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| NATH > SEC Filings for NATH > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
Forward-Looking Statements
Statements in this Form 10-Q quarterly report may be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These risks and uncertainties, many of which are not within our control, include but are not limited to: the adverse effect that increasing commodity costs has on our profitability and operating results; the pending litigation with the primary supplier of hot dogs to our Branded Product Program may result in a disruption in that supply or increased costs, which would adversely affect our operating results; current economic conditions could result in decreased consumer spending on discretionary products, such as fast food; as well as those risks discussed from time to time in the Company's Form 10-K annual report for the year ended March 29, 2009, and in other documents which we file with the Securities and Exchange Commission. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements. We generally identify forward-looking statements with the words "believe," "intend," "plan," "expect," "anticipate," "estimate," "will," "should" and similar expressions. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q.
Introduction
As used in this Report, the terms "we", "us", "our", "Nathan's" or "the Company" mean Nathan's Famous, Inc. and its subsidiaries (unless the context indicates a different meaning).
We are engaged primarily in the marketing of the "Nathan's Famous" brand and the sale of products bearing the "Nathan's Famous" trademarks through several different channels of distribution. Historically, our business has been the operation and franchising of quick-service restaurants featuring Nathan's World Famous Beef Hot Dogs, crinkle-cut French-fried potatoes, and a variety of other menu offerings. Our Company-owned and franchised units operate under the name "Nathan's Famous," the name first used at our original Coney Island restaurant opened in 1916. Nathan's licensing program began in 1978 by selling packaged hot dogs and other meat products to retail customers through supermarkets or grocery-type retailers for off-site consumption. During fiscal 1998, we introduced our Branded Product Program, which enables foodservice retailers to sell some of Nathan's proprietary products outside of the realm of a traditional franchise relationship. In conjunction with this program, foodservice operators are granted a limited use of the Nathan's Famous trademark with respect to the sale of Nathan's World Famous Beef Hot Dogs and certain other proprietary food items and paper goods. During fiscal 2008, we launched our Branded Menu Program, under which foodservice operators may sell a greater variety of Nathan's Famous menu items than under the Branded Product Program.
Our revenues are generated primarily from selling products under Nathan's Branded Product Program, operating Company-owned restaurants, franchising the Nathan's restaurant concept (including under the Branded Menu Program) and licensing agreements for the sale of Nathan's products within supermarkets and club stores, the manufacture of certain proprietary spices and the sale of Nathan's products directly to other foodservice operators.
In addition to plans for expansion through franchising, licensing and our Branded Product Program, Nathan's continues to co-brand within its restaurant system. Nathan's is also the owner of the Arthur Treachers brand. At September 27, 2009, the Arthur Treacher's brand was being sold within 58 Nathan's restaurants.
Today, our restaurant system consists of 280 Nathan's franchised or licensed units, including 62 Branded Menu units and seven Company-owned units (including one seasonal unit), located in 24 states, the Cayman Islands and four foreign countries. Included in the number of franchised units are 42 Miami Subs locations. Previously, Miami Subs locations were not included in the number of units operating. At September 28, 2008, our restaurant system consisted of 235 Nathan's franchised or licensed units, including 46 limited-menu Branded Menu locations and six Company-owned units (including one seasonal unit), located in 25 states and five foreign countries.
Critical Accounting Policies and Estimates
As discussed in our Form 10-K for the fiscal year ended March 29, 2009, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies and estimates relate to revenue recognition; impairment of goodwill and other intangible assets; impairment of long-lived assets; impairment of notes receivable; share-based compensation and income taxes (including uncertain tax positions). Since March 29, 2009, there have been no changes in our critical accounting policies or significant changes to the assumptions and estimates related to them.
Adoption of Accounting Pronouncements
See Note B to the Consolidated Financial Statements contained in Item 1 of this Form 10-Q, for a complete discussion of the impact of adopting new accounting pronouncements during the fiscal quarter ended September 27, 2009 on the Company's financial position.
