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 with John Morrell &
Co., 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, weather (including the affects on the supply
of cattle and the impact of weather 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, business conditions or tariffs; the collectibility
of receivables; changes in consumer tastes; the continued viability of Coney
Island as a destination location for visitors; the ability to continue to
attract franchisees; the impact of the new minimum wage legislation in New York
State or other changes in labor laws, including court decisions which could
render a franchisor as a "joint employee" or the impact of our new union
contracts; our ability to attract competent restaurant and managerial personnel;
the enforceability of international franchising agreements and 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 ended March 28, 2021, and in other
documents we file with the U.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"
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 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
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. Our Branded Menu Program 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.
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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 or "ghost"
kitchens).
At June 27, 2021, our restaurant system consisted of 219 Nathan's franchised
units, including 100 Branded Menu units, and four Company-owned units (including
one seasonal unit), located in 19 states, and 10 foreign countries. At June 28,
2020, our restaurant system consisted of 217 Nathan's franchised units,
including 95 Branded Menu units, and four Company-owned units (including one
seasonal unit), located in 20 states, and 9 foreign countries.
Our strategic emphasis continues to focus on increasing the number of
distribution points for our products across all of our business platforms,
including our Licensing Program for distribution of Nathan's Famous branded
consumer packaged goods, our Branded Products Program for distribution of
Nathan's Famous branded bulk products to the foodservice industry, and our
namesake restaurant system comprised of both Company-owned and franchised units,
including virtual or "ghost" 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.
We remain committed to these parts of our business and we continue to
reinvigorate our restaurant system. The operating plan we have adopted in this
regard is focused on surrounding our core items, Nathan's World Famous Beef Hot
Dogs and crinkle-cut French fried potatoes, with other much higher quality menu
items, including fresh angus hamburgers and hand-dipped chicken sandwiches,
developed to deliver best-in-class customer experience and greater customer
frequency. Menu development activities have been combined with concept
positioning efforts, operational improvements and more effective digital and
social marketing campaigns. The goal is to improve the performance of the
existing restaurant system and to grow it through franchising efforts. While we
do not expect to significantly increase the number of company-owned units, we do
expect to 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. Our virtual or "ghost" kitchens should position us to further
expand our delivery options and should allow us to reach even more of our
customers.
As described in our Annual Report on Form 10-K for the year ended March 28,
2021, our future results could be materially impacted by many developments
including the impact of the COVID-19 pandemic on our business, our dependence on
John Morrell & Co. as our principal supplier and the dependence of our licensing
revenue and overall profitability on our agreement with John Morrell & Co. In
addition, our future operating results could be impacted by supply constraints
on beef or by increased costs of beef compared to earlier periods in addition to
the potential impact that any future tariffs may have on the business.
On November 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 "Redemption") the Company's 10.000% Senior Secured Notes
due 2020 (the "2020 Notes"), paid a portion of the special $5.00 cash dividend
and used any remaining proceeds for general corporate purposes, including
working capital. Our future results could also be impacted by our obligations
under the 2025 Notes. As a result of the issuance of the 2025 Notes, Nathan's
incurs interest expense of $9,937,500 per annum. Nathan's expects to incur
annual amortization of debt issuance costs of approximately $691,000 through
November 1, 2025.
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 on our business
In March 2020, the World Health Organization declared the novel strain of
coronavirus ("COVID-19") a global pandemic. During the fiscal 2022 period, the
number of COVID-19 cases began to stabilize and more regions began to loosen
restrictions, adhering to state and local guidelines.
Although the Company has experienced some recovery from the initial impact of
COVID-19, the long-term impact of COVID-19 on the economy and on the Company's
business remains uncertain, the duration and scope of which cannot currently be
predicted. The Company cannot predict if there will be another surge, what
additional restrictions may be enacted, to what extent it can maintain
off-premises sales volumes, whether it can maintain sufficient staffing levels,
or if individuals will be comfortable returning to its dining rooms or venues
such as professional sports arenas, amusement parks, shopping malls or movie
theaters during or following social distancing protocols, and what long-lasting
effects the COVID-19 pandemic may have on the Company as a whole.
The full impact of the COVID-19 pandemic continues to evolve as of the date of
this report. The duration of the disruption on global, national, and local
economies cannot be reasonably estimated at this time due to the ongoing effects
of this situation. Management is continually evaluating the impact of this
global crisis on its financial condition, liquidity, operations, and workforce
and will take additional actions as necessary.
