NATHAN'S FAMOUS, INC. Forward-Looking Statements
This Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1933, as amended, that involve risks and uncertainties. You can identify forward-looking statements because they contain words such as "believes", "expects", "projects", "may", "would", "should", "seeks", "intends", "plans", "estimates", "anticipates" or similar expressions that relate to our strategy, plans or intentions. All statements we make relating to our estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results or to our expectations regarding future industry trends are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may change at any time, and, therefore, our actual results may differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements contained in this Form 10-Q are based upon information available to us on the date of this Form 10-Q. 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 impact of the COVID-19 pandemic; the status of our licensing and supply agreements, including our licensing revenue and overall profitability being substantially dependent on our agreement withJohn Morrell & Co. , a wholly-owned subsidiary ofSmithfield Foods, Inc. , the impact of our debt service and repayment obligations under the 2025 Notes, including the effect on our ability to fund working capital, operations and make new investments; economic (including inflationary pressures like those currently being experienced), weather (including the impact on the supply of cattle and the impact on sales at our restaurants, particularly during the summer months), and change in the price of beef trimmings; our ability to pass on the cost of any price increases in beef and beef trimmings, or labor costs; legislative and business conditions; the collectibility of receivables; changes in consumer tastes; the continued viability ofConey Island as a destination location for visitors; the ability to continue to attract franchisees; the impact of the minimum wage legislation on labor costs inNew York State or other changes in labor laws, including regulations which could render a franchisor as a "joint employee" or the impact of our union contracts; our ability to attract competent restaurant and managerial personnel; the enforceability of international franchising agreements; the future effects of any food borne illness such as bovine spongiform encephalopathy, BSE or e-coli; as well as those risks discussed from time to time in this Form 10-Q and our Form 10-K annual report for the year endedMarch 27, 2022 , and in other documents we file with theU.S. 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" meanNathan'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 originalConey Island restaurant opened in 1916. Nathan's product licensing program sells packaged hot dogs and other meat products to retail customers through supermarkets or grocery-type retailers for off-site consumption. Our Branded Product Program 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 theNathan'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. Our Branded Menu Program is a limited franchise program, under which foodservice operators may sell a greater variety ofNathan's Famous menu items than under the Branded Product Program. -20- --------------------------------------------------------------------------------
Our revenues are generated primarily from selling products under Nathan's Branded Product Program, operating Company-owned restaurants, 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 and the royalties, fees and other sums we can earn from franchising the Nathan's restaurant concept (including the Branded Menu Program and virtual kitchens).
AtDecember 25, 2022 , our restaurant system, excluding virtual kitchens, consisted of 233 Nathan's franchised units, including 120 Branded Menu Program units, and four Company-owned units (including one seasonal unit), located in 17 states, and 12 foreign countries (including 2 Branded Menu units inUkraine which are temporarily closed as a result of theRussia -Ukraine conflict). Our virtual kitchens in operation consisted of 226 units located in 19 states and four foreign countries. AtDecember 26, 2021 , our restaurant system, excluding virtual kitchens, consisted of 242 Nathan's franchised units, including 120 Branded Menu Program units, and four Company-owned units (including one seasonal unit), located in 18 states, and 14 foreign countries. Our virtual kitchens in operation consisted of 277 units located in 20 states and six foreign countries. Our primary focus is to expand the market penetration of the Nathan's Famous brand by increasing the number of distribution points for our products across all of our business platforms, including our Licensing Program for distribution ofNathan's Famous branded consumer packaged goods, our Branded Products Program for distribution ofNathan's Famous branded bulk products to the foodservice industry, and our namesake restaurant system comprised of both Company-owned and franchised units, including virtual kitchens. The primary drivers of our recent growth have been our Licensing and Branded Product Programs which have been the largest contributors to the Company's profits. While we do not expect to significantly increase the number of Company-owned units, we may opportunistically and strategically invest in a small number of new units as showcase locations for prospective franchisees and master developers as we seek to grow our franchise system. We continue to seek opportunities to drive sales in a variety of ways as we adapt to the ever-changing consumer and environment. As described in our Annual Report on Form 10-K for the year endedMarch 27, 2022 , our future results could be materially impacted by many developments including the impact of the COVID-19 pandemic on our business, our dependence onSmithfield Foods, Inc. as our principal supplier and the dependence of our licensing revenue and overall profitability on our agreement withSmithfield Foods, Inc. In addition, our future operating results could be impacted by supply constraints on beef or by increased costs of beef, beef trimmings and other commodities due to inflationary pressures compared to earlier periods. OnNovember 1, 2017 , the Company issued$150,000,000 of 6.625% Senior Secured Notes due 2025 (the "2025 Notes") and used the majority of the proceeds of this offering to redeem the Company's 10.000% Senior Secured Notes due 2020, paid a portion of the special$5.00 cash dividend and used the remaining proceeds for general corporate purposes, including working capital. OnJanuary 26, 2022 , the Company redeemed$40,000,000 in aggregate principal amount of its 2025 Notes. As a result of the partial redemption, the Company expects to reduce its future cash interest expense by$2,650,000 per annum.
