What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-05 compared with 2021-08-06 · 151 added, 78 removed, 198 unchanged (54% of the section changed)

27 unchanged sentences

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;

or the impact of our union contracts;

our ability to attract competent restaurant and managerial personnel;

29 unchanged sentences

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”

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”

At September 26, 2021, our restaurant system, excluding virtual or “ghost”

kitchens, consisted of 224 Nathan’s franchised units, including 109 Branded Menu Program units, and four Company-owned units (including one seasonal unit), located in 18 states, and 12 foreign countries.

At September 27, 2020, our restaurant system, excluding virtual or “ghost”

kitchens, consisted of 214 Nathan’s franchised units, including 93 Branded Menu Program units, and four Company-owned units (including one seasonal unit), located in 19 states, and 9 foreign countries.

Our strategic emphasis is focused 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”

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.

2 unchanged sentences

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.

The goal is to improve the performance of the existing restaurant system and to grow it through franchising efforts, including virtual or “ghost”

While we do not expect to significantly increase the number of company-owned restaurants, 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.

8 unchanged sentences

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.

As described below, we are also including information relating to EBITDA and Adjusted EBITDA, which are non-GAAP financial measures, in the Form 10-Q quarterly report.

See “Reconciliation of GAAP and Non-GAAP Measures.”

1 unchanged sentence

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.

During the fiscal 2022 period, the number of COVID-19 cases continued to stabilize with approved vaccines being more widely distributed and administered and, as a result, more regions continued 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.

Our ability to attract and retain employees at our Company-owned restaurants has become more challenging, as the job market for these employees has become more competitive.

The challenges in the labor market have also affected some suppliers, resulting in some intermittent product shortages.

The Company cannot predict if new variants of COVID-19 will be discovered or 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.

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The following is a reconciliation of net income to EBITDA and Adjusted EBITDA (in thousands):

Thirteen weeks ended

June 27, 2021

June 28, 2020

Twenty-six weeks ended

September 26,

September 27,

September 26,

September 27,

Interest expense

5 unchanged sentences

Thirteen weeks ended June 27, 2021 compared to thirteen weeks ended June 28, 2020

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.

Thirteen weeks ended September 26, 2021 compared to thirteen weeks ended September 27, 2020

Total revenues increased by 51% to $32,878,000 for the thirteen weeks ended September 26, 2021 (“second quarter fiscal 2022”) as compared to $21,839,000 for the thirteen weeks ended September 27, 2020 (“second quarter fiscal 2021”) as we continue to lap the significant impact of COVID-19 on our results beginning in March 2020.

Total sales increased by 85% to $23,500,000 for the second quarter fiscal 2022 as compared to $12,692,000 for the second quarter fiscal 2021.

Foodservice sales from the Branded Product Program increased by 97% to $19,063,000 for the second quarter fiscal 2022 as compared to sales of $9,698,000 for the second quarter fiscal 2021.

The sales from our Branded Product Program have increased as certain government mandated restrictions associated with the COVID-19 pandemic have eased with approved vaccines being more widely distributed and administered.

As a result, most 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 second quarter fiscal 2022, the total pounds of hot dogs sold in the Branded Product Program increased by approximately 92% as compared to the second quarter fiscal 2021.

Our average selling prices increased by approximately 3.7% as compared to the second quarter fiscal 2021.

Total Company-owned restaurant sales increased by 48% to $4,437,000 during the second quarter fiscal 2022 as compared to $2,994,000 during the second quarter fiscal 2021.

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 as a result of the public health measures taken to reduce exposure to the COVID-19 virus compared to the second quarter fiscal 2021.

License royalties decreased by 7% to $7,658,000 in the second quarter fiscal 2022 as compared to $8,268,000 in the second quarter fiscal 2021.

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 WalMart, decreased 9% to $7,042,000 for the second quarter fiscal 2022 as compared to $7,716,000 in the second quarter fiscal 2021.

The decrease is due to a 6% decrease in retail volume during the second quarter fiscal 2022 period and a 2% decrease in average net selling price as compared to the second quarter fiscal 2021.

The foodservice business earned lower royalties of $11,000 as compared to the second quarter fiscal 2021.

Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $65,000 during the second quarter fiscal 2022 as compared to the second quarter fiscal 2021 primarily due to additional royalties earned on sales of proprietary spices, offset in part, by lower royalties earned on pickles and French fries.

Franchise fees and royalties were $1,167,000 in the second quarter fiscal 2022 as compared to $476,000 in the second quarter fiscal 2021.

The increase was primarily due to the continued momentum associated with the recovery from the COVID-19 pandemic.

Total royalties were $1,037,000 in the second quarter fiscal 2022 as compared to $409,000 in the second quarter fiscal 2021.

Royalties earned under the Branded Menu Program were $207,000 in the second quarter fiscal 2022 as compared to $70,000 in the second quarter fiscal 2021.

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 $97,000 in the second quarter fiscal 2022.

Traditional franchise royalties were $733,000 in the second quarter fiscal 2022 as compared to $339,000 in the second quarter fiscal 2021.

Franchise restaurant sales increased to $15,644,000 in the second quarter fiscal 2022 as compared to $6,969,000 in the second quarter fiscal 2021 primarily due to the reopening of a majority of our franchised locations.

Approximately 87% of our franchise system was open at the end of the second quarter fiscal 2022 as compared to 58% at the end of the second quarter fiscal 2021.

Comparable domestic franchise sales (consisting of 47 Nathan’s outlets, excluding sales under the Branded Menu Program) were $11,425,000 in the second quarter fiscal 2022 as compared to $5,991,000 in the second quarter fiscal 2021.         

At September 26, 2021, 224 franchised outlets, including domestic, international and Branded Menu Program outlets were operating as compared to 214 franchised outlets, including domestic, international and Branded Menu Program outlets at September 27, 2020.

Total franchise fee income was $130,000 in the second quarter fiscal 2022 compared to $67,000 in the second quarter fiscal 2021.

Domestic franchise fee income was $38,000 in the second quarter fiscal 2022 compared to $31,000 in the second quarter fiscal 2021.

International franchise fee income was $56,000 in the second quarter fiscal 2022 compared to $26,000 during the second quarter fiscal 2021.

We recognized $36,000 and $10,000 in forfeited fees in the second quarter fiscal 2022 and the second quarter fiscal 2021, respectively.

During the second quarter fiscal 2022, two new traditional franchised outlets opened, as well as eleven new Branded Menu Program outlets.

Additionally, 54 new virtual kitchens opened.

During the second quarter fiscal 2021, two new traditional franchised outlets opened, including one new Branded Menu Program outlet.

Advertising fund revenue, after eliminating Company contributions, was $553,000 during the second quarter fiscal 2022, as compared to $403,000 during the second quarter fiscal 2021.

Costs and Expenses

Overall, our cost of sales increased by 103% to $20,131,000 in the second quarter fiscal 2022 as compared to $9,927,000 in the second quarter fiscal 2021.

Our gross profit (representing the difference between sales and cost of sales) increased to $3,369,000 or 14.3% of sales during the second quarter fiscal 2022 as compared to $2,765,000 or 21.8% of sales during the second quarter fiscal 2021.

Cost of sales in the Branded Product Program increased by 115% to $17,389,000 in the second quarter fiscal 2022 as compared to $8,087,000 in the second quarter fiscal 2021, primarily due to the 92% increase in the volume of product sold as discussed above, as well as a 16% increase in the average cost per pound of our hot dogs.

Beginning in July 2021, the cost of hot dogs increased significantly due to ongoing supply chain challenges associated with increased consumer demand as a result of the continued recovery from the COVID-19 pandemic which caused some delays and shortages.

This trend continued during the summer months of August and September 2021.

We did not make any purchase commitments of beef during the second quarter fiscal 2022 or the second quarter fiscal 2021.

If the cost of beef and beef trimmings increases and we are unable to pass on these higher costs through price increases or otherwise reduce any increase in our costs through the use of purchase commitments, our margins will be adversely impacted.

With respect to Company-owned restaurants, our cost of sales during the second quarter fiscal 2022 was $2,742,000 or 61.8% of restaurant sales, as compared to $1,840,000 or 61.5% of restaurant sales during the second quarter fiscal 2021.