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Critical Accounting Policies and Estimates
As discussed in our Form 10-K for the fiscal year ended March 28, 2021, 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 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; leases; impairment of
goodwill and other intangible assets; impairment of long-lived assets;
share-based compensation and income taxes (including uncertain tax positions).
Except for the adoption in Note B - simplifying the accounting for income taxes,
there have been no other significant changes to the Company's accounting
policies subsequent to March 28, 2021.
Adoption of New Accounting Standard
Please refer to Note B of the preceding consolidated financial statements for
our discussion of the Adoption of the New Accounting Standard.
New Accounting Standard Not Yet Adopted
Please refer to Note C 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.
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 in the 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 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
June 27, 2021 June 28, 2020
(unaudited)
Net income $ 5,763 $ 4,000
Interest expense 2,650 2,650
Provision for income taxes 2,341 1,561
Depreciation and amortization 278 310
EBITDA 11,032 8,521
Share-based compensation 29 29
Adjusted EBITDA $ 11,061 $ 8,550
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Results of Operations
Thirteen weeks ended June 27, 2021 compared to thirteen weeks ended June 28,
2020
Revenues
Total revenues increased by 77% to $31,319,000 for the thirteen weeks ended June
27, 2021 ("fiscal 2022 period") as compared to $17,686,000 for the thirteen
weeks ended June 28, 2020 ("fiscal 2021 period") as we begin to lap the
significant impact of COVID-19 on our results beginning in March 2020.
Total sales increased by 189% to $19,325,000 for the fiscal 2022 period as
compared to $6,683,000 for the fiscal 2021 period. Foodservice sales from the
Branded Product Program increased by 237% to $15,996,000 for the fiscal 2022
period as compared to sales of $4,749,000 in the fiscal 2021 period. The sales
from our Branded Product Program have increased as certain government mandated
restrictions associated with the COVID-19 pandemic have begun to ease with
approved vaccines being more widely distributed and administered. As a result,
many of our Branded Product Program customers have reopened adhering to state
and local guidelines, such as professional sports arenas, amusement parks,
shopping malls and movie theaters. During the fiscal 2022 period, the volume of
business increased by approximately 232% as compared to the fiscal 2021 period.
Our average selling prices decreased by approximately 4.5% as compared to the
fiscal 2021 period.
Total Company-owned restaurant sales increased by 72% to $3,329,000 during the
fiscal 2022 period as compared to $1,934,000 during the fiscal 2021 period. The
increase was primarily due to an increase in traffic at our Coney Island
locations driven, in part, by the re-opening of Luna Park, the amusement park in
Coney Island, as well as the easing of certain government mandated restrictions
compared to the fiscal 2021 period.
License royalties increased by 1.5%, to $10,682,000 in the fiscal 2022 period as
compared to $10,523,000 in the fiscal 2021 period. Total royalties earned on
sales of hot dogs from our license agreement with John Morrell & Co. at retail
and foodservice, substantially from sales of hot dogs to Sam's Club and WalMart,
increased 1.4% to $9,880,000 in the 2022 fiscal period as compared to $9,744,000
in the fiscal 2021 period. The increase is due to a 6.8% increase in retail
volume during the fiscal 2022 period, which was offset, in part, by a 5.7%
decrease in average net selling price as compared to the fiscal 2021 period. The
foodservice business earned higher royalties of $102,000 as compared to the
fiscal 2021 period. Royalties earned from all other licensing agreements for the
manufacture and sale of Nathan's products increased by $23,000 during the fiscal
2022 period as compared to the fiscal 2021 period primarily due to additional
royalties earned on sales of pickles, cocktail franks and mozzarella sticks.
Franchise fees and royalties were $907,000 in the fiscal 2022 period as compared
to $191,000 in the fiscal 2021 period. Total royalties were $800,000 in the
fiscal 2022 period as compared to $110,000 in the fiscal 2021 period. Royalties
earned under the Branded Menu program were $82,000 in the fiscal 2022 period as
compared to $17,000 in the fiscal 2021 period. Royalties earned under the
Branded Menu Program are not based upon a percentage of restaurant sales but are
based upon product purchases. Ghost kitchen royalties were $73,000 in the fiscal
2022 period. Traditional franchise royalties were $645,000 in the fiscal 2022
period as compared to $93,000 in the fiscal 2021 period. Franchise restaurant
sales increased to $12,985,000 in the fiscal 2022 period as compared to
$2,218,000 in the fiscal 2021 period primarily due to the reopening of a
majority of our franchised locations. Approximately 80% of our franchise system
was open in the fiscal 2022 period as compared to 52% in the fiscal 2021 period.