As described below, we are also including information relating to EBITDA and Adjusted EBITDA, which are non-GAAP financial measures, in this Form 10-Q quarterly report. See "Reconciliation of GAAP and Non-GAAP Measures."
Impact of COVID-19 Pandemic
In
COVID-19 related pressures have continued during the thirty-nine weeks endedDecember 25, 2022 ("fiscal 2023 period"), although to a lesser extent than during the thirty-nine weeks endedDecember 26, 2021 ("fiscal 2022 period"). As approved vaccines continue to be distributed and administered, state and local restrictions continue to be lessened. Despite the fact that vaccines are now widely available across the country, there have been increases in diagnosed cases reported due to the spread of additional COVID-19 variants. Customer traffic at our Company-owned restaurants, in particular atConey Island , during the fiscal 2023 period increased by approximately 12% over the fiscal 2022 period. Additionally, we experienced increased customer traffic within our franchise system, including airport locations; highway travel plazas; shopping malls; movie theaters; and casino locations, primarily inLas Vegas, Nevada . The increase in customer traffic translated into higher Company-owned restaurant sales and higher franchise fees and royalties during the fiscal 2023 period than during the fiscal 2022 period. -21- -------------------------------------------------------------------------------- Additionally, as the level of comfort of consumers gathering in social settings increases and travel continues to increase, our Branded Product Program customers, including professional sports arenas, amusement parks, shopping malls and movie theaters have experienced stronger attendance contributing to higher sales.
We continue to follow guidance from health officials in determining the appropriate restrictions, if any, to place within our operations. Our Company-owned and franchised restaurants could be disrupted by COVID-19 related employee absences or due to changes in the availability and cost of labor.
There continues to be uncertainty around the COVID-19 pandemic as variants including Omicron and others have caused increases in the number of reported COVID-19 cases. We cannot predict the ultimate duration, scope and severity of the COVID-19 pandemic or its ultimate impact on our business in the short or long-term. The ongoing economic impacts and health concerns associated with the pandemic may continue to affect consumer behavior, spending levels, and may result in reduced customer traffic and consumer spending trends that may adversely impact our financial condition and results of operations. Inflation We remain in regular contact with our major suppliers and to date we have not experienced significant disruptions in our supply chain; however, we have experienced rising transportation costs, rising costs of hot dogs due to the higher costs for beef and beef trimmings, and other food costs and paper products, which could continue to increase as the impact of COVID-19 continues across the supply chain. The ongoing effects of COVID-19 and its variants, along with other macroeconomic events could lead to further wage inflation, product cost inflation and supply chain challenges during the remainder of fiscal 2023 and may impact our operations. In general, we have been able to offset cost increases resulting from inflation by increasing prices. We continue to monitor these inflationary pressures and will continue to implement mitigation plans as needed. Delays in implementing price increases, competitive pressures, consumer spending levels and other factors may limit our ability to implement further price increases in the future.
Critical Accounting Policies and Estimates
As discussed in our Form 10-K for the fiscal year endedMarch 27, 2022 , 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 inthe United States of America . The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those consolidated 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 intangible assets; impairment of long-lived assets; and income taxes (including uncertain tax positions). SinceMarch 27, 2022 , there have been no material changes in our critical accounting policies or significant changes to the assumptions and estimates related to them.
New Accounting Standard Not Yet Adopted
Please refer to Note B of the preceding consolidated financial statements for our discussion of the New Accounting Standard Not Yet Adopted.
EBITDA and Adjusted EBITDA
The Company believes that EBITDA and Adjusted EBITDA, which are non-GAAP
financial measures, are useful to investors to assist in assessing and
understanding the Company's operating performance and underlying trends in the
Company's business because EBITDA and Adjusted EBITDA are (i) among the measures
used by management in evaluating performance and (ii) are frequently used by
securities analysts, investors and other interested parties as a common
performance measure.
-22---------------------------------------------------------------------------------
Reconciliation of GAAP and Non-GAAP Measures
The following is provided to supplement certain Non-GAAP financial measures.
