What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-02 compared with 2022-11-03 · 162 added, 125 removed, 239 unchanged (55% of the section changed)

18 unchanged sentences

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;

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., a wholly-owned subsidiary of Smithfield 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;

9 unchanged sentences

the enforceability of international franchising agreements;

the future effects of any food borne illness;

such as bovine spongiform encephalopathy, BSE or e-coli;

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 27, 2022, and in other documents we file with the U.S.

26 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 kitchens).

At September 25, 2022, our restaurant system, excluding virtual kitchens, consisted of 234 Nathan’s franchised units, including 119 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 in Ukraine which are temporarily closed as a result of the Russia-Ukraine conflict.) Our virtual kitchens in operation consisted of 229 units located in 18 states and four foreign countries.

At September 26, 2021, our restaurant system, excluding virtual 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 December 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 in Ukraine which are temporarily closed as a result of the Russia-Ukraine conflict).

Our virtual kitchens in operation consisted of 226 units located in 19 states and four foreign countries.

At December 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.

3 unchanged sentences

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 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 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 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.

as our principal supplier and the dependence of our licensing revenue and overall profitability on our agreement with Smithfield 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.

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In March 2020, the World Health Organization declared a global pandemic related to the outbreak of a novel strain of coronavirus, designated COVID-19.

COVID-19 related pressures have continued during the twenty-six weeks ended September 25, 2022 (“fiscal 2023 period”), although to a lesser extent than during the twenty-six weeks ended September 26, 2021 (“fiscal 2022 period”).

COVID-19 related pressures have continued during the thirty-nine weeks ended December 25, 2022 (“fiscal 2023 period”), although to a lesser extent than during the thirty-nine weeks ended December 26, 2021 (“fiscal 2022 period”).

As approved vaccines continue to be distributed and administered, state and local restrictions continue to be lessened.

1 unchanged sentence

Customer traffic at our Company-owned restaurants, in particular at Coney 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 shopping malls, movie theaters, as well as airport and highway travel plazas.

Additionally, we experienced increased customer traffic within our franchise system, including airport locations;

highway travel plazas;

shopping malls;

movie theaters;

and casino locations, primarily in Las 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.

2 unchanged sentences

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 BA.4 and BA.5, subvariants of Omicron, have caused increases in the number of reported COVID-19 cases.

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.

2 unchanged sentences

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.

We anticipate that inflationary pressures that began in the latter half of fiscal 2022 in labor and commodity costs, in particular beef and beef trimmings, due to supply chain challenges will continue during the remainder of fiscal 2023 and may impact our operations.

As a result of the recent inflationary pressures and the continued supply chain challenges, we expect to mitigate, to the extent possible, the impact with planned price increases on select products and menu items that were implemented during the first quarter of 2023 and continued during the second quarter of 2023.

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.

17 unchanged sentences

(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 gain on disposal of property and equipment and (ii) share-based compensation that the Company believes will impact the comparability of its results of operations.

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.

2 unchanged sentences

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

Thirteen weeks ended

Twenty-six weeks ended

September 25,

September 26,

September 25,

September 26,

Thirty-nine weeks ended

Interest expense

1 unchanged sentence

Depreciation and amortization

Gain on disposal of property and equipment

Loss on disposal of property and equipment

Share-based compensation

4 unchanged sentences

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 twenty-six weeks ended September 25, 2022 are not necessarily indicative of those for a full fiscal year.

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 December 25, 2022 are not necessarily indicative of those for a full fiscal year.

Results of Operations

Thirteen weeks ended September 25, 2022 compared to thirteen weeks ended September 26, 2021

Total revenues increased by 14% to $37,497,000 for the thirteen weeks ended September 25, 2022 (“second quarter fiscal 2023”) as compared to $32,878,000 for the thirteen weeks ended September 26, 2021 (“second quarter fiscal 2022”).