Comparable domestic franchise sales (consisting of 34 Nathan's outlets,
excluding sales under the Branded Menu Program) were $7,801,000 in the fiscal
2022 period as compared to $1,800,000 in the fiscal 2021 period.
At June 27, 2021, 219 franchised outlets, including domestic, international and
Branded Menu Program outlets were operating compared to 217 franchised outlets,
including domestic, international and Branded Menu Program outlets at June 28,
2020. Total franchise fee income was $107,000 in the fiscal 2022 period as
compared to $81,000 in the fiscal 2021 period. Domestic franchise fee income was
$35,000 in the fiscal 2022 period as compared to $33,000 in the fiscal 2021
period. International franchise fee income was $54,000 in the fiscal 2022 period
as compared to $25,000 during the fiscal 2021 period.
We recognized $18,000 and $23,000 in forfeited fees in the fiscal 2022 and
fiscal 2021 periods, respectively. During the fiscal 2022 period, one new
traditional franchised outlet opened, internationally, as well as seven new
Branded Menu Program outlets. Additionally, 71 new virtual kitchens opened.
During the fiscal 2021 period, two new traditional franchised outlets opened,
domestically.
Advertising fund revenue, after eliminating Company contributions, was $405,000
in the fiscal 2022 period, as compared to $289,000 in the fiscal 2021 period.
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Costs and Expenses
Overall, our cost of sales increased by 190% to $15,365,000 in the fiscal 2022
period as compared to $5,297,000 in the fiscal 2021 period. Our gross profit
(representing the difference between sales and cost of sales) increased to
$3,960,000 or 20.5% of sales during the fiscal 2022 period as compared to
$1,386,000 or 20.7% of sales during the fiscal 2021 period.
Cost of sales in the Branded Product Program increased by approximately
$9,277,000 during the fiscal 2022 period as compared to the fiscal 2021 period,
primarily due to the 232% increase in the volume of product sold as discussed
above which was offset, in part, by the 5.3% decrease in the average cost per
pound of our hot dogs. We did not make any purchase commitments of beef during
the fiscal 2022 and 2021 periods. 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
2022 period was $2,135,000 or 64.1% of restaurant sales, as compared to
$1,344,000 or 69.5% of restaurant sales in the fiscal 2021 period. The decrease
in cost of sales, as a percent of sales, during the first quarter of fiscal 2022
was primarily due to higher food costs, which were offset by lower restaurant
labor costs. During the fiscal 2021 period, labor costs as a percentage of sales
were increased by the significant reduction in total restaurant sales caused by
the COVID-19 pandemic. 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. We expect that our future labor costs may
continue to be impacted by the additional increase in minimum wage requirements
in New York State which commenced on July 1, 2021, as well as other new labor
regulations and our food costs may be impacted by increases in commodity costs.
Restaurant operating expenses were $1,111,000 in the fiscal 2022 period as
compared to $852,000 in the fiscal 2021 period. We incurred higher occupancy
expenses of $88,000, higher utility expenses of $14,000, higher repairs and
maintenance expenses of $16,000, higher insurance costs of $32,000 and higher
delivery charges of $37,000 associated with offsite consumption.
Depreciation and amortization, which primarily consists of the depreciation of
fixed assets, including leasehold improvements and equipment, was $278,000 in
the fiscal 2022 period as compared to $310,000 in the fiscal 2021 period.
General and administrative expenses increased by $614,000 or 22% to $3,458,000
in the fiscal 2022 period as compared to $2,844,000 in the fiscal 2021 period.
The increase in general and administrative expenses was primarily attributable
to higher corporate payroll expenses, a higher incentive compensation accrual,
higher insurance costs and higher legal and professional fees.
Advertising fund expense, after eliminating Company contributions, was $405,000
in the fiscal 2022 period, as compared to $289,000 in the fiscal 2021 period.
Other Items
Interest expense of $2,650,000 in the fiscal 2022 and fiscal 2021 periods
represented accrued interest of $2,477,000 on the 2025 Notes at 6.625% per annum
and amortization of debt issuance costs of $173,000.
Interest income was $36,000 in the fiscal 2022 period as compared to $117,000 in
the fiscal 2021 period.
Other income, which primarily relates to a sublease of a franchised restaurant,
was $16,000 in the fiscal 2022 period.