In addition to disclosing results that are determined in accordance with Generally Accepted Accounting Principles inthe United States of America ("US GAAP"), the Company has provided EBITDA, a non-GAAP financial measure, which is defined as net income excluding (i) interest expense; (ii) provision for income taxes and (iii) depreciation and amortization expense. The Company has also provided Adjusted EBITDA, a non-GAAP financial measure, which is defined as EBITDA, excluding (i) the loss on disposal of property and equipment and (ii) share-based compensation that the Company believes will impact the comparability of its results of operations. EBITDA and Adjusted EBITDA are not recognized terms under US GAAP and should not be viewed as alternatives to net income or other measures of financial performance or liquidity in conformity with US GAAP. Additionally, our definitions of EBITDA and Adjusted EBITDA may differ from other companies. Analysis of results and outlook on a non-US GAAP basis should be used as a complement to, and in conjunction with, data presented in accordance with US GAAP. The following is a reconciliation of net income to EBITDA and Adjusted EBITDA (in thousands): Thirteen weeks ended Thirty-nine weeks ended December 25, December 26, December 25, December 26, 2022 2021 2022 2021 (unaudited) (unaudited) Net income$ 3,263 $ 2,130 $ 16,358 $ 11,438 Interest expense 1,944 2,650 5,831 7,951 Provision for income taxes 1,223 860 6,093 4,477 Depreciation and amortization 303 259 837 807 EBITDA 6,733 5,899 29,119 24,673 Loss on disposal of property and equipment 101 - 87 - Share-based compensation 65 8 81 66 Adjusted EBITDA$ 6,899 $ 5,907 $ 29,287 $ 24,739 Seasonality Our routine business pattern is affected by seasonal fluctuations, including the effects of weather and economic conditions. Historically, sales from our Company-owned locations, principally atConey Island , and franchised restaurants from which franchised royalties are earned and the Company's earnings have been highest during our first two fiscal quarters, with the fourth quarter representing the slowest period. Additionally, revenues from our Branded Product Program and retail licensing program generally follow similar seasonal fluctuations, although not to the same degree. Working capital requirements may vary throughout the year to support these seasonal patterns.
Due to the above seasonal factors, as well as the COVID-19 pandemic and
inflationary pressures, our results of operations for the thirteen and
thirty-nine weeks ended
Results of Operations
Thirteen weeks ended
Revenues
Total revenues increased by 1% to
Total sales decreased by 2% to$18,340,000 for the third quarter fiscal 2023 as compared to$18,637,000 for the third quarter fiscal 2022 which included foodservice sales from the Branded Product Program decreasing by 1% to$16,661,000 for the third quarter fiscal 2023 as compared to sales of$16,901,000 for the third quarter fiscal 2022. During the third quarter fiscal 2023, the volume of hot dogs sold in the Branded Product Program increased by approximately 3% as compared to the third quarter fiscal 2022. Our average selling prices decreased by approximately 3% as compared to the third quarter fiscal 2022.Total Company -owned restaurant sales decreased by 3% to$1,679,000 during the third quarter fiscal 2023 as compared to$1,736,000 during the third quarter fiscal 2022. The decrease was primarily due to a decline in traffic at ourYonkers, New York andOceanside, New York locations which were partially offset by an increase in traffic at ourConey Island locations. -23- -------------------------------------------------------------------------------- License royalties increased by 8% to$6,337,000 in the third quarter fiscal 2023 as compared to$5,878,000 in the third quarter fiscal 2022. Total royalties earned on sales of hot dogs from our license agreement withSmithfield Foods, Inc. at retail and foodservice, including sales of hot dogs to WalMart, increased 5% to$5,489,000 for the third quarter fiscal 2023 as compared to$5,239,000 in the third quarter fiscal 2022. The increase is primarily due to a 7% increase in retail volume as compared to the third quarter fiscal 2022, which was offset by a 3% decline in average net selling price. The foodservice business earned higher royalties of$63,000 as compared to the third quarter fiscal 2022. Royalties earned from all other licensing agreements for the manufacture and sale of Nathan's products increased by$209,000 during the third quarter fiscal 2023 as compared to the third quarter fiscal 2022 primarily due to additional royalties earned on sales of French fries and seasonings. Franchise fees and royalties were$976,000 in the third quarter fiscal 2023 as compared to$919,000 in the third quarter fiscal 2022. Total royalties were$829,000 in the third quarter fiscal 2023 as compared to$744,000 in the third quarter fiscal 2022. Royalties earned under the Branded Menu program were$151,000 in the third quarter fiscal 2023 as compared to$101,000 in the third quarter fiscal 2022. Royalties earned under the Branded Menu Program are not based upon a percentage of restaurant sales but are based upon product purchases. Virtual kitchen royalties were$30,000 in the third quarter fiscal 2023 as compared to$88,000 in the third quarter fiscal 2022. Traditional franchise royalties were$648,000 in the third quarter fiscal 2023 as compared to$555,000 in the third quarter fiscal 