Nathan’s Famous, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first 39 weeks of fiscal 2012, ended December 25, 2011; comparative periods ended December 26, 2010. Amounts below are in millions unless stated otherwise. The company markets its brand through branded-product sales, company-operated and franchised restaurants, and licensing. At quarter-end it had 297 franchised/Branded Menu outlets and five company-operated restaurants.
Financial performance
| Metric | 13 weeks ended Dec. 25, 2011 | 13 weeks ended Dec. 26, 2010 | 39 weeks ended Dec. 25, 2011 | 39 weeks ended Dec. 26, 2010 |
|---|---|---|---|---|
| Total revenue | $14.800 | $13.079 | $51.815 | $44.987 |
| Income (loss) before tax | $1.959 | $(0.174) | $8.285 | $2.472 |
| Net income | $1.211 | $(0.153) | $5.076 | $1.658 |
| EPS, diluted | $0.24 | $(0.03) | $0.98 | $0.30 |
| Operating cash flow | Not presented separately | Not presented separately | $6.442 | $4.857 |
- Third-quarter revenue rose 13.2%; nine-month revenue rose 15.2%. Nine-month sales increased 17.3% to $41.681 million, led by Branded Product Program sales, up 28.6% to $29.843 million. Franchise fees and royalties and license royalties also increased.
- Gross profit on sales was $2.011 million, or 17.5% of sales, in the quarter versus $2.276 million, or 22.2%, a year earlier. For the 39-week period it was $8.639 million, or 20.7%, versus $8.679 million, or 24.4%. Higher hot-dog costs, especially in the Branded Product Program, compressed margins despite sales growth.
- Nine-month net income improved substantially, but the comparison includes a $4.910 million SMG litigation charge in the prior-year period and none in the current period. Current-period interest expense of $0.335 million reflects post-judgment interest on that dispute.
- Cash and cash equivalents were $15.832 million at December 25, up $6.892 million from fiscal year-end; marketable securities were $15.800 million, down from $18.906 million. Working capital was $34.446 million. Total liabilities were $14.022 million and the company reported no outstanding borrowings.
- Operating cash flow was $6.442 million; investing activities provided $3.000 million, including securities proceeds and sale proceeds on the Miami Subs note; financing activities used $2.550 million, principally for share repurchases. Capital expenditures were $0.636 million.
Changes, outlook and key risks
- Third-quarter company-owned restaurant sales rose 8.5%, helped by warmer weather, higher check averages and modestly higher customer counts. Nine-month company-owned restaurant sales declined $0.092 million; management attributed pressure principally to adverse summer weather and Tropical Storm Irene, including estimated lost sales of $0.172 million.
- Comparable domestic franchise sales fell 3.0% in the quarter and 1.6% over 39 weeks; management cited economic conditions and weaker consumer confidence/spending. Comparable international franchise sales increased 12.0% and 9.0%, respectively.
- Beef and hot-dog costs were unusually high: market hot-dog costs were about 18.1% higher year over year in the quarter and 14.0% higher over the 39-week period. Management warned that further commodity increases, if not offset by pricing or purchasing arrangements, could pressure margins. Oil, gas, labor, health-care and potential minimum-wage costs are additional concerns.
- The company’s appeal of the approximately $4.910 million SMG judgment remained pending. The judgment and accrued post-judgment interest were secured in a blocked account; restricted cash and the litigation accrual were each $5.307 million at quarter-end. The company expects to continue accruing interest at 9% annually during the appeal. SMG is also the exclusive U.S. retail packaged-frankfurter licensee and a key supplier; the license agreement is scheduled to expire in March 2014.
- At quarter-end, the company had a commitment to purchase up to 987,000 pounds of hot dogs for approximately $1.900 million, expected to be completed by March 2012. Management stated that cash, securities and operating cash flow were expected to fund operations and repurchases for at least 12 months; it also disclosed that the January 2012 tender offer would reduce cash and securities by approximately $13.177 million before fees.
- The January 12, 2012 tender offer, a subsequent event, accepted 598,959 shares at $22 each for $13.177 million, excluding fees. The filing says the effect would be reflected in the quarter ending March 25, 2012. Management estimated a fiscal-2012 annual tax rate of 37.5%–39.5%; no specific revenue or earnings guidance was provided.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. The filing notes that interim results are seasonal and may not indicate full-year performance.
Important facts for investors to verify
- Developments and potential cash consequences of the SMG appeal, including restricted funds, interest accruals and any effect on the supplier/license relationship.
- Whether hot-dog commodity costs can be offset through pricing, purchasing commitments or other measures, and the resulting effect on gross margins.
- Post-tender liquidity, share count and subsequent-period cash flows, including the $13.177 million repurchase and associated expenses.
- Comparable domestic franchise trends, weather-related effects on company restaurants, and the durability of Branded Product and Branded Menu growth.
- Resolution of uncertain tax positions and actual fiscal-year tax rate compared with management’s 37.5%–39.5% estimate.