Provision for Income Taxes
The income tax provision for the thirteen week periods ended June 27, 2021 and
June 28, 2020 reflect effective tax rates of 28.9% and 28.1%, respectively.
The amount of unrecognized tax benefits at June 27, 2021 was $422,000 all of
which would impact Nathan's effective tax rate, if recognized. As of June 27,
2021, Nathan's had $282,000 of accrued interest and penalties in connection with
unrecognized tax benefits.
Nathan's estimates that its unrecognized tax benefit excluding accrued interest
and penalties could be further reduced by up to $19,000 during the fiscal year
ending March 27, 2022.
Off-Balance Sheet Arrangements
At June 27, 2021 and June 28, 2020, Nathan's did not have any open purchase
commitments for hot dogs. Nathan's may enter into purchase commitments in the
future as favorable market conditions become available.
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Liquidity and Capital Resources
Cash and cash equivalents at June 27, 2021 aggregated $79,526,000, a $1,538,000
decrease during the fiscal 2022 period as compared to cash and cash equivalents
of $81,064,000 at March 28, 2021. Net working capital increased to $84,994,000
from $80,072,000 at March 28, 2021. On May 1, 2021, we paid our first
semi-annual interest payment of $4,968,750 for fiscal 2022. We paid our first
quarter fiscal 2022 dividend of $1,440,000 on June 25, 2021.
In November 2017, the Company refinanced its then-outstanding 2020 Notes
totaling $135.0 million at 10.000% per annum by issuing $150.0 million 2025
Notes at 6.625% per annum. Please refer to Note Q - Long Term Debt in the
accompanying Consolidated Financial Statements, for a further discussion of the
Redemption.
The 2025 Notes bear interest at 6.625% per annum, payable semi-annually on May
1st and November 1st of each year, beginning on May 1, 2018. Semi-annual
interest payments are $4,968,750. During the thirteen week period ended June 27,
2021, we paid interest of $4,968,750 on May 1, 2021 for the 2025 Notes. The 2025
Notes have no scheduled principal amortization payments prior to its final
maturity on November 1, 2025.
Cash provided by operations of $77,000 in the fiscal 2022 period is primarily
attributable to net income of $5,763,000 in addition to other non-cash operating
items of $577,000, offset by changes in other operating assets and liabilities
of $6,263,000. Non-cash operating expenses consist principally of depreciation
and amortization of $278,000, amortization of debt issuance costs of $173,000,
share-based compensation expense of $29,000, and non-cash rental expense of
$105,000. In the fiscal 2022 period, accounts and other receivables increased by
$7,532,000 due primarily to higher receivables from Branded Product Program
sales of $5,675,000, higher franchise and license royalties receivable of
$884,000, and higher receivables due to the Advertising Fund of $281,000.
Prepaid expenses and other current assets decreased by $531,000 due primarily to
the reduction of prepaid income taxes, insurance and marketing expenses of
$280,000, $66,000 and $88,000, respectively. In the fiscal 2022 period, accounts
payable, accrued expenses and other current liabilities increased by $555,000
due to the reduction in accrued interest of $2,492,000 resulting from our May
2021 debt service payment. Additionally, accrued payroll and other benefits
declined by $1,389,000 resulting from the payment of year-end compensation. This
was offset by higher accrued corporate taxes of $1,882,000; higher accrued
rebates due under the Branded Product Program of $326,000 as a result of higher
sales; and an increase in accounts payable of $2,180,000 arising from seasonally
higher product purchases for the Branded Product Program.
Cash used in investing activities was $175,000 in the fiscal 2022 period
primarily in connection with capital expenditures incurred for our Branded
Product Program and our Coney Island restaurants.
Cash used in financing activities of $1,440,000 in the fiscal 2022 period
relates to the payment of the Company's regular $0.35 per share cash dividend on
June 25, 2021.
During the period from October 2001 through June 27, 2021, Nathan's purchased
5,254,081 shares of its common stock at a cost of approximately $84,770,000
pursuant to its stock repurchase plans previously authorized by the Board of
Directors. Since March 26, 2007, we have repurchased 3,362,981 shares at a total
cost of approximately $77,612,000, reducing the number of shares
then-outstanding by 55.9%.
In 2016, the Company's Board of Directors 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 of June 27, 2021, Nathan's has repurchased
1,066,450 shares at a cost of $37,108,000 under the sixth stock repurchase plan.