The increase in cost of sales, during the second quarter of fiscal 2022 was primarily due to the 48% increase in sales as discussed above, in addition to higher commodity costs and restaurant labor costs.

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.

Our labor costs were impacted by the additional increase in minimum wage requirements in New York State which commenced on July 1, 2021.

Our food costs may be impacted by increases in commodity costs, as well as the mix of products that we sell.

Restaurant operating expenses were $1,216,000 in the second quarter fiscal 2022 as compared to $1,011,000 in the second quarter fiscal 2021.

We incurred higher occupancy expenses of $123,000, higher insurance expenses of $33,000, higher repairs and maintenance expenses of $26,000 and higher delivery charges of $23,000 associated with offsite consumption.

Depreciation and amortization, which primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment, was $270,000 in the second quarter fiscal 2022 as compared to $302,000 in the second quarter fiscal 2021.

General and administrative expenses increased by $657,000 or 25% to $3,269,000 in the second quarter fiscal 2022 as compared to $2,612,000 in the second quarter fiscal 2021.

The increase in general and administrative expenses was primarily attributable to higher corporate payroll expenses of $171,000, a higher incentive compensation accrual of $95,000, higher insurance costs of $46,000 and higher marketing expenses of $162,000.

Advertising fund expense, after eliminating Company contributions, was $553,000 during the second quarter fiscal 2022, as compared to $403,000 in the second quarter fiscal 2021.

Interest expense of $2,651,000 in both the second quarter fiscal 2022 and the second quarter fiscal 2021 represented accrued interest of $2,478,000 on the 2025 Notes at 6.625% per annum and amortization of debt issuance costs of $173,000.

Interest income was $28,000 in the second quarter fiscal 2022 as compared to $103,000 in the second quarter fiscal 2021.

Other income, which primarily relates to a sublease of a franchised restaurant, was $5,000 in the second quarter fiscal 2022, as compared to $22,000 in the second quarter fiscal 2021.

Provision for Income Taxes

The income tax provision for the second quarter fiscal 2022 and second quarter fiscal 2021 reflect effective tax rates of 26.5% and 27.7%, respectively.

The amount of unrecognized tax benefits at September 26, 2021 was $433,000 all of which would impact Nathan’s effective tax rate, if recognized.

As of September 26, 2021 Nathan’s had $293,000 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.

Results of Operations

Twenty-six weeks ended September 26, 2021 compared to twenty-six weeks ended September 27, 2020

Total revenues increased by 62% to $64,197,000 for the twenty-six weeks ended September 26, 2021 (“fiscal 2022 period”) as compared to $39,525,000 for the twenty-six weeks ended September 27, 2020 (“fiscal 2021 period”) as we continue to lap the significant impact of COVID-19 on our results beginning in March 2020.

Total sales increased by 121% to $42,825,000 for the fiscal 2022 period as compared to $19,375,000 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.

Foodservice sales from the Branded Product Program increased by 143% to $35,059,000 for the fiscal 2022 period as compared to sales of $14,447,000 for the fiscal 2021 period.

During the fiscal 2022 period, the total pounds of hot dogs sold in the Branded Product Program increased by approximately 140% as compared to the fiscal 2021 period.

Our average selling prices decreased by approximately 0.3% as compared to the fiscal 2021 period.

Total Company-owned restaurant sales increased by 58% to $7,766,000 during the fiscal 2022 period as compared to $4,928,000 during 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.

License royalties decreased by 2.4% to $18,340,000 in the fiscal 2022 period as compared to $18,791,000 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.

at retail and foodservice, substantially from sales of hot dogs to WalMart, decreased 3% to $16,922,000 for the fiscal 2022 period as compared to $17,460,000 in the fiscal 2021 period.

The decrease is due to a 1.5% increase in retail volume during the fiscal 2022 period which was offset by a 4% decrease in average net selling price as compared to the fiscal 2021 period.

The foodservice business earned higher royalties of $92,000 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.

Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $87,000 during the fiscal 2022 period as compared to the fiscal 2021 period primarily due to additional royalties earned on sales of proprietary spices, offset, in part, by lower royalties earned on French fries.