Total sales increased by 16% to $27,301,000 for the second quarter fiscal 2023 as compared to $23,500,000 for the second quarter fiscal 2022 which included foodservice sales from the Branded Product Program increasing by 16% to $22,030,000 for the second quarter fiscal 2023 as compared to sales of $19,063,000 for the second quarter fiscal 2022.

During the second quarter fiscal 2023, the volume of hot dogs sold increased by approximately 9% as compared to the second quarter fiscal 2022.

Our average selling prices increased by approximately 4% as compared to the second quarter fiscal 2022.

Total Company-owned restaurant sales increased by 19% to $5,271,000 during the second quarter fiscal 2023 as compared to $4,437,000 during the second quarter fiscal 2022.

The increase was primarily due to an increase in traffic at our Coney Island locations.

License royalties increased by 10% to $8,413,000 in the second quarter fiscal 2023 as compared to $7,658,000 in the second quarter fiscal 2022.

Total royalties earned on sales of hot dogs from our license agreement with John Morrell & Co.

at retail and foodservice, including sales of hot dogs to WalMart, increased 9% to $7,655,000 for the second quarter fiscal 2023 as compared to $7,042,000 in the second quarter fiscal 2022.

The increase is due to a 10% increase in average net selling price as compared to the second quarter fiscal 2022, which was offset by a 2% decrease in retail volume.

The foodservice business earned higher royalties of $71,000 as compared to the second quarter fiscal 2022.

Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $142,000 during the second quarter fiscal 2023 as compared to the second quarter fiscal 2022 primarily due to additional royalties earned on sales of French fries, cocktail franks, mozzarella sticks and seasonings.

Franchise fees and royalties were $1,199,000 in the second quarter fiscal 2023 as compared to $1,167,000 in the second quarter fiscal 2022.

Total royalties were $1,055,000 in the second quarter fiscal 2023 as compared to $1,037,000 in the second quarter fiscal 2022.

Royalties earned under the Branded Menu Program were $178,000 in the second quarter fiscal 2023 as compared to $207,000 in the second quarter fiscal 2022.

Thirteen weeks ended December 25, 2022 compared to thirteen weeks ended December 26, 2021

Total revenues increased by 1% to $26,154,000 for the thirteen weeks ended December 25, 2022 (“third quarter fiscal 2023”) as compared to $25,913,000 for the thirteen weeks ended December 26, 2021 (“third quarter fiscal 2022”).

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 our Yonkers, New York and Oceanside, New York locations which were partially offset by an increase in traffic at our Coney Island locations.

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 with Smithfield 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 $37,000 in the second quarter fiscal 2023 as compared to $97,000 in the second quarter fiscal 2022.

Traditional franchise royalties were $840,000 in the second quarter fiscal 2023 as compared to $733,000 in the second quarter fiscal 2022.

Franchise restaurant sales increased to $18,595,000 in the second quarter fiscal 2023 as compared to $15,644,000 in the second quarter fiscal 2022 primarily due to higher sales at airport locations;

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;

2 unchanged sentences

and casino locations, primarily in Las Vegas, Nevada.

Comparable domestic franchise sales (consisting of 63 Nathan’s outlets, excluding sales under the Branded Menu Program) were $15,338,000 in the second quarter fiscal 2023 as compared to $12,318,000 in the second quarter fiscal 2022.         

At September 25, 2022, 234 franchised units, including domestic, international and Branded Menu Program units were operating as compared to 224 franchised units, including domestic, international and Branded Menu Program units at September 26, 2021.

Total franchise fee income was $144,000 in the second quarter fiscal 2023 compared to $130,000 in the second quarter fiscal 2022.

Domestic franchise fee income was $28,000 in the second quarter fiscal 2023 compared to $38,000 in the second quarter fiscal 2022.

International franchise fee income was $61,000 in the second quarter fiscal 2023 compared to $56,000 during the second quarter fiscal 2022.

We recognized $55,000 and $36,000 in forfeited fees in the second quarter fiscal 2023 and the second quarter fiscal 2022, respectively.

During the second quarter fiscal 2023, one new traditional franchised unit opened.

