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NATH > SEC Filings for NATH > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for NATHANS FAMOUS INC

Form 10-Q for NATHANS FAMOUS INC


8-Nov-2013

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: economic, weather (including the continued impact of Hurricane Sandy and the three-year drought in the Midwest which has caused an increase in corn pricing and reduced supply of cattle), continued increases in the price of beef trimmings; legislative and business conditions; the collectibility of receivables; changes in consumer tastes; the status of our licensing and supply agreements, including the impact of a new supply agreement for hot dogs with John Morrell & Co. and the termination in 2014 of our existing hot dog supply agreement with SMG and any issues arising from or related to the transition from SMG to John Morrell & Co. as our primary hot dog supplier; the ability to continue to attract franchisees; no material increases in the minimum wage; our ability to attract competent restaurant and managerial personnel; and the future effects of any food borne illness; such as bovine spongiform encephalopathy, BSE; as well as those risks discussed from time to time in our Form 10-K annual report for the year ended March 31, 2013, 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.

At September 29, 2013, our restaurant system consisted of 316 Nathan's franchised units, including 129 Branded Menu units, and five Company-owned units (including one seasonal unit), located in 28 states, the Cayman Islands and nine foreign countries. 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.

Nathan's is also the owner of the Arthur Treacher's brand. At September 29, 2013, the Arthur Treacher's brand was being sold within 53 Nathan's restaurants.

As described in our Annual Report on Form 10-K for the year ended March 31, 2013, our future results could be impacted by many developments including that the terms of our next primary license agreement for hot dogs are expected to be more favorable than our agreement with SMG which is scheduled to expire on March 1, 2014. In addition, our future operating results could be impacted by the cumulative effects that three years of drought has had on the cost of feed and the resulting decline in the supply of beef.

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Critical Accounting Policies and Estimates

As discussed in our Form 10-K for the fiscal year ended March 31, 2013, 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 31, 2013, 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

There are no recently issued accounting pronouncements that have not yet been adopted that are expected, when adopted, to have a material impact on the consolidated financial statements or notes thereto.

Results of Operations

Thirteen weeks ended September 29, 2013 compared to thirteen weeks ended September 23, 2012

Revenues

Total sales increased by 12.9% to $19,887,000 for the thirteen weeks ended September 29, 2013 ("second quarter fiscal 2014") as compared to $17,608,000 for the thirteen weeks ended September 23, 2012 ("second quarter fiscal 2013"). Foodservice sales from the Branded Product and Branded Menu Programs increased by 21.5% to $13,960,000 for the second quarter fiscal 2014 as compared to sales of $11,485,000 in the second quarter fiscal 2013. This increase was primarily attributable to a 21.4% increase in the volume of products ordered and the impact of a slight shift in the sales mix of products sold as compared to the second quarter fiscal 2013. Total Company-owned restaurant sales decreased by $290,000 to $5,819,000 during the second quarter fiscal 2014 compared to $6,109,000 during the second quarter fiscal 2013. This sales decrease was primarily attributed to the Yonkers restaurant, which has been closed for redevelopment since December 2012. The comparative sales impact from this restaurant during the second quarter fiscal 2014 was approximately $495,000. Sales at our two Coney Island restaurants during the second quarter fiscal 2014 were approximately $250,000 higher than the second quarter fiscal 2013. Other sales, primarily to Wal-mart, were approximately $94,000 higher than the second quarter fiscal 2013.

Franchise fees and royalties were $1,516,000 in the second quarter fiscal 2014 as compared to $1,508,000 in the second quarter fiscal 2013. Total royalties were $1,376,000 in the second quarter fiscal 2014 as compared to $1,389,000 in the second quarter fiscal 2013. Royalties earned under the Branded Menu program were $279,000 in the second quarter fiscal 2014 as compared to $233,000 in the second quarter fiscal 2013 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 $1,097,000 in the second quarter fiscal 2014 as compared to $1,156,000 in the second quarter fiscal 2013. Franchise restaurant sales decreased to $24,170,000 in the second quarter fiscal 2014 as compared to $25,492,000 in the second quarter fiscal 2013 primarily due to the impact of closed restaurants. Comparable domestic franchise sales (consisting of 119 Nathan's outlets, excluding sales under the Branded Menu Program) were $18,803,000 in the second quarter fiscal 2014 as compared to $18,800,000 in the second quarter fiscal 2013.

At September 29, 2013, 311 domestic and international franchised or Branded Menu Program franchise outlets were operating as compared to 304 domestic and international franchised or Branded Menu Program franchise outlets at September 23, 2012. Total franchise fee income was $140,000 in the second quarter fiscal 2014 compared to $119,000, including an $8,000 cancellation fee, in the second quarter fiscal 2013. Domestic franchise fee income was $33,000 in the second quarter fiscal 2014 compared to $36,000 in the second quarter fiscal 2013. International franchise fee income was $107,000 in the second quarter fiscal 2014, compared to $75,000 during the second quarter fiscal 2013. During the second quarter fiscal 2014, seven new franchised outlets opened, including six locations in Moscow. 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 Kmart.

