate full-year results.
Important facts for investors to verify
- Subsequent developments in the SMG appeal, potential payment obligations, and the availability of the $5.754 million restricted deposit.
- Insurance recovery, remaining storm-related costs, and reopening progress for the Coney Island restaurants and affected franchised locations.
- Execution and economics of the John Morrell agreement, including minimum royalties, transition timing, product quality and supply continuity.
- Whether pricing and purchase commitments can offset further beef-cost increases without materially weakening demand or margins.
- Franchise sales trends, the effect of restaurant redevelopment and closures, and the use of remaining share-repurchase authorization.