Results of Operations
Thirteen weeks ended September 27, 2009 compared to thirteen weeks ended September 28, 2008
Revenues from Continuing Operations
Total sales were $11,758,000 for the thirteen weeks ended September 27, 2009 ("second quarter fiscal 2010") as compared to $11,418,000 for the thirteen weeks ended September 28, 2008 ("second quarter fiscal 2009"). Foodservice sales from the Branded Product and Branded Menu Programs increased by 1.4% to $6,372,000 for the second quarter fiscal 2010 as compared to sales of $6,283,000 in the second quarter fiscal 2009. This increase was primarily attributable to higher average selling prices of 6.8%, which were partly offset by lower sales volume of approximately 3.7%. Total Company-owned restaurant sales (representing five comparable Nathan's restaurants, including one seasonal restaurant during both periods, two restaurants that the Company has operated due to the default of a franchisee on its franchise agreement and one restaurant that was transferred to a franchisee on January 26, 2009) were $4,920,000 for the second quarter fiscal 2010 as compared to $4,681,000 during the second quarter fiscal 2009. Sales at the five comparable Company-owned restaurants (including one seasonal restaurant) increased by 5.0% to $4,743,000 during the second quarter fiscal 2010, as compared to $4,519,000 during the second quarter fiscal 2009. The sales increase at our comparable Company-owned restaurants was due to higher customer counts of approximately 2.1% and higher check averages of approximately 2.7%. We believe that favorable weather conditions had a positive impact on our Coney Island restaurant this summer. During the second quarter fiscal 2010, sales to our television retailer were approximately $12,000 higher than the second quarter fiscal 2009. Nathan's products were on air 16 times during the second quarter fiscal 2010 as compared to 13 times during the second quarter fiscal 2009.
Franchise fees and royalties were $1,312,000 in the second quarter fiscal 2010 as compared to $1,191,000 in the second quarter fiscal 2009. Total royalties were $1,162,000 in the second quarter fiscal 2010 as compared to $1,058,000 in the second quarter fiscal 2009. During the second quarter fiscal 2010, we did not recognize revenue of $20,000 for royalties deemed to be uncollectible as compared to the second quarter fiscal 2009, when we did not recognize $70,000 of royalty income. Total royalties, excluding the adjustments for royalties deemed uncollectible as described above, were $1,182,000 in the second quarter fiscal 2010 as compared to $1,128,000 in the second quarter fiscal 2009. During the second quarter fiscal 2010, Nathan's earned $15,000 of higher royalties from sales by our manufacturers and primary distributor under our Branded Menu Program, primarily due to the increase in the number of Branded Menu locations. Franchise restaurant sales were $25,169,000 in the second quarter fiscal 2010 as compared to $25,143,000 in the second quarter fiscal 2009. Comparable domestic franchise sales (consisting of 126 Nathan's outlets, excluding sales under the Branded Menu Program) were $18,214,000 in the second quarter fiscal 2010 as compared to $19,647,000 in the second quarter fiscal 2009, a decrease of 7.3%. Franchise sales continued to be negatively affected by the economic recession, particularly at our travel, retail and entertainment venues, where sales are lower by approximately 7.1% compared to the second quarter fiscal 2009. At September 27, 2009, 280 domestic and international franchised or Branded Menu Program franchise outlets were operating as compared to 235 domestic and international franchised or Branded Menu Program franchise outlets at September 28, 2008. Royalty income from 10 domestic franchised outlets was deemed unrealizable during the thirteen weeks ended September 27, 2009, as compared to 15 franchised outlets during the thirteen weeks ended September 28, 2008. Domestic franchise fee income was $136,000 in the second quarter fiscal 2010 as compared to $79,000 in the second quarter fiscal 2009 due to the opening of one more conventional location during the second quarter fiscal 2010. International franchise fee income was $14,000 in the second quarter fiscal 2010, as compared to $9,000 during the second quarter fiscal 2009 primarily due to higher amortization of deferred development fees, associated with future development in Canada and China. During the second quarter fiscal 2010, eight new franchised outlets opened, including four Branded Menu Program outlets. During the second quarter fiscal 2009, nine new franchised outlets were opened, including seven Branded Menu Program outlets. We did not open any new international locations in the second quarter fiscal 2010 or the second quarter fiscal 2009.