Franchise fees and royalties were $2,074,000 in the fiscal 2022 period as compared to $667,000 in the fiscal 2021 period.

The increase was primarily due to the continued momentum associated with the recovery from the COVID-19 pandemic.

Total royalties were $1,837,000 in the fiscal 2022 period as compared to $519,000 in the fiscal 2021 period.

4 unchanged sentences

Franchise restaurant sales increased to $28,630,000 in the fiscal 2022 period as compared to $9,188,000 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 49 Nathan’s outlets, excluding sales under the Branded Menu Program) were $21,793,000 in the fiscal 2022 period as compared to $7,565,000 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 $237,000 in the fiscal 2022 period as compared to $148,000 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.

Domestic franchise fee income was $73,000 in the fiscal 2022 period compared to $64,000 in the fiscal 2021 period.

International franchise fee income was $110,000 in the fiscal 2022 period as compared to $51,000 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.

We recognized $54,000 and $33,000 in forfeited fees in the fiscal 2022 period and fiscal 2021 period, respectively.

During the fiscal 2022 period, three new franchised outlets opened, as well as eighteen new Branded Menu Program outlets.

Additionally, 125 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.

During the fiscal 2021 period, six new traditional franchised outlets opened, including three new Branded Menu Program outlets.

Advertising fund revenue, after eliminating Company contributions, was $958,000 during the fiscal 2022 period, as compared to $692,000 during the fiscal 2021 period.

Costs and Expenses

1 unchanged sentence

Our gross profit (representing the difference between sales and cost of sales) increased to $7,329,000 or 17.1% of sales during the fiscal 2022 period as compared to $4,151,000 or 21.4% 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.

Cost of sales in the Branded Product Program increased by 154% to $30,619,000 during the fiscal 2022 period as compared to $12,040,000 during the fiscal 2021 period, primarily due to the 140% increase in the volume of product sold as discussed above, as well as a 6% increase in the average cost per pound of our hot dogs.

We did not make any purchase commitments of beef during the fiscal 2022 period or the fiscal 2021 period.

With respect to Company-owned restaurants, our cost of sales during the fiscal 2022 period was $4,877,000 or 62.8% of restaurant sales, as compared to $3,184,000 or 64.6% 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 increase in cost of sales during the fiscal 2022 period was primarily due to the 58% increase in sales discussed above, in addition to higher commodity costs and restaurant labor costs.

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.

Our labor costs were impacted by the additional increase in minimum wage requirements in New York State which commenced on July 1, 2021.

Our food costs may be impacted by increases in commodity costs, as well as the mix of products that we sell.

Restaurant operating expenses were $2,327,000 in the fiscal 2022 period as compared to $1,863,000 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.

We incurred higher occupancy expenses of $212,000, higher utility expenses of $31,000, higher insurance expense of $65,000, higher repairs and maintenance expenses of $42,000 and higher delivery charges of $60,000 associated with offsite consumption.

Depreciation and amortization, which primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment, was $548,000 in the fiscal 2022 period as compared to $612,000 in the fiscal 2021 period.

General and administrative expenses increased by $1,271,000 or 23% to $6,727,000 in the fiscal 2022 period as compared to $5,456,000 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.

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.

The increase in general and administrative expenses was primarily attributable to higher corporate payroll expenses of $241,000, a higher incentive compensation accrual of $354,000, higher insurance costs of $83,000 and higher marketing expenses of $181,000.

Advertising fund expense, after eliminating Company contributions, was $958,000 during the fiscal 2022 period, as compared to $692,000 in the fiscal 2021 period.

Interest expense of $5,301,000 in both the fiscal 2022 period and the fiscal 2021 period represented accrued interest of $4,955,000 on the 2025 Notes at 6.625% per annum and amortization of debt issuance costs of $346,000.

Interest income was $64,000 in the fiscal 2022 period as compared to $220,000 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.

Other income, which primarily relates to a sublease of a franchised restaurant, was $21,000 and $22,000 in the fiscal 2022 and fiscal 2021 periods, respectively.

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.

The income tax provision for the fiscal 2022 period and fiscal 2021 period reflect effective tax rates of 28.0% and 27.9%, respectively.