2022. Franchise restaurant sales increased to$14,761,000 in the third quarter fiscal 2023 as compared to$12,280,000 in the third quarter fiscal 2022 primarily due to higher sales at airport locations; highway travel plazas; shopping malls; movie theaters; and casino locations, primarily inLas Vegas, Nevada . Comparable domestic franchise sales (consisting of 61 Nathan's units, excluding sales under the Branded Menu Program) were$12,369,000 in the third quarter fiscal 2023 as compared to$9,811,000 in the third quarter fiscal 2022. AtDecember 25, 2022 , 233 franchised units, including domestic, international and Branded Menu Program units were operating as compared to 242 franchised units, including domestic, international franchised and Branded Menu Program units atDecember 26, 2021 . Total franchise fee income was$147,000 in the third quarter fiscal 2023 as compared to$175,000 in the third quarter fiscal 2022. Domestic franchise fee income was$27,000 in the third quarter fiscal 2023 as compared to$36,000 in the third quarter fiscal 2022. International franchise fee income was$61,000 in the third quarter fiscal 2023 as compared to$63,000 during the third quarter fiscal 2022. We recognized$59,000 and$76,000 in forfeited fees in the third quarter fiscal 2023 and the third quarter fiscal 2022, respectively. During the third quarter fiscal 2023, two franchised units opened, as well as two Branded Menu Program units. Additionally, 9 virtual kitchens opened. During the third quarter fiscal 2022, twelve franchised units opened, as well as fourteen Branded Menu Program units. Additionally, 39 virtual kitchens opened. Advertising fund revenue, after eliminating Company contributions, was$501,000 during the third quarter fiscal 2023 as compared to$479,000 during the third quarter fiscal 2022 period. Costs and Expenses Overall, our cost of sales decreased by 7% to$14,925,000 in the third quarter fiscal 2023 as compared to$16,040,000 in the third quarter fiscal 2022. Our gross profit (representing the difference between sales and cost of sales) increased to$3,415,000 or 19% of sales during the third quarter fiscal 2023 as compared to$2,597,000 or 14% of sales during the third quarter fiscal 2022. Cost of sales in the Branded Product Program decreased by 7% to$13,681,000 in the third quarter fiscal 2023 as compared to$14,724,000 in the third quarter fiscal 2022, primarily due to the 9% decrease in the average cost per pound of our hot dogs, partially offset by the 3% increase in the volume of hot dogs sold as discussed above. Beef prices declined during the third quarter fiscal 2023 as compared to the significantly higher commodity costs experienced during the third quarter fiscal 2022. We did not make any purchase commitments of beef during the third quarter fiscal 2023 or the third quarter fiscal 2022. 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 third quarter fiscal 2023 was$1,244,000 or 74% of restaurant sales as compared to$1,316,000 or 76% of restaurant sales in the third quarter fiscal 2022. The decrease in cost of sales during the third quarter of fiscal 2023 was primarily due to the 3% decrease in sales as discussed above. Food and paper costs as a percentage of Company-owned restaurant sales were 31%, down from 32% in the comparable period of the prior year. Labor and related expenses as a percentage of Company-owned restaurant sales were 43%, down from 44% in the comparable period in the prior year. The availability of labor remains a challenge at our Company-owned restaurants and it has required us to remain flexible as it relates to staffing levels and costs. Restaurant operating expenses were$932,000 in the third quarter fiscal 2023 as compared to$547,000 in the third quarter fiscal 2022. We incurred higher occupancy expenses of$324,000 , higher utility expenses of$18,000 , and higher insurance costs of$22,000 . -24-
-------------------------------------------------------------------------------- Depreciation and amortization, which primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment, was$303,000 in the third quarter fiscal 2023 as compared to$259,000 in the third quarter fiscal 2022. General and administrative expenses increased by$186,000 or 6% to$3,161,000 in the third quarter fiscal 2023 as compared to$2,975,000 in the third quarter fiscal 2022. The increase in general and administrative expenses was primarily attributable to higher compensation expenses of$287,000 offset, in part, by a decrease in travel expenses of$37,000 and a reduction in bad debt expense of$52,000 .
Advertising fund expense, after eliminating Company contributions, was
Other Items
Interest expense of
Interest expense of
Interest income was
Other expense, net was$60,000 in the third quarter fiscal 2023 which primarily relates to a loss on disposal of assets for capitalized software no longer in use of$101,000 offset by sublease income from a franchised restaurant. Provision for Income Taxes The effective income tax rate for the third quarter fiscal 2023 was 27.3% compared to 28.8% in the third quarter fiscal 2022. The effective income tax rate for the third quarter fiscal 2023 reflected income tax expense of$1,223,000 recorded on$4,486,000 of pre-tax income. The effective income tax rate for the third quarter fiscal 2022 reflected income tax expense of$860,000 recorded on$2,990,000 of pre-tax income. The effective tax rates are higher than the statutory rates primarily due to state and local taxes.