License royalties were $2,151,000 in the second quarter fiscal 2014 as compared to $2,122,000 in the second quarter fiscal 2013. Total royalties earned on sales of hot dogs from our retail and foodservice license agreements decreased 6.3% to $1,589,000 from 1,696,000 in the second quarter fiscal 2014. Royalties earned from SMG, primarily from the retail sale of hot dogs, were $1,192,000 during the second quarter fiscal 2014 as compared to $1,334,000 during the second quarter fiscal 2013. The decline in royalties from SMG during the second quarter is due entirely to the reduced production by SMG, on which our royalties are based. We are in the final months of the license agreement with SMG that will not be renewed. In March 2014, our new license agreement will commence with John Morrell & Co. becoming Nathan's exclusive licensee to manufacture and sell branded hot dog, sausage and corned beef products at retail. Royalties earned from our foodservice licensee, substantially from sales of hot dogs to Sam's Club, were $397,000 during the second quarter fiscal 2014 as compared to $362,000 during the second quarter fiscal 2013. This increase was due primarily to the effect of the royalty concession on sales to Sam's Club during July 2012 partly offset by reduced sales to foodservice. Royalties earned from all other licensing agreements for the manufacture and sale of Nathan's products increased by $136,000, during the second quarter fiscal 2014, as compared to the second quarter fiscal 2013.

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Interest income was $87,000 in the second quarter fiscal 2014 as compared to $100,000 in the second quarter fiscal 2013, primarily due to lower interest income earned on 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 of $21,000 in the second quarter fiscal 2014 as compared to $22,000 in the second quarter fiscal 2013 relates primarily to a sublease of a non-franchised restaurant.

Costs and Expenses

Overall, our cost of sales increased by $2,461,000 to $15,374,000 in the second quarter fiscal 2014 as compared to $12,913,000 in the second quarter fiscal 2013. Our gross profit (representing the difference between sales and cost of sales) was $4,513,000 or 22.7% of sales during the second quarter fiscal 2014 as compared to $4,695,000 or 26.7% of sales during the second quarter fiscal 2013. The margin decline was primarily due to the impact of a higher average cost per pound of hot dogs for our Branded Product Program.

Cost of sales in the Branded Product Program increased by approximately $2,618,000 during the second quarter fiscal 2014 as compared to the second quarter fiscal 2013, primarily as a result of the higher sales volume and the approximately 9.0% increased average cost per pound of our hot dogs. During the second quarter fiscal 2014, the market cost of our hot dogs was approximately 9.8% higher than during the second quarter fiscal 2013 due primarily to an unusual increase in the beef trimmings markets during August and September 2013.The purchase commitments did not significantly impact our cost per pound during the second quarter fiscal 2014 or the second quarter fiscal 2013. During the second quarter fiscal 2014 approximately 98.2% of our product was purchased at prevailing market prices as compared to approximately 87.8% during the second quarter fiscal 2013. 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. We expect to be able to pass the recent cost increases on through price increases, some of which have already occurred.

With respect to Company-owned restaurants, our cost of sales during the second quarter fiscal 2014 was $2,941,000 or 50.5% of restaurant sales, as compared to $3,158,000 or 51.7% of restaurant sales in the second quarter fiscal 2013.

Restaurant operating expenses were $981,000 in the second quarter fiscal 2014 as compared to $1,053,000 in the second quarter fiscal 2013. The decline in restaurant operating costs was primarily due to the closure of the Yonkers restaurant during the entire second quarter fiscal 2014. We have also incurred higher percentage rent on the increased sales at the Boardwalk location. Utility costs at the four units that operated throughout the fiscal 2014 and 2013 periods decreased by approximately 6.7% during the second quarter fiscal 2014 as compared to the second quarter fiscal 2013. We continue to be concerned about the volatile market conditions for oil and natural gas.

Depreciation and amortization was $294,000 in the second quarter fiscal 2014 as compared to $267,000 in the second quarter fiscal 2013. This increase is primarily attributable to the higher depreciation in connection with our redevelopment of the Coney Island restaurant.

General and administrative expenses increased by $324,000 or 14.1% to $2,619,000 in the second quarter fiscal 2014 as compared to $2,296,000 in the second quarter fiscal 2013. The increase in general and administrative expenses was primarily due to increased compensation costs, including stock-based compensation and payroll related taxes of $269,000 and management training expenses of $15,000 in connection with the upcoming re-opening of our Yonkers restaurant.