License royalties decreased by $60,000 or 3.7% to $1,568,000 in the second quarter fiscal 2010 as compared to $1,628,000 in the second quarter fiscal 2009. The primary reason for this decline relates to the $234,000 settlement of a multi-year dispute for the manufacture of Nathan's proprietary ingredients in the second quarter fiscal 2009. Total royalties earned on sales of hot dogs from our retail and foodservice license agreements of $1,239,000 increased 14.2% from $1,085,000 as a result of higher licensee sales during the second quarter fiscal 2010. Royalties earned from SFG, primarily from the retail sale of hot dogs, were $895,000 during the second quarter fiscal 2010 as compared to $786,000 during the second quarter fiscal 2009. Royalties earned from another licensee, substantially from sales of hot dogs to Sam's Club, were $344,000 during the second quarter fiscal 2010 as compared to $299,000 during the second quarter fiscal 2009. We earned higher royalties of $43,000 from our agreement for the sale of Nathan's miniature bagel dogs to club stores.
Interest income was $240,000 in the second quarter fiscal 2010 as compared to $275,000 in the second quarter fiscal 2009, primarily due to lower interest earned on our cash and cash equivalents as a result of the lower current interest rate environment.
Other income was $18,000 in the second quarter fiscal 2010 as compared to $13,000 in the second quarter fiscal 2009.
Costs and Expenses from Continuing Operations
Overall, our cost of sales decreased by $508,000 to $8,093,000 in the second quarter fiscal 2010 as compared to $8,601,000 in the second quarter fiscal 2009. Our gross profit (representing the difference between sales and cost of sales) was $3,665,000 or 31.2% of sales during the second quarter fiscal 2010 as compared to $2,817,000 or 24.7% of sales during the second quarter fiscal 2009.
Cost of sales in the Branded Product Program decreased by approximately $552,000 during the second quarter fiscal 2010 as compared to the second quarter fiscal 2009, primarily as a result of the 7.6% reduction in our cost of hot dogs and lower sales volume. During the second quarter fiscal 2010, the market price of hot dogs was approximately 12.3% lower than during the second quarter fiscal 2009. In January 2009, we entered into a purchase commitment, as amended, to acquire 2,592,000 pounds of hot dogs at $1.685 per pound from April 2009 through September 2009, for approximately 47% of the expected usage. In January 2008, we entered into a purchase commitment to acquire approximately 1,785,000 pounds of hot dogs at $1.535 per pound from April 2008 through August 2008, or approximately 30% of the expected usage. These purchase commitments had varying affects on our hot dog costs during the second quarter fiscal 2010 and second quarter fiscal 2009, as compared to purchasing all of our products at the then-prevailing market price. During the second quarter fiscal 2010, the market price of hot dogs had declined from the time that we entered into the purchase commitment, costing the Company approximately $93,000 as compared to the benefit achieved from the prior purchase commitment during the second quarter fiscal 2009 when the market price of hot dogs continued to escalate resulting in savings of $158,000.
With respect to our Company-owned restaurants, our cost of sales during the second quarter fiscal 2010 was $2,588,000 or 52.6% of restaurant sales, as compared to $2,523,000 or 53.9% of restaurant sales in the second quarter fiscal 2009. During the second quarter fiscal 2010, our Company-owned stores experienced lower food, paper and labor costs as a percentage of sales which was partly offset by higher incentive compensation. The lower food cost as a percentage of sales was due primarily to the lower commodity cost of our products and the effect of sales price increases and certain menu changes. Cost of sales to our television retailer decreased by $21,000 in the second quarter fiscal 2010, primarily due to lower costs for our hot dogs, which was partly offset by higher sales volume.
Restaurant operating expenses were $973,000 in the second quarter fiscal 2010 as compared to $964,000 in the second quarter fiscal 2009. The increase during the second quarter fiscal 2010 when compared to the second quarter fiscal 2009 results from operating one more restaurant during the second quarter fiscal 2010 of $54,000 which was offset by a net reduction in operating expenses. Restaurant operating expenses at our comparable restaurants were $43,000 lower during the second quarter fiscal 2010, due primarily to lower utility costs of $77,000 and reductions in various other costs of $44,000, which were partly offset by higher occupancy costs of $29,000, insurance costs of $29,000 and marketing costs of $24,000 in connection with one monthly free standing insert campaign. During the second quarter fiscal 2010 our utility costs were approximately 8.3% lower than the second quarter fiscal 2009 which was due to lower commodity costs and lower consumption. We continue to be concerned about the uncertain market conditions for oil and natural gas.
Depreciation and amortization was $201,000 in the second quarter fiscal 2010 as compared to $200,000 in the second quarter fiscal 2009.
General and administrative expenses decreased by $10,000 to $2,239,000 in the second quarter fiscal 2010 as compared to $2,249,000 in the second quarter fiscal 2009. The difference in general and administrative expenses was primarily due to a decrease in bad debts of $95,000 and un-reimbursed property costs of $48,000, which was partly offset by higher marketing expenses of $61,000, higher professional fees of approximately $50,000 and higher compensation costs of $18,000.
Provision for Income Taxes from Continuing Operations
In the second quarter fiscal 2010, the income tax provision was $1,227,000 or 36.2% of income from continuing operations before income taxes as compared to $1,093,000 or 37.0% of income from continuing operations before income taxes in the second quarter fiscal 2009. For the fiscal periods ended September 27, 2009 and September 28, 2008, Nathan's tax provision, excluding the effects of tax-exempt interest income, was 38.5% and 40.2%, respectively. During the second quarter fiscal 2010, Nathan's resolved an uncertain tax position in one state and has reduced the associated unrecognized tax benefits and the related accrued interest and penalties by approximately $50,000 which lowered the effective tax rate from 37.7% to 36.2%. Nathan's is seeking to further resolve additional uncertain tax positions during the year ending March 28, 2010. Nathan's estimates that its unrecognized tax benefits and the related accrued interest and penalties could be reduced by $50,000 to $175,000.
Twenty-six weeks ended September 27, 2009 compared to twenty-six weeks ended September 28, 2008
Revenues from Continuing Operations
Total sales were $22,773,000 for the twenty-six weeks ended September 27, 2009 ("fiscal 2010 period") as compared to $22,434,000 for the twenty-six weeks ended September 28, 2008 ("fiscal 2009 period"). Foodservice sales from the Branded Product and Branded Menu Programs increased by 2.4% to $13,215,000 for the fiscal 2010 period as compared to sales of $12,901,000 in the fiscal 2009 period. This increase was primarily attributable to higher average selling prices of 9.4%, which was partly offset by lower sales volume of approximately 6.3%. Total Company-owned restaurant sales (representing four comparable Nathan's restaurants and one seasonal restaurant during both periods, two restaurants that the Company has operated due to the default of a franchisee on its franchise agreement and one restaurant that was transferred to a franchisee on January 26, 2009) were $8,416,000 for the fiscal 2010 period as compared to $8,540,000 during the fiscal 2009 period. Sales at the five comparable Company-owned restaurants (including one seasonal restaurant) were $8,239,000 during the fiscal 2010 period, as compared to $8,192,000 during the fiscal 2009 period. The sales increase at our five comparable Company-owned restaurants was adversely affected by reduced sales during June 2009, which we believe was primarily attributable to poor weather conditions. The rain during June 2009 severely reduced the number of people that went to the beach and consequently our Coney Island restaurant. Sales during the five months at these five restaurants, excluding June 2009, increased by approximately 4.8% over the same period last year. During the fiscal 2010 period, sales to our television retailer were approximately $149,000 higher than the fiscal 2009 period. Nathan's products were on air 57 times during the fiscal 2010 period as compared to 31 times during the fiscal 2009 period. This year's airings included 10 "Try Me" special promotions, seven "Today's Special Value" promotions and two, half-hour food shows.