The amount of unrecognized tax benefits at
Nathan's estimates that its unrecognized tax benefit excluding accrued interest and penalties could be further reduced by up to$16,000 during the fiscal year endingMarch 26, 2023 . Results of Operations
Thirty-nine weeks ended
Revenues
Total revenues increased by 15% to
Total sales increased by 18% to$72,535,000 for the fiscal 2023 period as compared to$61,462,000 for the fiscal 2022 period which included foodservice sales from the Branded Product Program increasing by 19% to$61,862,000 for the fiscal 2023 period as compared to sales of$51,960,000 for the fiscal 2022 period. During the fiscal 2023 period, the volume of hot dogs sold increased by approximately 14% as compared to the fiscal 2022 period. Our average selling prices increased by approximately 5% as compared to the fiscal 2022 period.Total Company -owned restaurant sales increased by 12% to$10,673,000 during the fiscal 2023 period as compared to$9,502,000 during the fiscal 2022 period. The increase was primarily due to an increase in traffic at ourConey Island locations. -25-
-------------------------------------------------------------------------------- License royalties increased by 8% to$26,064,000 in the fiscal 2023 period as compared to$24,218,000 in the fiscal 2022 period. Total royalties earned on sales of hot dogs from our license agreement withSmithfield Foods, Inc. at retail and foodservice, including sales of hot dogs to WalMart, increased 6% to$23,594,000 for the 2023 fiscal period as compared to$22,161,000 in the fiscal 2022 period. The increase is due to a 9% increase in average net selling price as compared to the fiscal 2022 period which was offset, in part, by a 3% decrease in retail volume. The foodservice business earned higher royalties of$196,000 as compared to the fiscal 2022 period. Royalties earned from all other licensing agreements for the manufacture and sale of Nathan's products increased by$413,000 during the fiscal 2023 period as compared to the fiscal 2022 period primarily due to additional royalties earned on sales of French fries, cocktail franks, mozzarella sticks, pickles and seasonings. Franchise fees and royalties were$3,268,000 in the fiscal 2023 period as compared to$2,993,000 in the fiscal 2022 period. Total royalties were$2,785,000 in the fiscal 2023 period as compared to$2,581,000 in the fiscal 2022 period. Royalties earned under the Branded Menu program were$468,000 in the fiscal 2023 period as compared to$430,000 in the fiscal 2022 period. Royalties earned under the Branded Menu Program are not based upon a percentage of restaurant sales but are based upon product purchases. Virtual kitchen royalties were$112,000 in the fiscal 2023 period as compared to$258,000 in the fiscal 2022 period. Traditional franchise royalties were$2,205,000 in the fiscal 2023 period as compared to$1,893,000 in the fiscal 2022 period. Franchise restaurant sales increased to$49,302,000 in the fiscal 2023 period as compared to$40,910,000 in the fiscal 2022 period primarily due to higher sales at airport locations; highway travel plazas; shopping malls; movie theaters; and casino locations, primarily inLas Vegas, Nevada . Comparable domestic franchise sales (consisting of 63 Nathan's units, excluding sales under the Branded Menu Program) were$40,192,000 in the fiscal 2023 period as compared to$31,434,000 in the fiscal 2022 period. AtDecember 25, 2022 , 233 franchised units, including domestic, international and Branded Menu Program units were operating as compared to 242 franchised units, including domestic, international and Branded Menu Program franchise units atDecember 26, 2021 . Total franchise fee income was$483,000 in the fiscal 2023 period as compared to$412,000 in the fiscal 2022 period. Domestic franchise fee income was$84,000 in the fiscal 2023 period as compared to$109,000 in the fiscal 2022 period. International franchise fee income was$191,000 in the fiscal 2023 period as compared to$173,000 during the fiscal 2022 period. We recognized$208,000 and$130,000 in forfeited fees in the fiscal 2023 period and fiscal 2022 period, respectively. During the fiscal 2023 period, six franchised units opened, as well as two Branded Menu Program units. Additionally, 67 virtual kitchens opened. During the fiscal 2022 period, fifteen franchised units opened, as well as thirty-two Branded Menu Program units. Additionally, 164 virtual kitchens opened.