Interest expense of $23,000 in the second quarter fiscal 2014 and $109,000 in the second quarter fiscal 2013 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. On July 24, 2013, we satisfied the judgment, in full settlement of this matter.

Provision for Income Taxes

In the second quarter fiscal 2014, the income tax provision was $1,723,000 or 39.4% of earnings before income taxes as compared to $1,877,000 or 39.8% of income before income taxes in the second quarter fiscal 2013. Nathan's effective tax rate was reduced by 0.8% during the second quarter fiscal 2014 and reduced by 0.8% during the second quarter fiscal 2013, due to the differing effects of tax-exempt interest income. Nathan's effective tax rates without these adjustments would have been 40.2% for the second quarter fiscal 2014 and 40.6% for the second quarter fiscal 2013. Nathan's estimates that its unrecognized tax benefits and the related accrued interest and penalties could be further reduced by up to $67,000 during the remainder of fiscal 2014.

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Results of Operations

Twenty-six weeks ended September 29, 2013 compared to twenty-six weeks ended September 23, 2012

Revenues

Total sales increased by 8.1% to $36,767,000 for the twenty-six weeks ended September 29, 2013 ("fiscal 2014 period") as compared to $34,013,000 for the twenty-six weeks ended September 23, 2012 ("fiscal 2013 period"). Foodservice sales from the Branded Product and Branded Menu Programs increased by 16.4% to $27,101,000 for the fiscal 2014 period as compared to sales of $23,291,000 in the fiscal 2013 period. This increase was primarily attributable to a 15.8% increase in the volume of products ordered and the impact of a slight shift in the sales mix of products sold as compared to the fiscal 2013 period. Total Company-owned restaurant sales decreased by $1,152,000 to $9,545,000 during the fiscal 2014 period compared to $10,697,000 during the fiscal 2013 period. This decrease was primarily attributed to the sales decline at our Flagship Coney Island restaurant which was closed during April and May 2013. Additionally, our Yonkers restaurant, which has been closed for redevelopment since December 2012, negatively impacted our sales results. The comparative sales impact from both restaurants due to the closed periods was approximately $1,895,000. This decline was partly offset by sales at our two Coney Island locations which were approximately $801,000 higher than last season even though our Flagship Coney Island restaurant only operated for 18 weeks during the fiscal period ending September 29, 2013. Sales at our seasonal Boardwalk restaurant in Coney Island were approximately 17.1% higher during the 26 weeks ended September 29, 2013 than the 26 weeks ended September 23, 2012.

Franchise fees and royalties were $2,863,000 in the fiscal 2014 period as compared to $2,938,000 in the fiscal 2013 period. Total royalties were $2,633,000 in the fiscal 2014 period as compared to $2,670,000 in the fiscal 2013 period. Royalties earned under the Branded Menu program were $531,000 in the fiscal 2014 period as compared to $474,000 in the fiscal 2013 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 $2,102,000 in the fiscal 2014 period as compared to $2,196,000 in the fiscal 2013 period. Franchise restaurant sales decreased to $46,760,000 in the fiscal 2014 period as compared to $48,870,000 in the fiscal 2013 period primarily due to the impact of closed restaurants. Comparable domestic franchise sales (consisting of 119 Nathan's outlets, excluding sales under the Branded Menu Program) were $35,288,000 in the fiscal 2014 period as compared to $35,485,000 in the fiscal 2013 period, a decrease of 0.6%.

At September 29, 2013, 311 domestic and international franchised or Branded Menu Program franchise outlets were operating as compared to 304 domestic and international franchised or Branded Menu Program franchise outlets at September 23, 2012. Total franchise fee income was $230,000 in the fiscal 2014 period compared to $268,000 in the fiscal 2013 period, including $38,000 of cancellation fees. Domestic franchise fee income was $118,000 in the fiscal 2014 period compared to $139,000 in the fiscal 2013 period. International franchise fee income was $112,000 in the fiscal 2014 period, compared to $91,000 during the fiscal 2013 period. During the fiscal 2014 period, 15 new franchised outlets opened, including seven locations in Moscow and four Branded Menu Program outlets. 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 units operated by Kmart.