Additionally, 43 new virtual kitchens opened.

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

Additionally, 54 new virtual kitchens opened.

Advertising fund revenue, after eliminating Company contributions, was $584,000 during the second quarter fiscal 2023, as compared to $553,000 during the second quarter fiscal 2022.

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.

At December 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 at December 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 increased by 9% to $21,898,000 in the second quarter fiscal 2023 as compared to $20,131,000 in the second quarter fiscal 2022.

Our gross profit (representing the difference between sales and cost of sales) increased to $5,403,000 or 20% of sales during the second quarter fiscal 2023 as compared to $3,369,000 or 14% of sales during the second quarter fiscal 2022.

Cost of sales in the Branded Product Program increased by 9% to $18,975,000 in the second quarter fiscal 2023 as compared to $17,389,000 in the second quarter fiscal 2022, primarily due to the 9% increase in the volume of hot dogs sold as discussed above, partially offset by a 3% decrease in the average cost per pound of our hot dogs.

Beginning in July 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.

Beef prices began to stabilize and declined slightly during the second quarter fiscal 2023 as compared to the significantly higher commodity costs experienced during the second quarter fiscal 2022.

We did not make any purchase commitments of beef during the second quarter fiscal 2023 or the second quarter fiscal 2022.

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 second quarter fiscal 2023 was $2,923,000 or 55% of restaurant sales as compared to $2,742,000 or 62% of restaurant sales during the second quarter fiscal 2022.

The increase in cost of sales during the second quarter of fiscal 2023 was primarily due to the 19% increase in sales as 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 28%, down from 30% in the comparable period of the prior year primarily due to commodity inflation, offset by an increase in sales.

Labor and related expenses as a percentage of Company-owned restaurant sales were 27%, down from 32% 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 $1,253,000 in the second quarter fiscal 2023 as compared to $1,216,000 in the second quarter fiscal 2022.

We incurred lower occupancy expenses of $87,000, offset by higher utility expenses of $15,000, higher marketing expenses of $47,000, and higher insurance costs of $30,000.

Depreciation and amortization, which primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment, was $301,000 in the second quarter fiscal 2023 as compared to $270,000 in the second quarter fiscal 2022.

General and administrative expenses increased by $103,000 or 3% to $3,372,000 in the second quarter fiscal 2023 as compared to $3,269,000 in the second quarter fiscal 2022.

The increase in general and administrative expenses was primarily attributable to higher compensation expenses of $93,000 and professional fees of $30,000.

Advertising fund expense, after eliminating Company contributions, was $759,000 during the second quarter fiscal 2023, as compared to $553,000 in the second quarter fiscal 2022.

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 its second quarter fiscal 2023 results of operations.

Interest expense of $1,943,000 in the second quarter fiscal 2023 represented interest expense of $1,816,000 on the 2025 Notes and amortization of debt issuance costs of $127,000.

Interest expense of $2,651,000 in the second quarter fiscal 2022 represented interest expense of $2,478,000 on the 2025 Notes and amortization of debt issuance costs of $173,000.

Interest income was $80,000 in the second quarter fiscal 2023 as compared to $28,000 in the second quarter fiscal 2022 due primarily to higher interest rates.

Other income, net was $34,000 and $5,000 in the second quarter fiscal 2023 and the second quarter fiscal 2022, respectively, which primarily relates to sublease income from a franchised restaurant.

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.

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 $501,000 during the third quarter fiscal 2023 as compared to $479,000 in the third quarter fiscal 2022.

Interest expense of $1,944,000 in the third quarter fiscal 2023 represented interest expense of $1,817,000 on the 2025 Notes and amortization of debt issuance costs of $127,000.

Interest expense of $2,650,000 in the third quarter fiscal 2022 represented interest expense of $2,477,000 on the 2025 Notes and amortization of debt issuance costs of $173,000.

Interest income was $158,000 for the third quarter fiscal 2023 as compared to $24,000 in the third quarter fiscal 2022.