The amount of unrecognized tax benefits at September 26, 2021 was $433,000 all of which would impact Nathan’s effective tax rate, if recognized.

As of September 26, 2021, Nathan’s had $293,000 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.

At September 26, 2021 and September 27, 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.

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.

Cash and cash equivalents at September 26, 2021 aggregated $86,756,000, a $5,692,000 increase 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 $87,267,000 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.

We paid our semi-annual interest payments for fiscal 2022 of $4,968,750 on May 1, 2021 and November 1, 2021, respectively.

We paid our first and second quarter fiscal 2022 dividend payments of $1,440,000 on June 25, 2021 and September 3, 2021, respectively.

We expect to pay our third quarter dividend on December 3, 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.

Long Term Debt in the accompanying Consolidated Financial Statements, for further discussion of the Redemption.

The 2025 Notes bear interest at 6.625% per annum, payable semi-annually on May 1 st and November 1 st 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.

1 unchanged sentence

Non-cash operating expenses consist principally of depreciation and amortization of $548,000, amortization of debt issuance costs of $346,000, share-based compensation expense of $58,000, and non-cash rental expense of $208,000.

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.

In the fiscal 2022 period, accounts and other receivables increased by $3,192,000 due primarily to higher Branded Product Program receivables of $3,978,000, higher receivables due to the Advertising Fund of $1,007,000 which were offset, in part, by lower franchise and license royalties receivable of $1,917,000.

Prepaid expenses and other current assets decreased by $713,000 due primarily to the reduction of prepaid income taxes, insurance and marketing expenses of $280,000, $226,000, and $196,000, 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.

In the fiscal 2022 period, accounts payable, accrued expenses and other current liabilities increased by $830,000 due to an increase in accrued rebates of $328,000 due under the Branded Product Program as a result of higher sales;

an increase in accrued rent and occupancy costs of $385,000;

as well as increase in accrued corporate income taxes of $621,000.

Accounts payable increased by $1,043,000 due principally to seasonally higher product purchases for the Branded Product Program.

These increases were partially offset by a decline in accrued payroll and other benefits of $851,000 resulting primarily from the payment of year-end fiscal 2021 incentive compensation and earned deferred revenue of $640,000.

Cash used in investing activities was $343,000 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.

Cash used in financing activities of $2,887,000 in the fiscal 2022 period relates to the payments of the Company’s quarterly $0.35 per share cash dividends on June 25, 2021 and September 3, 2021 totaling $2,880,000.

During the period from October 2001 through September 26, 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 (the “Board”).

During the fiscal 2022 period, we did not repurchase any shares of common stock.

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.

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 of September 26, 2021, Nathan’s has repurchased 1,066,450 shares at a cost of $37,108,000 under the sixth stock repurchase plan.

At September 26, 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.

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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.

On March 13, 2020, the Board 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.

Effective June 1, 2020, the Board 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.

As discussed above, we had cash and cash equivalents at September 26, 2021 aggregating $86,756,000.

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.

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.

In November 2017, we refinanced our 2020 Notes through the issuance of the 2025 Notes and, our Board 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, 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.

On June 14, 2019, the Board 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 and its second quarter fiscal 2022 dividend of $1,440,000 on September 3, 2021.

Effective November 5, 2021, the Company declared its third quarter dividend of $0.35 per common share to stockholders of record as of the close of business on November 22, 2021, which is payable on December 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.

During the fiscal year ending March 27, 2022, we will be required to make interest payments of $9,937,500, of which all have been made as of November 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.

At September 26, 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:

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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.

The Brooklyn Guaranty has an initial term of 10 years and one 5-year renewal 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.

As of September 26, 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.

Our average cost of hot dogs between April 2021 and September 2021 was approximately 6% higher than between April 2020 and September 2020.

This trend continued during the summer months of August and September 2021.

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 2022.

To the extent that beef prices increase as compared to earlier periods, it could impact our results of operations.

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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.

The increase was 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.

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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.

All of Nathan’s Company-owned restaurants are within New York State and have been affected by this new legislation.

We may attempt to offset the effects of wage inflation, at least in part, through periodic menu price increases.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis