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NATH > SEC Filings for NATH > Form 10-Q on 2-Nov-2012All Recent SEC Filings

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Form 10-Q for NATHANS FAMOUS INC


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 have on our profitability and operating results, including the prolonged Midwest drought which has resulted in record high corn prices; 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; the outcome of any appeal of the court's ruling in such litigation; the timing of any such cash payment under the court ruling in such litigation and the tax impact of the ruling; the status of our licensing and supply agreements, including our ability to enter into a new supply agreement for hot dogs and the terms thereof; current economic conditions could result in decreased consumer spending on discretionary products, such as fast food; as well as those risks discussed in the Company's Form 10-K annual report for the year ended March 25, 2012, 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 product 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 currently enables foodservice retailers and others to sell some of Nathan's proprietary products outside of the realm of a traditional franchise relationship. In conjunction with this program, purchasers of Nathan's products are granted a limited use of the Nathan's Famous trademark with respect to the sale of the purchased products, including Nathan's World Famous Beef Hot Dogs, certain other proprietary food items and paper goods. During fiscal 2008, we launched our Branded Menu Program, which is a limited franchise 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 the Branded Menu Program) and licensing agreements for the sale of Nathan's products within supermarkets and club stores, the sale of Nathan's products directly to other foodservice operators and the manufacture of certain proprietary spices by third parties.

In addition to plans for expansion through our Branded Product Program, franchising and licensing, Nathan's continues to seek to co-brand within its restaurant system. Nathan's is also the owner of the Arthur Treacher's brand. At September 23, 2012, the Arthur Treacher's brand was being sold within 55 Nathan's restaurants.

At September 23, 2012, our restaurant system consisted of 304 Nathan's franchised units, including 125 Branded Menu units, and five Company-owned units (including one seasonal unit), located in 27 states, the Cayman Islands and six foreign countries. At September 25, 2011, our restaurant system consisted of 282 Nathan's franchised units, including 106 Branded Menu units, and five Company-owned units (including one seasonal unit), located in 27 states, the Cayman Islands and six foreign countries.

As described in our Annual Report on Form 10-K for the year ended March 25, 2012, our future results could be impacted by many developments including that the terms of our next primary license agreement for hot dogs may be more favorable, although there can be no assurance thereof, than our agreement with SMG which is scheduled to expire on February 28, 2014. In addition, our future operating results could be impacted by the record high corn prices, as a result of the drought in the Midwest, which could significantly increase the cost of beef as well as lost revenue related to the temporary closure of our Coney Island restaurant due to Hurricane Sandy and the costs to fix such location so that it can reopen soon. See Note M of the Notes to Consolidated Financial Statements.

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Critical Accounting Policies and Estimates

As discussed in our Form 10-K for the fiscal year ended March 25, 2012, 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 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; share-based compensation and income taxes (including uncertain tax positions). Since March 25, 2012, there have been no changes in our critical accounting policies or significant changes to the assumptions and estimates related to them.

Recently Issued Accounting Pronouncements Not Yet Adopted

In July 2012, the Financial Accounting Standards Board, ("FASB") issued new accounting guidance on testing indefinite-lived intangible assets for impairment. The new guidance provides the entity with the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of an indefinite-lived asset is less than its carrying value. If it is not, then no further analysis is required otherwise then the previously required quantitative testing is required. The new guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, which for Nathan's will be the first quarter of its fiscal 2014. Early adoption is permitted. We do not expect the adoption of this new guidance to have a material impact on the results of operations or financial position.

Results of Operations

Thirteen weeks ended September 23, 2012 compared to thirteen weeks ended September 25, 2011