At June 27, 2021, there were 133,550 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 March 13, 2020, the Company's Board of Directors approved a 10b5-1 stock plan
(the "10b5-1 Plan") which expired on August 12, 2020. During the fiscal 2021
period, the Company repurchased in open market transactions 26,676 shares of the
Company's common stock at an average share price of $56.26 for a total cost of
$1,501,000 under the 10b5-1 Plan.
Effective June 1, 2020, Nathan's Board of Directors authorized the repurchase of
up to $10,000,000 of the 2025 Notes by the Company (at a price equal to or less
than par) from time to time. There is no set time limit on the repurchases.
As discussed above, we had cash and cash equivalents at June 27, 2021
aggregating $79,526,000. Our Board routinely monitors and assesses its cash
position and our current and potential capital requirements. In November 2017,
we refinanced our 2020 Notes through the issuance of the 2025 Notes and, our
Board of Directors announced the payment of a $5.00 per share special dividend
to the shareholders of record as of the close of business on December 22, 2017.
On May 31, 2018, Nathan's Board of Directors 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. On June 14, 2019, Nathan's Board of Directors authorized the
increase of its regular quarterly dividend to $0.35 from $0.25. The Company paid
its first quarter fiscal 2022 dividend of $1,440,000 on June 25, 2021.
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Effective August 6, 2021, the Company declared its second quarter fiscal 2022
dividend of $0.35 per common share to stockholders of record as of the close of
business on August 23, 2021, which is payable on September 3, 2021.
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 ending March 27, 2022, we
will be required to make interest payments of $9,937,500, of which $4,968,750
has been made on May 1, 2021.
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.
At June 27, 2021, 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 March 28, 2021.
On February 27, 2017, a wholly-owned subsidiary of the Company executed a
Guaranty of Lease (the "Brooklyn Guaranty") in connection with its
re-franchising of a restaurant located in Brooklyn, New York. The Company is
obligated to make payments under the Brooklyn Guaranty in the event of a default
by the tenant/franchisee. The Brooklyn Guaranty has an initial term of 10 years
and one 5-year option and is limited to 24 months of rent for the first three
years of the term. For the remainder of the term, the Brooklyn Guaranty is
limited to 12 months of rent plus reasonable costs of collection and attorney's
fees. As of June 27, 2021, Nathan's has recorded a liability of $113,000 in
connection with the Brooklyn Guaranty which does not include potential
percentage rent, real estate tax increases, attorney's fees and other costs as
these amounts are not reasonably determinable at this time. Nathan's has
received a personal guaranty from the franchisee for all obligations under the
Brooklyn Guaranty.
Inflationary Impact
We do not believe that general inflation has materially impacted earnings.
However, we have experienced significant volatility in our costs for our hot
dogs and certain food products, distribution costs and utilities. Our average
cost of hot dogs between April 2021 and June 2021 was approximately 5.3% lower
than between April 2020 and June 2020.
We are unable to predict the future cost of our hot dogs and expect to
experience price volatility for our beef products during fiscal 2022. 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.
New York State passed legislation increasing the minimum hourly wage for fast
food workers of restaurant chains with 30 or more locations nationwide. The
increase was being phased in differently between New York City and the rest of
New York State. Effective December 31, 2019, the minimum wage was $15.00 in New
York City and increased to $13.75 per hour for the remainder of New York State.
The minimum hourly rate of pay for the remainder of New York State increased to
$14.50 on Dec. 31, 2020; and increased to $15.00 on July 1, 2021. All of
Nathan's Company-owned restaurants are within New York State and have been
significantly affected by this new legislation.
We may attempt to offset the effects of wage inflation, at least in part,
through periodic menu price increases. However, no assurance can be given that
we will be able to offset these wage increases in the future.
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Effective November 27, 2017, the City of New York Fair Work Week Legislation
package of bills took effect that covers City of New York fast food workers by
giving them more predictable work schedules. A key component of the package is a
requirement that fast food restaurants schedule their workers at least two weeks
in advance or pay employees between $10 to $75 per scheduling change, depending
on the situation. Due to Nathan's dependency on weather conditions at our two
Coney Island beach locations during the summer season, we are unable to
determine the potential impact on our results of operations, which could be
material. We believe that we have been able to implement tools to minimize the
financial impact of this legislation.
Continued increases in labor, food and other operating expenses, including
health care, could adversely affect our operations and those of the restaurant
industry and we might have to further reconsider our pricing strategy as a means
to offset reduced operating margins.
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 in New 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.
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 ended March 28, 2021.
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