Advertising fund revenue, after eliminating Company contributions, was
Costs and Expenses Overall, our cost of sales increased by 15% to$59,490,000 in the fiscal 2023 period as compared to$51,536,000 in the fiscal 2022 period. Our gross profit (representing the difference between sales and cost of sales) increased to$13,045,000 or 18% of sales during the fiscal 2023 period as compared to$9,926,000 or 16% of sales during the fiscal 2022 period. Cost of sales in the Branded Product Program increased by 17% to$53,056,000 during the fiscal 2023 period as compared to$45,343,000 during the fiscal 2022 period, primarily due to the 14% increase in the volume of hot dogs sold as discussed above, as well as a 3% increase in the average cost per pound of our hot dogs. We continue to experience commodity inflation, including beef and beef trimmings. We did not make any purchase commitments of beef during the fiscal 2023 period or the fiscal 2022 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. With respect to Company-owned restaurants, our cost of sales during the fiscal 2023 period was$6,434,000 or 60% of restaurant sales as compared to$6,193,000 or 65% of restaurant sales in the fiscal 2022 period. The increase in cost of sales during the fiscal 2023 period was primarily due to the 12% increase in sales discussed above. The decrease in cost of sales, as a percent of total restaurant sales, was due to an increase in customer counts driving higher sales which were offset by higher commodity costs and restaurant labor costs. Food and paper costs as a percentage of Company-owned restaurant sales were 29%, down from 30% in the comparable period of the prior year. Labor and related expenses as a percentage of Company-owned restaurant sales were 31%, down from 35% in the comparable period in the prior year due to labor wage increases as a result of competitive pressures, offset by higher sales.
Restaurant operating expenses were
-26-
--------------------------------------------------------------------------------
Depreciation and amortization, which primarily consists of the depreciation of
fixed assets, including leasehold improvements and equipment, were $837,000 in
the fiscal 2023 period as compared to $807,000 in the fiscal 2022 period.
General and administrative expenses increased by $420,000 or 4% to $10,122,000
in the fiscal 2023 period as compared to $9,702,000 in the fiscal 2022 period.
The increase in general and administrative expenses was primarily attributable
to higher compensation expenses of $232,000 , and higher marketing and trade show
expenses of $295,000 .
Advertising fund expense, after eliminating Company contributions, was
$1,679,000 in the fiscal 2023 period, as compared to $1,437,000 in the fiscal
2022 period. The Company has determined that the Advertising Fund normal
seasonal deficit is not to be fully recovered during the remainder of the fiscal
2023 period and has reflected the projected deficit of $175,000 in the fiscal
2023 period.
Other Items
Interest expense of $5,831,000 in the fiscal 2023 period represented interest
expense of $5,450,000 on the 2025 Notes and amortization of debt issuance costs
of $381,000 .
Interest expense of $7,951,000 in the fiscal 2022 period represented interest
expense of $7,433,000 on the 2025 Notes and amortization of debt issuance costs
of $518,000 .
Interest income was
Other expense, net was$4,000 in the fiscal 2023 period which primarily relates to a net loss on disposal of assets for capitalized software no longer in use of$87,000 , offset by sublease income from a franchised restaurant.
Provision for Income Taxes
The effective income tax rate for the fiscal 2023 period was 27.1% compared to 28.1% in the fiscal 2022 period. The effective income tax rate for the fiscal 2023 period reflected income tax expense of$6,093,000 recorded on$22,451,000 of pre-tax income. The effective income tax rate for the fiscal 2022 period reflected income tax expense of$4,477,000 recorded on$15,915,000 of pre-tax income. The effective tax rates are higher than the statutory rates primarily due to state and local taxes.
The amount of unrecognized tax benefits at
Nathan's estimates that its unrecognized tax benefit excluding accrued interest and penalties could be further reduced by up to$16,000 during the fiscal year endingMarch 26, 2023 .
Off-Balance Sheet Arrangements
At
Liquidity and Capital Resources
Cash and cash equivalents atDecember 25, 2022 aggregated$55,454,000 , a$5,391,000 increase during the fiscal 2023 period as compared to cash and cash equivalents of$50,063,000 atMarch 27, 2022 . Net working capital increased to$58,413,000 from$48,988,000 atMarch 27, 2022 . We paid our semi-annual interest payments for fiscal 2023 of$3,643,750 onMay 1, 2022 andNovember 1, 2022 , respectively. We paid our first, second and third quarter fiscal 2023 dividend payments of$1,852,000 ,$1,836,000 and$1,836,000 onJune 24, 2022 ,September 2, 2022 andDecember 2, 2022 , respectively. We expect to pay our fourth quarter dividend onMarch 3, 2023 . The 2025 Notes bear interest at 6.625% per annum, payable semi-annually onMay 1st andNovember 1st of each year, beginning onMay 1, 2018 . The 2025 Notes have no scheduled principal amortization payments prior to its final maturity onNovember 1, 2025 . -27-
-------------------------------------------------------------------------------- Cash provided by operations of$13,329,000 in the fiscal 2023 period is primarily attributable to net income of$16,358,000 in addition to other non-cash operating items of$1,384,000 , offset by changes in other operating assets and liabilities of$4,413,000 . Non-cash operating expenses consist principally of depreciation and amortization of$837,000 , amortization of debt issuance costs of$381,000 , share-based compensation expense of$81,000 , bad debts of$114,000 , and a loss on disposal of assets of$87,000 . In the fiscal 2023 period, accounts and other receivables decreased by$218,000 due primarily to lower franchise and license royalties receivable of$647,000 which were offset, in part, by higher receivables due to theAdvertising Fund of$329,000 . Prepaid expenses and other current assets decreased by$332,000 due primarily to the reduction of prepaid insurance and marketing expenses of$21,000 and$281,000 , respectively. In the fiscal 2023 period, accounts payable, accrued expenses and other current liabilities decreased by$4,856,000 due primarily to lower accrued interest expense of$1,837,000 as a result of the partial redemption of our 2025 Notes; a decline in accrued payroll and other benefits of$519,000 resulting primarily from the payment of year-end fiscal 2022 incentive compensation; earned deferred revenue of$876,000 ; and a decline in accounts payable of$2,534,000 due to the timing of product purchases for ourBranded Product Program and Company -owned restaurants. Offsetting these declines were increases in accrued corporate income taxes of$991,000 due to the timing of estimated tax payments and higher earnings.