Revenues

Total sales increased by 11.0% to $17,608,000 for the thirteen weeks ended September 23, 2012 ("second quarter fiscal 2013") as compared to $15,857,000 for the thirteen weeks ended September 25, 2011 ("second quarter fiscal 2012"). Foodservice sales from the Branded Product and Branded Menu Programs increased by 8.7% to $11,485,000 for the second quarter fiscal 2013 as compared to sales of $10,566,000 in the second quarter fiscal 2012. This increase was primarily attributable to a 8.4% increase in the volume of products ordered and the impact of price increases. Total Company-owned restaurant sales, comprised of five Nathan's restaurants in both periods (including one seasonal restaurant), increased by 21.2% or $1,070,000 to $6,109,000 during the second quarter fiscal 2013 compared to $5,039,000 during the second quarter fiscal 2012. This increase was primarily attributed to the increased sales at our relocated and expanded seasonal Boardwalk restaurant in Coney Island that opened in April 2012. Weather conditions were also favorable during the second quarter fiscal 2013 as compared to the second quarter fiscal 2012, when we were forced to temporarily close all of our restaurants during tropical storm Irene for the weekend of August 27, 2011 and experienced much more rain than usual, particularly during weekends, and a cold Labor Day weekend which we believe further hurt sales particularly at our Coney Island locations. During the second quarter fiscal 2013, other sales were approximately $238,000 lower than the second quarter fiscal 2012 primarily because Nathan's terminated our agreement with the QVC television network in March 2012.

Franchise fees and royalties were $1,508,000 in the second quarter fiscal 2013 as compared to $1,420,000 in the second quarter fiscal 2012. Total royalties were $1,389,000 in the second quarter fiscal 2013 as compared to $1,246,000 in the second quarter fiscal 2012. Royalties earned under the Branded Menu program were $233,000 in the second quarter fiscal 2013 as compared to $132,000 in the second quarter fiscal 2012 due principally to the additional units in operation. Royalties earned under the Branded Menu Program are not based upon a percentage of restaurant sales but are based upon product purchases. Traditional franchise royalties were $1,156,000 in the second quarter fiscal 2013 as compared to $1,114,000 in the second quarter fiscal 2012. Franchise restaurant sales were $25,492,000 in the second quarter fiscal 2013 as compared to $25,447,000 in the second quarter fiscal 2012. Sales generated from new store openings, more than offset sales declines from closed stores and the sales decline at our comparable restaurants. Comparable domestic franchise sales (consisting of 139 Nathan's outlets, excluding sales under the Branded Menu Program, operating for 15 months prior to the beginning of the fiscal quarter) were $22,265,000 in the second quarter fiscal 2013 as compared to $ 23,209,000 in the second quarter fiscal 2012, a decrease of 4.1%. Franchise sales within entertainment venues declined by approximately 7.9% compared to the second quarter fiscal 2012, including significant sales declines at two franchised locations that have been negatively affected by adjacent long term construction projects. Franchise sales in retail environments increased by approximately 0.7% compared to the second quarter fiscal 2012. During the second quarter fiscal 2012, most of our franchised locations in the Northeast were negatively affected by tropical storm Irene. Comparable international franchise sales, principally the Middle East, increased by approximately $99,000 or 10.3% during the second quarter fiscal 2013 as compared to the second quarter fiscal 2012.

At September 23, 2012, 304 domestic and international franchised or Branded Menu Program franchise outlets were operating as compared to 282 domestic and international franchised or Branded Menu Program franchise outlets at September 25, 2011. Total franchise fee income was $119,000 in the second quarter fiscal 2013, including an $8,000 cancellation fee, compared to $174,000 in the second quarter fiscal 2012, including a $15,000 cancellation fee. Domestic franchise fee income was $36,000 in the second quarter fiscal 2013 compared to $116,000 in the second quarter fiscal 2012. International franchise fee income was $75,000 in the second quarter fiscal 2013, compared to $43,000 during the second quarter fiscal 2012. During the second quarter fiscal 2013, ten new franchised outlets opened, including our second mobile truck, our sixth restaurant in the Dominican Republic and four Branded Menu Program outlets operated by K-mart. During the second quarter fiscal 2012, 21 new franchised outlets opened, including one location in China and 16 Branded Menu Program outlets, including 12 units operated by K-mart.

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License royalties were $2,122,000 in the second quarter fiscal 2013 as compared to $1,706,000 in the second quarter fiscal 2012. Total royalties earned on sales of hot dogs from our retail and foodservice license agreements increased 29.2% to $1,696,000 from $1,313,000 primarily due to higher sales by SMG in the second quarter fiscal 2013. Royalties earned from SMG, primarily from the retail sale of hot dogs, were $1,334,000 during the second quarter fiscal 2013 as compared to $969,000 during the second quarter fiscal 2012. Royalties earned from our foodservice licensee, substantially from sales of hot dogs to Sam's Club and Kroger's, were $362,000 during the second quarter fiscal 2013 as compared to $344,000 during the second quarter fiscal 2012. During the second quarter fiscal 2013, we earned royalties of $36,000 from a new agreement for the sale of salty snacks. Royalties earned from all other licensing agreements for the manufacture and sale of Nathan's products decreased by $3,000, during the second quarter fiscal 2013, as compared to the second quarter fiscal 2012.