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 second quarter fiscal 2023 was 26.3% compared to 26.5% in the second quarter fiscal 2022.

The effective income tax rate for the second quarter fiscal 2023 reflected income tax expense of $2,127,000 recorded on $8,085,000 of pre-tax income.

The effective income tax rate for the second quarter fiscal 2022 reflected income tax expense of $1,276,000 recorded on $4,821,000 of pre-tax income.

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 September 25, 2022 was $430,000 all of which would impact the Company’s effective tax rate, if recognized.

As of September 25, 2022, the Company had approximately $305,000 accrued for the payment of interest and penalties in connection with unrecognized tax benefits.

The amount of unrecognized tax benefits at December 25, 2022 was $437,000 all of which would impact the Company’s effective tax rate, if recognized.

As of December 25, 2022, the Company had approximately $315,000 accrued for the payment of 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 $16,000 during the fiscal year ending March 26, 2023.

Results of Operations

Twenty-six weeks ended September 25, 2022 compared to twenty-six weeks ended September 26, 2021

Total revenues increased by 20% to $77,217,000 for the twenty-six weeks ended September 25, 2022 (“fiscal 2023 period”) as compared to $64,197,000 for the twenty-six weeks ended September 26, 2021 (“fiscal 2022 period”).

Thirty-nine weeks ended December 25, 2022 compared to thirty-nine weeks ended December 26, 2021

Total revenues increased by 15% to $103,371,000 for the thirty-nine weeks ended December 25, 2022 (“fiscal 2023 period”) as compared to $90,110,000 for the thirty-nine weeks ended December 26, 2021 (“fiscal 2022 period”).

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.

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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 with John Morrell & Co.

Total royalties earned on sales of hot dogs from our license agreement with Smithfield 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 13% increase in average net selling price as compared to the fiscal 2022 period, which was offset by a 6% decrease in retail volume.

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 $204,000 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 and seasonings.

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.

9 unchanged sentences

and casino locations, primarily in Las Vegas, Nevada.

Comparable domestic franchise sales (consisting of 64 Nathan’s outlets, excluding sales under the Branded Menu Program) were $28,448,000 in the fiscal 2023 period as compared to $22,191,000 in the fiscal 2022 period.         

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.

At December 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 at December 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 $57,000 in the fiscal 2023 period compared to $73,000 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, four new franchised units opened.

Additionally, 58 new virtual kitchens opened.

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.

Advertising fund revenue, after eliminating Company contributions, was $1,003,000 during the fiscal 2023 period as compared to $958,000 during the fiscal 2022 period.

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 $1,504,000 in the fiscal 2023 period, as compared to $1,437,000 during the fiscal 2022 period.

Costs and Expenses

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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 29% to $39,375,000 during the fiscal 2023 period as compared to $30,619,000 during the fiscal 2022 period, primarily due to the 19% increase in the volume of hot dogs sold as discussed above, as well as an 8% increase in the average cost per pound of our hot dogs.

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.

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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 $3,217,000 in the fiscal 2023 period as compared to $2,874,000 in the fiscal 2022 period.

We incurred lower occupancy expenses of $206,000, offset by higher utility expenses of $35,000, higher marketing expenses of $48,000 and higher insurance costs of $55,000.

Depreciation and amortization, which primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment, was $534,000 in the fiscal 2023 period as compared to $548,000 in the fiscal 2022 period.

We incurred higher occupancy expenses of $118,000, higher utility expenses of $54,000, higher marketing expenses of $51,000, and higher insurance costs of $77,000 .

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 marketing and trade show related expenses of $307,000, offset in part by lower compensation expenses of $55,000.

Advertising fund expense, after eliminating Company contributions, was $1,178,000 during the fiscal 2023 period as compared to $958,000 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.

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 $102,000 in the fiscal 2023 period as compared to $64,000 in the fiscal 2022 period due primarily to higher interest rates.

Other income, net was $56,000 and $21,000 in the fiscal 2023 and fiscal 2022 periods, respectively, which primarily relates to sublease income from a franchised restaurant.

Interest income was $260,000 for the fiscal 2023 period as compared to $88,000 in the fiscal 2022 period.

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

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The effective tax rates are higher than the statutory rates primarily due to state and local taxes.

The amount of unrecognized tax benefits at September 25, 2022 was $430,000 all of which would impact the Company’s effective tax rate, if recognized.

As of September 25, 2022, the Company had approximately $305,000 accrued for the payment of interest and penalties in connection with unrecognized tax benefits.

The amount of unrecognized tax benefits at December 25, 2022 was $437,000 all of which would impact the Company’s effective tax rate, if recognized.

As of December 25, 2022, the Company had approximately $315,000 accrued for the payment of 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 $16,000 during the fiscal year ending March 26, 2023.

Off-Balance Sheet Arrangements

At September 25, 2022 and September 26, 2021, Nathan’s did not have any open purchase commitments for hot dogs.

At December 25, 2022 and December 26, 2021, 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 September 25, 2022 aggregated $53,857,000, a $3,794,000 increase during the fiscal 2023 period as compared to cash and cash equivalents of $50,063,000 at March 27, 2022.

Cash and cash equivalents at December 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 at March 27, 2022.

Net working capital increased to $58,413,000 from $48,988,000 at March 27, 2022.

We paid our semi-annual interest payments for fiscal 2023 of $3,643,750 on May 1, 2022 and November 1, 2022, respectively.

We paid our first and second quarter fiscal 2023 dividend payments of $1,852,000 and $1,836,000 on June 24, 2022 and September 2, 2022, respectively.

We expect to pay our third quarter dividend on December 2, 2022.

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

We paid our first, second and third quarter fiscal 2023 dividend payments of $1,852,000, $1,836,000 and $1,836,000 on June 24, 2022, September 2, 2022 and December 2, 2022, respectively.

We expect to pay our fourth quarter dividend on March 3, 2023.

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.

The 2025 Notes have no scheduled principal amortization payments prior to its final maturity on November 1, 2025.

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 $534,000, amortization of debt issuance costs of $254,000, share-based compensation expense of $16,000, and bad debts of $80,000.

In the fiscal 2023 period, accounts and other receivables increased by $2,877,000 due primarily to higher receivables from Branded Product Program sales of $2,689,000, higher receivables due to the Advertising Fund of $809,000, which were offset, in part, by lower franchise and license royalties receivable of $705,000.

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 the Advertising 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 $1,384,000 due to a decline in accrued payroll and other benefits of $1,032,000 resulting primarily from the payment of year-end fiscal 2022 incentive compensation;

earned deferred revenue of $676,000 and a decline in accounts payable of $1,436,000 due to the timing of product purchases for our Branded Product Program and Company-owned restaurants.

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 our Branded 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.

increases in accrued rebates due under the Branded Product Program of $161,000 as a result of higher sales;

and increases in accrued professional fees of $152,000.

Cash used in investing activities was $398,000 in the fiscal 2023 period primarily in connection with capital expenditures incurred for our Branded Product Program and our Coney Island restaurants.

Cash used in financing activities of $5,580,000 in the fiscal 2023 period relates to the payments of the Company’s quarterly $0.45 per share cash dividends on June 24, 2022 and September 2, 2022 totaling $3,688,000.

Cash used in investing activities was $522,000 in the fiscal 2023 period primarily in connection with capital expenditures incurred for our Branded Product Program, our Coney Island restaurants and our general ledger and accounting system upgrade.

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 on June 24, 2022, September 2, 2022 and December 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 of September 25, 2022, Nathan’s has repurchased 1,101,884 shares at a cost of $39,000,000 under the sixth stock repurchase plan.

At September 25, 2022, there were 98,116 shares remaining to be repurchased pursuant to the sixth stock repurchase plan.

As of December 25, 2022, Nathan’s has repurchased 1,101,884 shares at a cost of $39,000,000 under the sixth stock repurchase plan.