Cash used in investing activities was
Cash used in financing activities of$7,416,000 in the fiscal 2023 period relates primarily to the payments of the Company's quarterly$0.45 per share cash dividends onJune 24, 2022 ,September 2, 2022 andDecember 2, 2022 totaling$5,524,000 . Additionally, during the fiscal 2023 period, the Company repurchased 35,434 shares of common stock for$1,892,000 under the 10b5-1 Plan. In 2016, the Board authorized increases to the sixth stock repurchase plan for the purchase of up to 1,200,000 shares of its common stock on behalf of the Company. As ofDecember 25, 2022 , Nathan's has repurchased 1,101,884 shares at a cost of$39,000,000 under the sixth stock repurchase plan. AtDecember 25, 2022 , there were 98,116 shares remaining to be repurchased pursuant to the sixth stock repurchase plan. The plan does not have a set expiration date. Purchases under the Company's stock repurchase program may be made from time to time, depending on market conditions, in open market or privately negotiated transactions, at prices deemed appropriate by management. There is no set time limit on the repurchases.
On
During the fiscal 2023 period, the Company repurchased in open market transactions 35,434 shares of the Company's common stock at an average price of$53.39 for a total cost of$1,892,000 under the 10b5-1 Plan. The Company did not repurchase any shares of its common stock during the thirteen weeks endedDecember 25, 2022 . As discussed above, we had cash and cash equivalents atDecember 25, 2022 aggregating$55,454,000 . Our Board routinely monitors and assesses its cash position and our current and potential capital requirements. OnMay 31, 2018 , the Board authorized the commencement of a regular dividend of$1.00 per share per annum, payable at the rate of$0.25 per share per quarter. OnJune 14, 2019 , the Board authorized the increase of its regular quarterly dividend to$0.35 from$0.25 . OnFebruary 4, 2022 , the Board authorized the increase of its regular quarterly dividend to$0.45 from$0.35 . OnFebruary 2, 2023 , the Board authorized the increase of its regular quarterly dividend to$0.50 from$0.45 . The Company paid its first quarter fiscal 2023 dividend of$1,852,000 onJune 24, 2022 , its second quarter fiscal 2023 dividend of$1,836,000 onSeptember 2, 2022 and its third quarter fiscal 2023 dividend of$1,836,000 onDecember 2, 2022 . EffectiveFebruary 2, 2023 , the Company declared its fourth quarter dividend of$0.50 per common share to stockholders of record as of the close of business onFebruary 21, 2023 , which is payable onMarch 3, 2023 . The Company's total cash requirement for dividends for all of fiscal 2023 would be approximately$7,564,000 based on the number of shares of common stock outstanding atFebruary 2, 2023 . The Company intends to declare and pay quarterly cash dividends; however, there can be no assurance that any additional quarterly dividends will be declared or paid or of the amount or timing of such dividends, if any. Our ability to pay future dividends is limited by the terms of the Indenture for the 2025 Notes. In addition, the payment of any cash dividends in the future, are subject to final determination of the Board and will be dependent upon our earnings and financial requirements. We may also return capital to our stockholders through stock repurchases, subject to any restrictions in the Indenture, although there is no assurance that the Company will make any repurchases under its existing stock repurchase plan. We expect that in the future we will make investments in certain existing restaurants, support the growth of the Branded Product and Branded Menu Programs, service the outstanding debt, fund our dividend program and may continue our stock repurchase programs, funding those investments from our operating cash flow. We may also incur capital and other expenditures or engage in investing activities in connection with opportunistic situations that may arise on a case-by-case basis. During the fiscal year endingMarch 26, 2023 , we will be required to make interest payments of$7,287,500 , of which all have been made as ofNovember 1, 2022 . -28-
-------------------------------------------------------------------------------- Management believes that available cash, cash equivalents and cash generated from operations should provide sufficient capital to finance our operations, satisfy our debt service requirements, fund dividend distributions and stock repurchases for at least the next 12 months. AtDecember 25, 2022 , we sublet one property to a franchisee that we lease from a third party. We remain contingently liable for all costs associated with this property including: rent, property taxes and insurance. We may incur future cash payments with respect to such property, consisting primarily of future lease payments, including costs and expenses associated with terminating such lease.