Interest income was $100,000 in the second quarter fiscal 2013 as compared to $134,000 in the second quarter fiscal 2012, primarily due to lower interest income on our cash and cash equivalents as a result of the reduced amount of marketable securities. As additional marketable securities mature or are called by the issuer and we are unable to earn similar returns upon reinvestment, we would anticipate lower investment income in the future.

Other income was $22,000 in the second quarter fiscal 2013 as compared to $1,000 in the second quarter fiscal 2012. This increase is due primarily to a renegotiated sublease of a non-franchised restaurant.

Costs and Expenses

Overall, our cost of sales increased by $1,004,000 to $12,913,000 in the second quarter fiscal 2013 as compared to $11,909,000 in the second quarter fiscal 2012. Our gross profit (representing the difference between sales and cost of sales) was $4,695,000 or 26.7% of sales during the second quarter fiscal 2013 as compared to $3,948,000 or 24.9% of sales during the second quarter fiscal 2012. The margin improvement was primarily due to the impact of sales price increases that have been implemented in order to offset the higher cost of hot dogs for our Branded Product Program.

Cost of sales in the Branded Product Program increased by approximately $705,000 during the second quarter fiscal 2013 as compared to the second quarter fiscal 2012, primarily as a result of the higher sales volume and the approximately 1.5% increased cost of our hot dogs. During the second quarter fiscal 2013, approximately 87.8% of our product was purchased at prevailing market prices as compared to approximately 96.7% during the second quarter fiscal 2012. The purchase commitments did not significantly impact our cost per pound during the second quarter fiscal 2013 or the second quarter fiscal 2012. The cost of beef could further increase due to the record high corn prices as a result of the drought in the Midwest. If the cost of beef and beef trimmings increases and we are unable to pass on these higher costs through price increases or otherwise reduce any increase in our costs through the use of purchase commitments, our margins will be adversely impacted.

With respect to Company-owned restaurants, our cost of sales during the second quarter fiscal 2013 was $3,158,000 or 51.7% of restaurant sales, as compared to $2,646,000 or 52.5% of restaurant sales in the second quarter fiscal 2012. Other cost of sales declined by $213,000 in the second quarter fiscal 2013, primarily because of the termination of our agreement with the QVC television network in March 2012.

Restaurant operating expenses were $1,053,000 in the second quarter fiscal 2013 as compared to $920,000 in the second quarter fiscal 2012. The difference in restaurant operating costs was primarily due to higher percentage rent due on the increased sales at the new Boardwalk location. Although utility costs declined slightly during the second quarter fiscal 2013, we continue to be concerned about the volatile market conditions for oil and natural gas.

Depreciation and amortization was $267,000 in the second quarter fiscal 2013 as compared to $245,000 in the second quarter fiscal 2012. This increase is primarily attributable to the investment made at the new Boardwalk location and higher depreciation on newly-added consigned equipment by our Branded Product Program.

General and administrative expenses increased by $98,000 or 4.5% to $2,296,000 in the second quarter fiscal 2013 as compared to $2,198,000 in the second quarter fiscal 2012. The increase in general and administrative expenses was primarily due to increased compensation costs of $126,000, marketing activities of $16,000 which were partially offset by lower professional fees of $44,000.

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Interest expense of $109,000 in the second quarter fiscal 2013 and $111,000 in the second quarter fiscal 2012 primarily represents accrued interest in connection with Nathan's appeal of the SMG damages award calculated at the New York State statutory rate of 9% per annum. In connection with its appeal, on March 31, 2011, Nathan's was required to enter into both a security agreement and a blocked deposit account control agreement and to deposit approximately $4,910,000 into the account and agree to deposit additional amounts monthly in an amount equal to the post-judgment interest. Nathan's expects to continue to accrue these charges during the term of the appeal.