Franchise fees and royalties were $2,466,000 in the fiscal 2010 period as compared to $2,343,000 in the fiscal 2009 period. Total royalties were $2,199,000 in the fiscal 2010 period as compared to $2,093,000 in the fiscal 2009 period. During the fiscal 2010 period, we did not recognize revenue of $125,000 for royalties deemed to be uncollectible as compared to the fiscal 2009 period, when we did not recognize $98,000 of royalty income. Total royalties, excluding the adjustments for royalties deemed uncollectible as described above, were $2,324,000 in the fiscal 2010 period as compared to $2,191,000 in the fiscal 2009 period. During the fiscal 2010 period, Nathan's earned $45,000 of higher royalties from sales by our manufacturers and primary distributor under our Branded Menu Program, primarily due to the increase in the number of Branded Menu locations. Franchise restaurant sales were $49,167,000 in the fiscal 2010 period as compared to $48,900,000 in the fiscal 2009 period. Comparable domestic franchise sales (consisting of 126 Nathan's outlets, excluding sales under the Branded Menu Program) were $34,837,000 in the fiscal 2010 period as compared to $37,470,000 in the fiscal 2009 period, a decrease of 7.0%. Franchise sales continued to be negatively affected by the economic recession, particularly at our travel, retail and entertainment venues, where sales are lower by approximately 8.1% compared to the fiscal 2009 period. At September 27, 2009, 280 domestic and international franchised or Branded Menu Program franchise outlets were determined to be operating as compared to 235 domestic and international franchised or Branded Menu Program franchise outlets at September 28, 2008. Royalty income from 10 domestic franchised outlets was deemed unrealizable during the twenty-six weeks ended March 29, 2009, as compared to 16 franchised outlets during the twenty-six weeks ended September 28, 2008. Domestic franchise fee income was $204,000 in the fiscal 2010 period as compared to $126,000 in the fiscal 2009 period due to higher opening fees earned from conventional franchised locations during the fiscal 2010 period. International franchise fee income was $63,000 in the fiscal 2010 period, as compared to $79,000 during the fiscal 2009 period primarily due to fewer openings of international franchised restaurants. During the fiscal 2010 period, 15 new franchised outlets opened, including eight Branded Menu Program outlets, one unit in Kuwait and one unit in the Dominican Republic. During the fiscal 2009 period, 23 new franchised outlets were opened, including 16 Branded Menu Program outlets, two units in Kuwait and one unit in Dubai.
License royalties increased by $132,000 or 4.1% to $3,375,000 in the fiscal 2010 period as compared to $3,243,000 in the fiscal 2009 period. Total royalties earned on sales of hot dogs from our retail and foodservice license agreements of $2,755,000 increased 12.8% from $2,443,000 as a result of higher licensee sales during the fiscal 2010 period. Royalties earned from SFG, primarily from the retail sale of hot dogs, were $2,020,000 during the fiscal 2010 period as compared to $1,838,000 during the fiscal 2009 period. Royalties earned from another licensee, substantially from sales of hot dogs to Sam's Club, were $735,000 during the fiscal 2010 period as compared to $605,000 during the fiscal 2009 period. Beginning March 2008, Nathan's World Famous Beef Hot Dogs were introduced into over 500 of the foodservice cafes operating in Sam's Clubs throughout the United States. The Sam's Club introduction was substantially completed by June 2008. Accordingly, we anticipate earning similar royalties under this agreement during the balance of this fiscal year as compared to the last two fiscal quarters of last year. We earned lower royalties of $190,000 from the sale of proprietary ingredients during the fiscal 2010 period. During the fiscal 2009 period, we earned $234,000 in settlement of a multi-year dispute under that agreement related to the unauthorized use of certain ingredients. During the fiscal 2010 period, revenues from our agreement for the manufacture of Nathan's proprietary ingredients increased by $37,000 when compared to sales in fiscal 2009.