Our contractual obligations primarily consist of the 2025 Notes and the related
interest payments, operating leases, and employment agreement with certain
executive officers. These contractual obligations impact our short-term and
long-term liquidity and capital resource needs. There have been no material
changes in our contractual obligations since
Inflationary Impact Beginning in fiscal 2022 and continuing into the fiscal 2023 period, we have experienced inflationary pressures on commodity prices. We expect this trend to continue throughout the remainder of fiscal 2023. Our average cost of hot dogs during fiscal 2022 was approximately 19% higher than during fiscal 2021. Our average cost of hot dogs during fiscal 2023 was approximately 3% higher than during fiscal 2022. Beginning inJuly 2021 , the cost of hot dogs has increased significantly due to higher costs for beef and beef trimmings, labor, packaging and transportation, as well as supply chain challenges associated with increased consumer demand as a result of the continued recovery from the COVID-19 pandemic. Inherent volatility experienced in certain commodity markets, such as those for beef and beef trimmings due to seasonal shifts, climate conditions, industry demand, inflationary pressures and other macroeconomic factors could have an adverse effect on our results of operations. We have experienced competitive pressure on labor rates as a result of the increase in the minimum hourly wage for fast food workers which increased to$15.00 inNew York state during fiscal 2022 where our Company-owned restaurants are located. Additionally, with the continued recovery from the COVID-19 pandemic, there has been an increased demand for labor at all levels which has resulted in greater challenges retaining adequate staffing levels at our Company-owned restaurants; our franchised restaurants and Branded Menu Program locations; as well as for certain vendors in our supply chain that we depend on for our commodities. We remain in contact with our major suppliers and to date we have not experienced significant disruptions in our supply chain. We are unable to predict the future cost of our hot dogs and expect to experience price volatility for our beef products during the remainder of fiscal 2023. To the extent that beef prices increase as compared to earlier periods, it could impact our results of operations. In the past, we entered into purchase commitments for a portion of our hot dogs to reduce the impact of increasing market prices. Our most recent purchase commitment was completed in 2016 for approximately 2,600,000 pounds of hot dogs. We may attempt to enter into similar purchase arrangements for hot dogs and other products in the future. Additionally, we expect to continue experiencing volatility in oil and gas prices on our distribution costs for our food products and utility costs in the Company-owned restaurants and volatile insurance costs resulting from the uncertainty of the insurance markets. We must comply with the Fair Labor Standards Act and various federal and state laws governing minimum wages. Increases in the minimum wage and labor regulations have increased our labor costs. The minimum wage forNew York State increased to$15.00 per hour onDecember 31, 2021 . All of our Company-owned restaurants operate inNew York State . In addition, the federal government and a number of other states are evaluating various proposals to increase their respective minimum wage. We believe that these increases in the minimum wage and other changes in employment law have had a significant financial impact on our financial results and the results of our franchisees that operate inNew York State . Our business could be negatively impacted if the decrease in margins for our franchisees results in the potential loss of new franchisees or the closing of a significant number of franchised restaurants. Continued increases in labor costs, commodity prices and other operating expenses, including healthcare, could adversely affect our operations. We attempt to manage inflationary pressure, and rising commodity costs, at least in part, through raising prices. Delays in implementing price increases, competitive pressures, consumer spending levels and other factors may limit our ability to offset these rising costs. Volatility in commodity prices, including beef and beef trimmings could have a significant adverse effect on our results of operations. The Company's business, financial condition, operating results and cash flows can be impacted by a number of factors, including but not limited to those set forth above in "Management's Discussion and Analysis of Financial Condition and Results of Operations," any one of which could cause our actual results to vary materially from recent results or from our anticipated future results. For a discussion identifying additional risk factors and important factors that could cause actual results to differ materially from those anticipated, also see the discussions in "Forward-Looking Statements" and "Notes to Consolidated Financial Statements" in this Form 10-Q and "Risk Factors" in our Form 10-K for our fiscal year endedMarch 27, 2022 . -29-
--------------------------------------------------------------------------------
© Edgar Online, source