Provision for Income Taxes

In the second quarter fiscal 2013, the income tax provision was $1,877,000 or 39.8% of earnings before income taxes as compared to $1,466,000 or 39.3% of income before income taxes in the second quarter fiscal 2012. Nathan's effective tax rate was reduced by 0.8% during the second quarter fiscal 2013 and reduced by 1.4% during the second quarter fiscal 2012, due to the differing effects of tax-exempt interest income. Nathan's effective tax rates without these adjustments would have been 40.6% for the second quarter fiscal 2013 and 40.7% for the second quarter fiscal 2012. Nathan's estimates that its unrecognized tax benefits and the related accrued interest and penalties could be further reduced by up to $35,000 during the remainder of fiscal 2013.

Twenty-six weeks ended September 23, 2012 compared to twenty-six weeks ended September 25, 2011

Revenues

Total sales increased by 12.7% to $34,013,000 for the twenty-six weeks ended September 23, 2012 ("fiscal 2013 period") as compared to $30,173,000 for the twenty-six weeks ended September 25, 2011 ("fiscal 2012 period"). Foodservice sales from the Branded Product and Branded Menu Programs increased by 12.5% to $23,291,000 for the fiscal 2013 period as compared to sales of $20,706,000 in the fiscal 2012 period. This increase was primarily attributable to a 9.4% increase in the volume of products ordered and the impact of price increases that took effect during the fiscal 2013 period and fiscal 2012 periods. Total Company-owned restaurant sales, comprised of five Nathan's restaurants in both periods (including one seasonal restaurant), increased by $1,646,000 to $10,697,000 during the fiscal 2013 period compared to $9,051,000 during the fiscal 2012 period. This increase was primarily attributed to the increased sales at our relocated and expanded seasonal Boardwalk restaurant in Coney Island that opened in April 2012. Weather conditions were also favorable throughout the fiscal 2013 period as compared to the fiscal 2012 period. During the fiscal 2012 period, we were forced to temporarily close all of our restaurants during tropical storm Irene for the weekend of August 27, 2011 and experienced much more rain than usual, particularly during weekends, and a cold Labor Day weekend which we believe further decreased sales particularly at our Coney Island locations. During the fiscal 2013 period, other sales were approximately $391,000 lower than the fiscal 2012 period primarily because Nathan's terminated our agreement with the QVC television network in March 2012.

Franchise fees and royalties were $2,938,000 in the fiscal 2013 period as compared to $2,855,000 in the fiscal 2012 period. Total royalties were $2,670,000 in the fiscal 2013 period as compared to $2,435,000 in the fiscal 2012 period. Royalties earned under the Branded Menu program were $474,000 in the fiscal 2013 period as compared to $251,000 in the fiscal 2012 period due principally to the additional units in operation. Royalties earned under the Branded Menu Program are not based upon a percentage of restaurant sales but are based upon product purchases. Traditional franchise royalties were $2,196,000 in the fiscal 2013 period as compared to $2,184,000 in the fiscal 2012 period. Franchise restaurant sales decreased to $48,870,000 in the fiscal 2013 period as compared to $49,521,000 in the fiscal 2012 period primarily due to the decline in our comparable restaurants. Sales generated from new store openings, partly offset sales declines from closed stores and the sales decline at our comparable restaurants. Comparable domestic franchise sales (consisting of 130 Nathan's outlets, operating for 15 months prior to the beginning of the fiscal year, excluding sales under the Branded Menu Program) were $39,314,000 in the fiscal 2013 period as compared to $40,727,000 in the fiscal 2012 period, a decrease of 3.5%. Franchise sales within our entertainment venues declined by approximately 7.2% compared to the prior period, including significant sales declines at two franchised locations that have been negatively affected by adjacent long term construction projects, and sales at retail environments declined by approximately 0.8% compared to the fiscal 2012 period. During the second quarter fiscal 2012, most of our franchised locations in the Northeast were negatively affected by tropical storm Irene. Comparable international franchise sales, principally the Middle East, increased by approximately $29,000 or 1.4% during the fiscal 2013 period as compared to the fiscal 2012 period.