At December 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.

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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.

As discussed above, we had cash and cash equivalents at September 25, 2022 aggregating $53,857,000.

The Company did not repurchase any shares of its common stock during the thirteen weeks ended December 25, 2022.

As discussed above, we had cash and cash equivalents at December 25, 2022 aggregating $55,454,000.

Our Board routinely monitors and assesses its cash position and our current and potential capital requirements.

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On February 4, 2022, the Board authorized the increase of its regular quarterly dividend to $0.45 from $0.35.

The Company paid its first quarter fiscal 2023 dividend of $1,852,000 on June 24, 2022 and its second quarter fiscal 2023 dividend of $1,836,000 on September 2, 2022.

Effective November 3, 2022, the Company declared its third quarter dividend of $0.45 per common share to stockholders of record as of the close of business on November 21, 2022, which is payable on December 2, 2022.

If the Company pays regular quarterly cash dividends for the remainder of fiscal 2023 at the same rate as declared in the first and second quarters of fiscal 2023, the Company’s total cash requirement for dividends for all of fiscal 2023 would be approximately $7,360,000 based on the number of shares of common stock outstanding at November 3, 2022.

On February 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 on June 24, 2022, its second quarter fiscal 2023 dividend of $1,836,000 on September 2, 2022 and its third quarter fiscal 2023 dividend of $1,836,000 on December 2, 2022.

Effective February 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 on February 21, 2023, which is payable on March 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 at February 2, 2023.

The Company intends to declare and pay quarterly cash dividends;

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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 September 25, 2022, we sublet one property to a franchisee that we lease from a third party.

At December 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:

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in our Form 10-K for our fiscal year ended March 27, 2022.

Quantitative and Qualitative Disclosures About Market Risk.

Cash                                     

We have historically invested our cash and cash equivalents in money market funds or short-term, fixed rate, highly rated and highly liquid instruments which are generally reinvested when they mature.

Although these existing investments are not considered at risk with respect to changes in interest rates or markets for these instruments, our rate of return on short-term investments could be affected at the time of reinvestment as a result of intervening events.

As of December 25, 2022, Nathan’s cash and cash equivalents aggregated $55,454,000.

Earnings on this cash would increase or decrease by approximately $139,000 per annum for each 0.25% change in interest rates.

At December 25, 2022, we had $110,000,000 of 6.625% 2025 Notes outstanding which are due in November 2025.

Interest expense on these borrowings would increase or decrease by approximately $275,000 per annum for each 0.25% change in interest rates.

We currently do not anticipate entering into interest rate swaps or other financial instruments to hedge our borrowings.

Commodity Costs

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.

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 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.

With the exception of purchase commitments, we have not attempted to hedge against fluctuations in the prices of the commodities we purchase using future, forward, option or other instruments.

As a result, we expect that the majority of our future commodity purchases will be subject to market changes in the prices of such commodities.

We have attempted to enter sales agreements with our customers that are correlated to our cost of beef, thus reducing our market volatility, or have passed through permanent increases in our commodity prices to our customers that are not on formula pricing, thereby reducing the impact of long-term increases on our financial results.

A short-term increase or decrease of 10.0% in the cost of our food and paper products for the thirty-nine week period ended December 25, 2022 would have increased or decreased our cost of sales by approximately $5,477,000.

Foreign Currencies

Foreign franchisees generally conduct business with us and make payments in United States dollars, reducing the risks inherent with changes in the values of foreign currencies.

As a result, we have not purchased future contracts, options or other instruments to hedge against changes in values of foreign currencies and we do not believe fluctuations in the value of foreign currencies would have a material impact on our financial results.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Exchange Act Rule 13a-15(e) and Exchange Act Rule 15d-15(e). 

Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.         

Changes in Internal Controls

There were no changes in our internal controls over financial reporting that occurred during the quarter ended December 25, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and our Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures are effective at the reasonable assurance level.

OTHER INFORMATION

Legal Proceedings.

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