Interest income was $480,000 in the fiscal 2010 period as compared to $522,000 in the fiscal 2009 period, primarily due to lower interest income on our cash and cash equivalents as a result of the lower current interest rate environment and the MSC Note (as defined) receivable, received in connection with the sale of Miami Subs on June 7, 2007.
Other income was $34,000 in the fiscal 2010 period as compared to $25,000 in the fiscal 2009 period.
Costs and Expenses from Continuing Operations
Overall, our cost of sales decreased by $731,000 to $16,202,000 in the fiscal 2010 period as compared to $16,933,000 in the fiscal 2009 period. Our gross profit (representing the difference between sales and cost of sales) was $6,571,000 or 28.9% of sales during the fiscal 2010 period as compared to $5,501,000 or 24.5% of sales during the fiscal 2009 period.
Cost of sales in the Branded Product Program decreased by approximately $645,000 during the fiscal 2010 period as compared to the fiscal 2009 period, primarily as a result of the sales volume decline, and decrease in the cost of our hot dogs by approximately 0.9%. During the fiscal 2010 period, the market price of hot dogs was approximately 5.8% lower than during the fiscal 2009 period. In January 2009, we entered into a purchase commitment, as amended, to acquire 2,592,000 pounds of hot dogs at $1.685 per pound from April 2009 through September 2009, or approximately 47% of the expected usage. In January 2008, we entered into a purchase commitment to acquire approximately 1,785,000 pounds of hot dogs at $1.535 per pound from April 2008 through August 2008, or approximately 30% of the expected usage. These purchase commitments had varying effects on our hot dog costs during the fiscal 2010 and fiscal 2009 periods, as compared to purchasing all of our products at the then-prevailing market price. During the fiscal 2010 period, the market price of hot dogs declined from the time that we entered into the purchase commitment, costing the Company approximately $52,000. During the fiscal 2009 period, the market price of hot dogs continued to escalate and the purchase commitment yielded savings of $462,000. Beginning in July 2008, we initiated price increases in our Branded Product Program, in an effort to offset the increased cost of our hot dogs, which has improved margins. If the cost of beef and beef trimmings increases for product in excess of that covered by the purchase commitment and we are unable to pass on these higher costs through price increases, our margins will be adversely impacted.
With respect to our Company-owned restaurants, our cost of sales during the fiscal 2010 period was $4,585,000 or 54.5% of restaurant sales, as compared to $4,760,000 or 55.7% of restaurant sales in the fiscal 2009 period. During the fiscal 2010 period, our Company-owned stores experienced lower food, paper and labor as a percentage of sales. The lower food cost as a percentage of sales was due primarily to the slightly lower commodity cost of our products and the effect of the sales price increases and certain menu changes. Cost of sales to our television retailer increased by $89,000 in the fiscal 2010 period, primarily due to higher sales volume.
Restaurant operating expenses decreased by $80,000 to $1,796,000 in the fiscal 2010 period as compared to $1,876,000 in the fiscal 2009 period. The decrease during the fiscal 2010 period when compared to the fiscal 2009 period results from lower operating costs at our comparable restaurants during the fiscal 2010 period of $74,000 due primarily to lower utility costs of $91,000 and reductions . . .
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