At September 23, 2012, 304 domestic and international franchised or Branded Menu Program franchise outlets were operating as compared to 282 domestic and international franchised or Branded Menu Program franchise outlets at September 25, 2011. Total franchise fee income was $268,000 in the fiscal 2013 period, including cancellation fees of $38,000, compared to $420,000 in the fiscal 2012 period, including cancellation fees of $25,000. Domestic franchise fee income was $139,000 in the fiscal 2013 period compared to $254,000 in the fiscal 2012 period. International franchise fee income was $91,000 in the fiscal 2013 period, compared to $141,000 during the fiscal 2012 period. During the fiscal 2013 period, 23 new franchised outlets opened, including our first two mobile trucks, our sixth restaurant in the Dominican Republic and twelve Branded Menu Program outlets, including nine 9 units operated by K-mart. During the fiscal 2012 period, 35 new franchised outlets opened, including a location in each of Canada, Kuwait and the Dominican Republic, two locations in China, and 22 Branded Menu Program outlets, including 13 units operated by K-mart.

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License royalties were $4,351,000 in the fiscal 2013 period as compared to $3,673,000 in the fiscal 2012 period. Total royalties earned on sales of hot dogs from our retail and foodservice license agreements increased 19.6% to $3,499,000 from $2,926,000 primarily due to higher sales by SMG in the fiscal 2013 period. Royalties earned from SMG, primarily from the retail sale of hot dogs, were $2,799,000 during the fiscal 2013 period as compared to $2,094,000 during the fiscal 2012 period. Royalties earned from our foodservice licensee, substantially from sales of hot dogs to Sam's Club and Kroger's, were $700,000 during the fiscal 2013 period as compared to $832,000 during the fiscal 2012 period. This decrease is due primarily to a temporary royalty concession for the period April 2012 through July 2012, on sales to Sam's Club and lower sales volume to Kroger's. During the fiscal 2013 period, we earned royalties of $93,000 from a new agreement for the sale of salty snacks. Royalties earned from all other licensing agreements for the manufacture and sale of Nathan's products increased by $12,000, during the fiscal 2013 period, as compared to the fiscal 2012 period.

Interest income was $200,000 in the fiscal 2013 period as compared to $312,000 in the fiscal 2012 period, primarily due to lower interest income of approximately $82,000 earned on marketable securities and lower interest earned on the Miami Subs note of approximately $30,000. As additional marketable securities mature or are called by the issuer and we are unable to earn similar returns upon reinvestment, we would anticipate lower investment income in the future. On June 29, 2011, we completed the sale of the Miami Subs note receivable and no longer earned interest income of 8.5% on this note receivable.

Other income was $40,000 in the fiscal 2013 period as compared to $2,000 in the fiscal 2012 period. This increase is due primarily to a renegotiated sublease of a non-franchised restaurant.

Costs and Expenses

Overall, our cost of sales increased by $2,353,000 to $25,898,000 in the fiscal 2013 period as compared to $23,545,000 in the fiscal 2012 period. Our gross profit (representing the difference between sales and cost of sales) was $8,115,000 or 23.9% of sales during the fiscal 2013 period as compared to $6,628,000 or 22.0% of sales during the fiscal 2012 period. The margin improvement was primarily due to the impact of sales price increases that have been implemented to offset the higher cost of hot dogs for our Branded Product Program.

Cost of sales in the Branded Product Program increased by approximately $1,869,000 during the fiscal 2013 period as compared to the fiscal 2012 period, primarily as a result of the higher sales volume and the approximately 2.1% increased cost of our hot dogs. During the fiscal 2013 period, the market price of hot dogs was approximately 0.9% higher than during the fiscal 2012 period. During the fiscal 2013 period, our purchase commitments increased cost by approximately $142,000. During the fiscal 2012 period, our purchase commitments to acquire hot dogs yielded savings of approximately $74,000. This difference is due to two contributing factors, a) the unexpected decline in the cost of one of the beef components and b) the higher amount of product purchased pursuant to the purchase commitments. During the fiscal 2013 period approximately 73.3% of our product was purchased at prevailing market prices as compared to approximately 93.8% during the fiscal 2012 period. The purchase commitments increased our costs by approximately $0.017 per pound during the fiscal 2013 . . .

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