License royalties were $4,416,000 in the fiscal 2014 period as compared to $4,351,000 in the fiscal 2013 period. Total royalties earned on sales of hot dogs from our retail and foodservice license agreements were $3,470,000 in the fiscal 2014 period as compared to $3,499,000 in the fiscal 2013 period. Royalties earned from SMG, primarily from the retail sale of hot dogs, were $2,658,000 during the fiscal 2014 period as compared to $2,799,000 during the fiscal 2013 period. The decline in royalties from SMG arose during the second quarter and is due entirely to the reduced production by SMG, on which our royalties are based. We are in the final months of the license agreement with SMG that will not be renewed. In March 2014, our new license agreement will commence with John Morrell & Co. becoming Nathan's exclusive licensee to manufacture and sell branded hot dog, sausage and corned beef products at retail. Royalties earned from our foodservice licensee, substantially from sales of hot dogs to Sam's Club, were $812,000 during the fiscal 2014 period as compared to $700,000 during the fiscal 2013 period. This increase is due primarily to the effect of the royalty concession on sales to Sam's Club during the fiscal 2013 period partly offset by reduced sales to foodservice. Royalties earned from all other licensing agreements for the manufacture and sale of Nathan's products increased by $94,000, during the fiscal 2014 period, as compared to the fiscal 2013 period.

Interest income was $178,000 in the fiscal 2014 period as compared to $200,000 in the fiscal 2013 period, primarily due to lower interest income earned on 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.

Insurance gain of $2,801,000 during the fiscal 2014 period represents the difference between insurance proceeds received and the historical net book value of assets destroyed at our Flagship Coney Island restaurant and demolition costs resulting from Superstorm Sandy (See note N).

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Other income of $38,000 in the fiscal 2014 period as compared to $40,000 in the fiscal 2013 period relates primarily to a sublease of a non-franchised restaurant.

Costs and Expenses

Overall, our cost of sales increased by $2,881,000 to $28,779,000 in the fiscal 2014 period as compared to $25,898,000 in the fiscal 2013 period. Our gross profit (representing the difference between sales and cost of sales) was $7,988,000 or 21.7% of sales during the fiscal 2014 period as compared to $8,115,000 or 23.9% of sales during the fiscal 2013 period. The margin decline was primarily due to the impact of higher average cost per pound of hot dogs for our Branded Product Program during the second quarter fiscal 2014.

Cost of sales in the Branded Product Program increased by approximately $3,550,000 during the fiscal 2014 period as compared to the fiscal 2013 period, primarily as a result of the higher sales volume in addition to the approximately 4.2% increased average cost per pound of our hot dogs. During the fiscal 2014 period, the market cost of our hot dogs was approximately 5.9% higher than during the fiscal 2013 period due primarily to an unusual increase in the beef trimmings markets during August and September 2013. During the fiscal 2014 period, our purchase commitments yielded savings of approximately $198,000. During the fiscal 2013 period, our purchase commitments to acquire hot dogs increased cost by approximately $142,000 due primarily to the unexpected decline in the market cost of one of the beef components during the fiscal 2013. During the fiscal 2014 period approximately 25.4% of our product was purchased pursuant to our purchase commitments as compared to approximately 26.7% during the fiscal 2013 period. The purchase commitments lowered our costs by approximately $0.020 per pound during the fiscal 2014 period and increased our costs by approximately $0.017 per pound during the fiscal 2013 period. 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. We expect to be able to pass the recent cost increases on through price increases, some of which have already occurred.

With respect to Company-owned restaurants, our cost of sales during the fiscal 2014 period was $5,004,000 or 52.4% of restaurant sales, as compared to $5,753,000 or 53.6% of restaurant sales in the fiscal 2013 period.

Restaurant operating expenses were $1,691,000 in the fiscal 2014 period as compared to $1,928,000 in the fiscal 2013 period. The decline in restaurant operating costs was primarily due to the closure of the Coney Island restaurant for eight weeks of the fiscal 2014 period and the Yonkers restaurant during the entire fiscal 2014 period. Nathan's expects to recover the fixed costs at the Flagship Coney Island restaurant while closed pursuant to Nathan's business interruption insurance. We have also incurred higher percentage rent on the increased sales at the Boardwalk location. Utility costs at the three units that operated throughout the fiscal 2014 and 2013 periods increased by approximately 7.0% during the fiscal 2014 period as compared to the fiscal 2013 period. We expect to incur higher property insurance costs beginning October 1, 2013 attributable to Superstorm Sandy. We continue to be concerned about the volatile market conditions for oil and natural gas.

Depreciation and amortization was $539,000 in the fiscal 2014 period as compared to $541,000 in the fiscal 2013 period. This decrease is primarily attributable to the reduced depreciation at the Coney Island and Yonkers restaurants while closed. Since re-opening our Coney Island restaurant, we have incurred higher depreciation of approximately $63,000 and expect to incur higher depreciation of approximately $180,000 per annum. We also expect to incur approximately $136,000 of depreciation per annum in connection with the redevelopment of the Yonkers restaurant.

General and administrative expenses increased by $700,000 or 14.2% to $5,621,000 in the fiscal 2014 period as compared to $4,921,000 in the fiscal 2013 period. The increase in general and administrative expenses was primarily due to . . .

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