Flanigan’s Enterprises, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first 26 weeks of fiscal 2019, ended March 30, 2019; comparisons are to periods ended March 31, 2018. Unless otherwise noted, amounts are in millions of dollars. The financial statements are unaudited.
Business context
The company operates restaurants and package liquor stores, including units owned through controlled limited partnerships, and franchises additional locations. As of March 30, 2019, it operated or controlled 26 units and franchised five. Store #19, a combined restaurant and liquor store in Hollywood, Florida, remained closed after an October 2018 fire.
Financial performance
| Metric | 13 weeks ended Mar. 30, 2019 | 13 weeks ended Mar. 31, 2018 | 26 weeks ended Mar. 30, 2019 | 26 weeks ended Mar. 31, 2018 |
|---|---|---|---|---|
| Total revenue | $29.736 | $29.456 | $57.630 | $57.849 |
| Operating income | $1.890 | $2.512 | $2.545 | $4.099 |
| Net income | $1.465 | $1.885 | $2.463 | $2.841 |
| Net income attributable to company stockholders | $1.021 | $1.397 | $1.764 | $2.018 |
| Basic and diluted EPS | $0.55 | $0.75 | $0.95 | $1.09 |
| Operating cash flow | — | $5.069 | $6.392 |
Second-quarter revenue increased 0.95%, while first-half revenue declined 0.38%. First-half operating income fell 37.9% and stockholder-attributable net income fell 12.6%. The second-quarter stockholder-attributable net margin was 3.43%, versus 4.74% a year earlier; first-half margin was 3.06%, versus 3.49%.
For the second quarter, restaurant food sales were $18.219 million, bar sales $5.745 million, and package-store sales $5.092 million. Comparable weekly restaurant food and bar sales rose 4.94% and 4.49%, respectively; same-store package-store sales rose 10.73%. Management cited stronger traffic, partly offset by the closed Store #19.
Restaurant food-and-bar gross margin was 65.29% for the quarter and 65.21% for the first half, versus 65.62% and 65.28%. Package-store gross margin was 26.96% for the quarter and 26.80% for the first half, versus 27.91% and 27.84%. Operating costs and expenses increased 3.35% in the quarter and 2.48% in the first half; SG&A increased 8.54% and 8.81%, respectively.
Cash, liquidity, debt and investment
Cash and cash equivalents were $13.473 million at March 30, 2019, compared with $13.414 million at September 29, 2018 and $15.497 million a year earlier. First-half investing cash outflow was $2.530 million, including property and equipment purchases; financing cash outflow was $2.480 million, including debt payments, dividends, and distributions to noncontrolling interests. The company paid a $0.28-per-share dividend during the half, up from $0.25 in the prior-year period.
Current assets were $19.746 million and current liabilities $16.734 million, leaving working capital of $3.012 million, down from $5.715 million at September 29, 2018. Management attributed the decline mainly to the $1.3 million Pompano Beach property purchase and reclassification of mortgage principal to current liabilities. Long-term debt, including current maturities, totaled $14.574 million, approximately unchanged from September 29, 2018; the company reported compliance with loan covenants. It also had $0.833 million outstanding on financed insurance premiums. Management believes cash, operating cash flow, and available borrowing capacity will fund operations and planned capital expenditures for at least 12 months.
First-half capital expenditures were $4.199 million, compared with $1.848 million in the prior-year period. The company purchased vacant Pompano Beach property for $1.3 million, intends to develop an adjacent restaurant site, and is advancing a Sunrise restaurant project. Management expects approximately $450,000 of fiscal 2019 refurbishment spending; $286,000 had been spent through March 30.
Outlook, unusual items and risks
- Management expected revenue to remain broadly stable for the rest of fiscal 2019, with Store #19 expected to remain closed at least through year-end. It expected package-store sales to increase, but restaurant sales and profits to face the closure’s impact.
- Management anticipated higher food costs, lower restaurant gross profit, and lower package-store margins from competitive pricing. It also expected SG&A to rise; occupancy costs were expected to remain stable. These are expectations, not formal earnings guidance.
- The Store #19 fire resulted in a reported $602,000 insurance recovery gain in the first half. Management did not expect further proceeds apart from $132,000 of depreciation recovery not yet received. The location generated a $274,000 net loss in the first half, according to management.
- The Sunrise restaurant was in development, with $63,000 of pre-opening costs recognized in the quarter. A planned redevelopment at Store #31 was abandoned because it would reduce parking too much. Subsequent to quarter-end, the company contracted for $1.618 million of Store #19 site work and a new liquor-store building, and for $77,000 of restaurant rebuild design work.
- The company had a fixed-price commitment to purchase approximately $5.888 million of ribs during calendar 2019. Routine litigation was described as not having had a material effect.
- Management expected adoption of lease accounting in fiscal 2020 to materially increase reported assets and liabilities; the impact assessment was ongoing.
- Disclosure controls were deemed ineffective because of a material weakness involving a fraudulent email that led to an erroneous wire transfer. The funds were recovered with no financial loss; the company implemented additional verification and approval procedures.
- The filing identifies cybersecurity threats as a risk. Management also notes that results are exposed to customer demand, competition, food, beverage and labor costs, and interest-rate changes.
Reporting detail to note: The income statement reports first-half income tax expense of $344,000, while the MD&A states $343,000.
Investor verification checklist
- Track comparable-store sales, food and labor costs, and whether margin pressure continues.
- Verify Store #19 rebuild timing, remaining insurance recovery, and total project costs and commitments.
- Monitor liquidity and debt maturities, particularly the current portion of debt and working-capital trend.
- Assess funding and execution of Sunrise and other development plans, including any limited-partnership fundraising.
- Follow remediation of the wire-transfer control weakness and the company’s lease-accounting adoption estimate.